Some Central Banks Slow Rate-Hike Pace

Markets sense central banks shifting gears
First the Reserve Bank of Australia surprised markets by hiking rates less than expected early in the month. Then the Bank of Canada caught the markets off guard on Wednesday by raising rates a less-than-expected 0.5% and signaling the rate-hiking cycle is getting closer to its end. That was followed up by the European Central Bank on Thursday. While the bank met market expectations by raising rates 0.75%, ECB President Christine Lagarde surprised markets by saying a substantial part of the tightening cycle is done and pointing out that there are clear signs of an economic slowdown in the eurozone. The more balanced view from Lagarde, moving away from an earlier inflation-centric focus, prompted investors to trim bets on further aggressive tightening by the ECB. Lagarde said the ECB will discuss at its December meeting the key principles it will follow in shrinking its balance sheet. The bank also announced that it has changed the terms of its supercheap loans to banks, the Targeted Long-Term Refinancing Operations, making them less attractive. Investors repriced the ECB terminal rate for this hiking cycle to closer to 2.5% than the 2.75% to 3% territory priced prior to Thursday’s meeting, but hot preliminary inflation figures from the eurozone on Friday saw rates drift higher again. It remains to be seen if the US Federal Reserve downshifts when its rate-setting committee meets next Wednesday, though over the past week expectations for the terminal fed funds rate have fallen from 5% to closer to 4.86% after a Wall Street Journal report indicated the FOMC was mulling a slower pace of hikes ahead. A 0.75% hike in the target range to 4% to 4.25% is fully priced in.

Markets applaud Sunak’s appointment as UK PM
Rishi Sunak was appointed prime minister of the United Kingdom on Tuesday by King Charles after Boris Johnson and Penny Mordaunt abandoned the Conservative Party leadership contest. Sunak retained Jeremy Hunt as his chancellor of the Exchequer, a move that soothed nervous markets. Sunak, who served as chancellor in Johnson’s cabinet, is seen as substantially more fiscally responsible than his immediate predecessor, Liz Truss. Days after Truss’ minibudget was introduced in late September, the pound crashed to record lows and 30-year gilt yields soared to 5%. Today, gilt yields are around 3.5%, roughly where they traded before Truss’ growth package was announced, and the pound has rebounded to the 1.1550 area from 1.0350. Expectations of Bank of England rate hikes have moderated dramatically as well. During the worst of the market crisis, expectations for the terminal rate for this cycle were above 6.25%. Today, the market expects the policy rate to top out at around 4.75%.

Xi secures third term
The 20^th National Party Congress of the Chinese Communist Party concluded last weekend with Xi Jinping securing an unprecedented third term as the party’s general secretary. Additionally, Xi was able to staff the party’s Politburo and Politburo Standing Committee with allies and loyalists, cementing his hold on power. Those officials are generally seen as less market-oriented than their predecessors and less experienced overall. Markets fear the consolidation of power by Xi could stifle the economy and private enterprise. In the short term, the country’s zero-COVID policy and tighter regulation, along with the potential for an early military move against Taiwan, could limit investors’ appetites for Chinese assets.

US economy returned to growth in Q3
The US economy grew at an annualized rate of 2.6% in the third quarter, reversing two quarters of contraction. An improving trade balance and moderate consumer spending were contributors to growth while business investment in structures and residential investment both tumbled amid sharply higher interest rates. A shift in spending patterns from goods to services continues, the data show. Core measures of growth, such as final sales to domestic purchasers, which grew at just a 0.1% annual rate, showed the economy is close to stalling.

Soft PMIs increase recession fears
Composite purchasing managers’ indices, which combine the manufacturing and services sectors, weakened further in most developed markets, preliminary October data revealed this week. The eurozone composite dropped to 47.1 from 48.1 last month, while in the UK, it dropped to 47.2 from 49.1. In the US, the index dropped to 47.3 from 49.5. Japan bucked the trend, with the composite edging up to 51.7 from 51.