Inflation, interest rate hikes continue to wreak havoc in the US, EU and UK


Money markets continue to price in higher highs for central bank interest rates that include the US and EU as economic growth holds up better than expected as CPI inflation remains hot and yields continue to rise .

“Higher for longer” is the mantra among central banks as the US money market swaps price at a peak rate of 5.5%. The future federal funds rate is in line for three additional 25 basis point hikes with no rate cuts until 2024.

Fed Funds Rate Probabilities: (Source: CME)
Fed Funds Rate Probabilities: (Source: CME)



Inflation continues to run rampant in Europe, with headline eurozone inflation forecast to fall to 8.3%. However, it slowed to just 8.5%. Energy inflation fell sharply to 13.7% from 19%. However, the issue of concern was core inflation, which rose to a record high of 5.6% against 5.3%.

Inflation in Euros: (Source: Macroscope)
Inflation in Euros: (Source: Macroscope)

Strong data continues to put pressure on the ECB

February S&P manufacturing PMIs for the southern region (Italy and Spain) rose much more than expected in expansionary territory. At the same time, Germany’s unemployment rate remained at 5.5% for seven months, indicating a more resilient workforce than expected.

Unemployment in Germany: (Source: Trading Economic)
Unemployment in Germany: (Source: Trading Economic)

United States

The decline in US home prices is accelerating

The S&P CoreLogic 20-city home price index fell faster than expected, sending the annual price rate down from 6.8% to 4.7%. This index is a trailing price indicator of a quarterly average from the third quarter of 2022.

While 30-year mortgage rates once again topped 7%, mortgage applications for home purchases fell as much as 6% last week, following an 18% absorption the previous week.

S&P CoreLogic: (Source: Bloomberg)
S&P CoreLogic: (Source: Bloomberg)

The US economy is still hot

ISM services were released on March 3, which showed that the US economy is still extremely strong. Services were better than expected, prices paid were lower, occupancy was higher and new orders were stronger.

All eyes are on the FOMC

The next FOMC meeting on March 22nd will include an update to the Fed Dot Plot and an update to the Summary of Economic Forecasts, which will matter more than just a 25 or 50 bps hike from the Fed.

United Kingdom

Record food inflation

Worrying times ahead for the UK as shop price inflation accelerated to near double digits in February, while food price inflation hit a record 17.1%, according to the British Retail Consortium.

BOE is caught between a rock and a hard place

Yields up, GBP down as BOE struggles in many different ways. Unlike the Fed and ECB, which have developed a hawkish plan for 2023, the BOE continues to move without clear direction. The pound at $1,199 is nearing a year-to-date low as the yield curve continues to steepen.

GBPUSD: (Source Trading View)
GBPUSD: (Source Trading View)

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