The Bank of England is expected to raise rates for the second time in less than two months. And as investors try to guess how aggressive the Fed will be in its fight against inflation, Friday’s U.S. jobs data will monopolize attention.
The Federal Reserve is clearly committed to controlling inflation and believes a “historically tight” labor market gives it plenty of room to raise rates without hurting job growth.
January jobs data released on Friday will likely confirm this view. Economists polled by Reuters forecast the U.S. economy added 238,000 new jobs compared with 199,000 in December, when employment rose less than expected due to labor shortages.
Evidence of a tighter job market and wage gains could fuel fresh bets on Fed aggressiveness, with markets now pricing in rate hikes of around five-quarter-points by the end of the month. the year.
Meanwhile, earnings season continues with Google parent company Alphabet Inc and Amazon.com reporting on February 1 and 3 respectively. But with rate hike jitters gripping Wall Street, earnings could play second fiddle to jobs data and the Fed.
TO TAKE A WALK
At Thursday’s Bank of England meeting, expect interest rates to rise to 0.5% from 0.25%, to curb inflation to its highest level in nearly 30 year.
In December, the BoE became the first major central bank in the world to tighten policy and markets are pricing in four 25 basis point hikes by the end of 2022. Now investors are looking for advice on how quickly the bank expects to proceed.
The big question – with which many central banks grapple – is whether a series of rate hikes can now rein in inflation before price pressures trigger higher wage demands and fuel pressures on generally higher prices.
Be wary of Governor Andrew Bailey’s comments on labor market strength, wage growth and his view of how quickly inflationary pressures are building beyond supply chain disruptions and soaring energy prices.
The same controversial topic – inflation – divides European Central Bank officials.
Eurozone inflation is at a record 5% and January data, released on Wednesday, could provide hawks with new ammunition to push for a change in policy.
Comments from ECB President Christine Lagarde suggest inflation will return below its 2% target this year as pressure from high energy prices and bottlenecks in the offers are diminishing.
It could push back market prices for rate hikes this year, which is out of sync with ECB messages. The fallout from higher rate betting in the US is a potential headache for policy makers keen to avoid an unwanted tightening of monetary conditions.
So Thursday’s meeting could turn out to be heated even if no immediate action is expected – the ECB has already presented plans to wrap up its PEPP stimulus package.
DOVES, HIDE YOURSELF!
As rate hike campaigns gather pace in other major economies, central bank doves are becoming an endangered species.
The Reserve Bank of Australia meets on Tuesday against the backdrop of the highest consumer inflation since 2014 and the strongest labor market since 2008, putting pressure on RBA Governor Philip Lowe to act.
Lowe insisted a rate hike in 2022 is unlikely, but economists are divided on whether the RBA will capitulate. Traders, however, have long been betting that Lowe is behind the inflation curve and forecast a rate hike in May, followed by at least three more by the end of the year.
The ugly ducklings shine
European banks, the ugly ducklings of international finance, have long been eclipsed by their successful US rivals, which outrank them in earnings and valuation.
Now they are trying to catch up. In the coming days, more of these banks will present their booth with results for 2021.
The dreaded wave of unpaid debt was largely banished by European governments, which borrowed more and more to bail out the economy and, indirectly, their banks.
Now, with the prospect of gradually rising interest rates, most European banks, with the exception of scandal-hit Credit Suisse, are looking to do their best.