The end of the beginning?


  • We expect a slower pace of tightening from December 2022 from the Fed and the ECB. Market optimism could however be curbed by the realization that a slower pace does not necessarily inform on the “terminal rate”. There will be more episodes of stress amid volatile dataflows.

The “end of the beginning” of the ongoing monetary tightening will be reached when central banks intend to continue hiking but decide they can take the risk of doing it at a less brisk pace. We expect both the Fed and the ECB to resort to a smaller quantum of tightening at their December meetings after delivering a last 75bp move, the Fed emulating the ECB this week. Yet, there is not direct link between slowing down and finding the right level of the policy rate which will be appropriate to return inflation back to 2%. The “terminal rate” remains elusive. It’s just that the risk of fuelling more overheating is now lower, so that the central bank can now move to a “probing strategy” rather than “catching up” in a hurry.

While the “probing” approach reduces the risk of policy mistakes – and from this point of view we can understand some of the market’s recent bout of optimism – if the resilience of the economy holds up into the coming months, the Fed may be forced to go further than the 4.6% median forecast of the FOMC members for Fed Fund in 2023. Still, for our part, we remain comfortable with being slightly below market expectations for the terminal rate given our forecast of a sizeable recession in the US driven in part by the ongoing steep deterioration in financial conditions, but we also expect more episodes of market stress in the months ahead every time the dataflow will not move down “fast enough”. Besides, investors need to accept more “macro pain” ahead before enjoying the benefits of a proper “dovish pivot” by the Fed. In the Euro area, a higher-than-expected inflation print for October released a day after a less “one-sided” Governing Council meeting may have wrong-footed the ECB. There remain strong reasons though to still expect a sizeable deceleration in inflation next year, converging to the central bank’s target. Yet, beyond the number and size of the next hikes (we now expect 50bps in December and 25bps in February) we suspect the bond market will become increasingly sensitive to the prospect of Quantitative Tightening, with a decision on this now scheduled for December. The Bank of England also meets this week. We stick to our view – and now the market’s – that 75bps would be a good “compromise hike”.

Related Articles

Market Updates

AXA IM US election reaction: what Trump's win means for markets and investors

Market Updates

Short duration update

Market Updates

The view from the Core CIO Office: US economic resilience a key consideration for investors

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top
    Are you a Professional Investor ?

    This website is available in English only and directed at professional, institutional or qualified investors. It is not suitable for retail investors. As such, some of the funds, products and services described on this website are not available for retail investors under the MiFID II (Directive 2014/65/UE). By pressing accept you confirm that you are a professional investor and agree to AXA Investment Managers' Legal Information and Terms of Use.