Morning Brief – Pencil to pen

Charles Porter
Tue 13 Dec 2022

Pencil to pen

As with any year ahead, 2023 has been fervently speculated over by market participants. Whilst forecasts for the forthcoming year take great priority every year, 2023 has perhaps the most divergent set of forecasts between analysts and institutions on recent record. Across asset classes and between institutions the core themes expected to play out and their market impact in 2023 change greatly. The source of this divergence in no small part comes down to global central banks and their likely 2023 policy path. Most importantly within this space is the peak of policy rates and the subsequent pivot to loosening policy. Given that the Fed largely sets the tone for policy rates, the big questions are where and when will Fed funds rates peak, and from that peak when and how quickly will they fall. 

These forecasts will be heavily scrutinised and likely finalised given the importance of this week’s events. We have the Federal Reserve meeting on Wednesday followed by a Bank of England and ECB decision on Thursday. To precede and qualify these events, there is also significant data due to be released across many geographies providing further data points to scrutinise the outlook for 2023. Not only will the ECB be meeting this week, but regarding the Eurozone there are also a handful of decisions from neighbouring European countries that also play an important part in assessing continental dynamics and the fortune for the European single currency. 

The Fed’s decision tomorrow is more than just an opportunity to analyse the policy adjustment that will be made to rates. It will provide a recap on current forward guidance and any changes therein, reflecting the CPI print due to be released later today. This will determine the broad tone for the US Dollar at least for the early stages of 2023. The market is currently pricing hiking from the Fed to a terminal rate of around 5% next year. Critically it is then pricing in interest rate cuts towards 4.5% into year-end 2023. This shows a market pricing one of the shortest peak rates in modern economic history. The answer of course as to whether this will prevail will be almost exclusively data dependent. However, shifts in that pricing from tomorrow’s and today’s events could lead to significant spot price swings in the Dollar.

Discussion and Analysis by Charles Porter

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