Traders Gear Up for Distant Day First Central Banks Hike Rates

1 / 5

Traders Gear Up for Distant Day First Central Banks Hike Rates

Stephen Spratt

(Bloomberg) -- After standing shoulder-to-shoulder for much of the pandemic, traders are preparing for the day the world’s central banks begin to move apart on policy.

Though little movement is expected for at least the next year, futures markets suggest the Federal Reserve will hike rates in late 2023 and the Reserve Bank of Australia in 2024. New Zealand looks ahead of the pack with a hike priced in for late 2022. In Europe and the U.K., the likelihood of additional cuts is still being debated, while in Japan, a further move lower remains stubbornly priced in.

Evolving expectations this year for when each central bank will next move are a break from 2020 when investors saw policy makers act almost as one to cut rates and boost asset purchases to help stave off economic collapse. Divergent policy paths can make one country’s bond market more attractive than another’s, opening up relative trade opportunities for investors.

Here’s a look at how the recent shifts are impacting markets:

U.S. on Pole, Europe a Non-Starter

With market-based measures of inflation rising, swap markets are slowly cranking up the pace of expected U.S. rate hikes. Traders are bracing for a first 25 basis point hike in the fourth quarter of 2023, then another 50 basis points over the next 18 months. That’s a slower pace than the last hiking cycle, suggesting there is room for more to be priced in.

That stands in contrast to Europe, where some central bankers continue to dangle the threat of rate cuts, not least as a means to counter strength in the euro. Market pricing suggests the first European Central Bank hike won’t come till 2024 and rates won’t climb into positive territory for the guts of a decade. That suggests the path for a further widening in rate expectations versus the U.S. looks open.

The divergence is showing up in the market, with short-term European bonds outperforming their U.S. peers in recent months. A Bloomberg Barclays gauge of 1-3 year European government bonds is up almost 0.60% since the end of September, compared to a rise of just 0.1% for the Treasuries equivalent.

Australia Anchored

The Reserve Bank of Australia have given a sense of stability to bond bulls, by extending guidance on its rate policy to 2024 and pledging more asset purchases. That has anchored short-term pricing for rates, though market pricing suggests traders expect the possibility of a quick series of increases thereafter.

Across the Tasman Sea, investors have been pulling bets that the Reserve Bank of New Zealand would turn to negative rates after a string of positive data surprises. In late October swap markets priced a full 50 basis points of cuts down to -0.25%, but that had been cut to zero last week. With the RBNZ now seen as having a freer hand, forwards suggest it will raise rates sooner than the RBA.

The moves have hit an ICE Bank of America gauge of short-dated New Zealand government bonds, which has fallen about 0.6% from the end of September, compared to a near 0.2% rise in the Australian equivalent.

U.K. and Japan

Over in the U.K., where the Bank of England are still toying with the idea of rate cuts, traders got a hawkish jolt on last Thursday. The central bank was at pains to stress that having the option of negative rates doesn’t mean they will be used, especially as it expects inflation to rise “sharply” toward its 2% target in the spring. That caused a rise in rate hike expectations for 2023.

Meanwhile in Japan, rate-cut pricing remain bulletproof. The Bank of Japan is looking at how to make monetary easing more sustainable, opening the door to a reduction in bond buying and increasing the likelihood of rate cuts as a policy tool.

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.

Latest Stories

  • Pro-Trump lawyer Lin Wood swears under oath he has evidence Mike Pence is a ‘traitor’

    Ally of former president called said he was 'prepared to file that evidence along with a considerable amount of evidence of election fraud' in response to separate case

  • Asian Man Beaten and Robbed of ‘Around $15K’ at Bank in the Bay Area

    In the latest of a new surge in anti-Asian attacks, a man was assaulted and robbed while trying to deposit “large sums of money” at a bank in San Leandro, California this week. The incident, which left the victim with minor injuries, occurred at the Bank of America branch at 1925 Marina Boulevard around 1:20 p.m. on Tuesday. Witnesses tell me this older Asian man was making a deposit at the Bank of America along Marina in San Leandro & was attacked & robbed.

  • Germany 'offered $1bn if US dropped sanctions against controversial pipeline'

    A new political row has broken out over a controversial gas pipeline between Russia and Germany after Angela Merkel’s government was accused of offering to spend $1bn (£720m) on American gas if the US called off planned sanctions against the project. The Nord Stream 2 pipeline will allow Russian gas to be pumped directly to Germany, but the US has threatened to impose sanctions on any company involved with the project, arguing it will make Europe too dependent on Russia for its energy needs. Lobbying group Environmental Action Germany (DUH) this week published a leaked letter from Olaf Scholz, the German finance minister, to Steve Mnuchin, the then US treasury secretary, dated last August. In it, Mr Scholz offered to invest $1bn on new infrastructure to import American liquefied natural gas (LNG) at German ports if the US dropped the planned sanctions.

  • Iranian nuclear scientist killed by one-ton automated gun in Israeli hit: Jewish Chronicle

    The Iranian nuclear scientist assassinated near Tehran in November was killed by a one-ton gun smuggled into Iran in pieces by the Israeli intelligence agency Mossad, according to a report by The Jewish Chronicle on Wednesday. Citing intelligence sources, the British weekly said a team of more than 20 agents, including Israeli and Iranian nationals, carried out the ambush on scientist Mohsen Fakhrizadeh after eight months of surveillance. Shortly after his death Iran pointed the finger at Israel, Foreign Minister Javad Zarif writing on Twitter of “serious indications of (an) Israeli role."

  • Lindsey Graham reads Neera Tanden negative Glassdoor reviews from old employees during confirmation hearing

    As Neera Tanden, President Biden's nominee to take over as the director of the Office of Management and Budget, sat Wednesday for her confirmation hearing, Sen. Lindsey Graham (R-S.C.), the ranking Republican on the Senate Budget Committee, read aloud some reviews her former employees at the Center for American Progress left on Glassdoor over the last few years. Graham noted that Tanden, the president of CAP, referred the committee to the reviews, some of which were far from flattering about the management at the public policy organization, even when the overall experience was considered positive ("Great experience, terrible management," one read.) "All I can say," Graham said after going through some of the negative comments, "is that this is not the unifying pick that I was looking for in this position." CONFIRMATION HEARING: Sen. Lindsey Graham reads negative Glassdoor reviews of Center for American Progress under Neera Tanden after she referred committee to them: “‘1 out of 5 stars. Terrible absolutely horrible.’” pic.twitter.com/u6hKaZWg0W — Forbes (@Forbes) February 10, 2021 Republicans like Graham weren't the only ones to raise concerns about Tanden. Sen. Bernie Sanders (I-Vt.), the chair of the committee, joined some GOP colleagues in questioning Tanden about some inflammatory comments she previously made on Twitter. "Your attacks were not just made against Republicans," he said. "There were vicious attacks made against progressives. People I have worked with." Sanders acknowledged lawmakers are used to such criticism, but he clarified that "it's important" to refrain from personal attacks and instead express "differences on policy." Tanden told Sanders she regrets her past remarks and will change her approach if confirmed. .@SenSanders says it's important to "minimize the level of personal and vicious attacks." Asks Neera Tanden if she'll have a different approach at OMB.@neeratanden: "Absolutely...social media does lead to too many personal comments and my approach will be radically different." pic.twitter.com/QB6FAtrWQr — CSPAN (@cspan) February 10, 2021 More stories from theweek.comTrump's dumbfounding defenseTrump the phone guy is backThe 2021 Oscars will be broadcast from multiple locations

  • Idaho man pleads guilty to rape and murder after innocent suspect spent 20 years behind bars

    'Today was a good day in that there's some finality to it,' says Angie Dodge's brother Brent

  • What next for the border in Northern Ireland?

    This was first published in The Telegraph's Refresher newsletter. For more facts and explanation behind the week’s biggest political stories, sign up to the Refresher here – straight to your inbox every Wednesday afternoon for free. What’s the story? The UK and EU are at once again at loggerheads over how to resolve difficulties at the Northern Irish border, following threats against port staff and fresh calls for the Government to abandon the Northern Ireland Protocol. Britain’s departure from the European Union and the end of the Brexit transition period mean that there must be customs checks on goods entering the EU single market by travelling between the UK and the EU via Northern Ireland. The perennial issue for legislators has been how to check goods without imposing a hard border between Northern Ireland and the Republic: something all sides have pledged to avoid since the signing of the Good Friday Agreement in 1998. But the solution agreed between the UK and EU in the Brexit Withdrawal Agreement – the Northern Ireland Protocol – has not been running as smoothly as hoped. Teething difficulties at the ports in Northern Ireland have been exacerbated by the European Commission’s threat on January 29 to block vaccines leaving the EU, which would effectively have imposed a hard border on the island. The Commission’s brief triggering of Article 16 of the Protocol was quickly rescinded, but not before tensions between unionists and republicans in Northern Ireland were inflamed by the sudden prospect of a border. Threats were made against port workers and loyalist graffiti was daubed on walls around Larne and Belfast. Northern Irish police say there is no indication of paramilitary involvement, but customs officials were sent home for their own safety. Michael Gove, who is responsible for dealing with border issues in Northern Ireland on behalf of the UK Government, has condemned the Commission for opening a “Pandora’s Box” and called for the extension of a “grace period” in the Protocol. The grace period, which would have ended in April, allows goods to travel across the border without some of the checks that will eventually be required, in an attempt to smooth the transition. It is hoped that an extension would allow the issues to be resolved before further checks are imposed. Looking back The Northern Ireland Protocol was Boris Johnson’s solution to the Northern Ireland border issue. Removing the hated backstop from Theresa May’s Withdrawal Agreement – and collapsing the Conservative Party’s agreement with the DUP – Mr Johnson instead agreed that some checks would take place on goods entering Northern Ireland from Great Britain, if they were “at risk” of travelling onward into the EU. That resolution was a controversial one. For DUP politicians, any checks on goods travelling between the four nations of the UK represent an unacceptable breach of the country’s own internal market. The EU was eventually satisfied by the Northern Ireland Protocol and agreed it with Mr Johnson’s Government in October 2019. But it did not come into force until the end of the Brexit transition period on January 1, after which the UK was finally no longer treated as an EU member state. For the Irish Government, which was opposed to Britain leaving the EU from the start, the issues in recent weeks are less to do with the EU’s vaccine threats and more to do with Brexit itself. In a radio interview last week Simon Coveney, the Irish foreign minister, said: “I would be open to advocating for modest extensions of grace periods when appropriate to try to, first of all, reassure people that we're listening to them in Northern Ireland, because we are, and then, secondly, so that we can ensure that businesses can operate as best they can under the protocol. "But that's not the same thing as scrapping the protocol and it's important to make a strong distinction between the two." Mr Coveney signalled the Irish Government would be open to an extension of the grace period, but said any settlement could not involve a renegotiation of the protocol and, by extension, the Withdrawal Agreement. Meanwhile, my colleagues report that the EU is almost certain to accept a time-limited extension to between three and six months, not the two years Mr Gove has requested. Anything else? The picture in Northern Ireland is further complicated by continued DUP calls for the UK Government to trigger Article 16 itself, and abandon the protocol altogether. The party is pursuing a series of political moves aimed at undermining the mechanism, including a boycott on engagement with the Irish Government on issues related to its operation and a vow to oppose any protocol-related legislation at the Assembly. Other parties in the Stormont power-sharing agreement say the DUP’s goal of scrapping the protocol altogether is “unrealistic”, and it should focus on cooperation with other Northern Irish parties. The Northern Ireland Assembly ultimately has a veto power over the protocol, but only in a vote every four years. Until then, the SDLP, another party in the agreement, said unionists “need to learn the lesson that they should have learned a number of times over the past 100 years – the British Government will let you down and if you keep going to the right you're going to end up in a worse position when you come back to the table”. The Refresher take For Brexit-watchers, the spectre of UK ministers in negotiation with the EU over Northern Ireland is familiar. But if both sides cannot agree to an extension of the grace period that is long enough to resolve the issues at the border technically and peacefully, then more customs checks will be imposed. The EU has little choice but to accept Mr Gove’s demand for an extension, since it was partly the Commission’s foolishness that caused the latest tensions. Notwithstanding the vaccines debacle, the last few weeks have exposed fragilities in a customs arrangement that exporters and citizens were promised would be solid. Mr Gove and his counterparts have an important but difficult few weeks ahead.

  • Thai protesters take to streets in protest at royal insults law

    Hundreds of Thai protesters gathered in Bangkok on Wednesday to demand the release of four activists remanded in custody pending trial on charges of insulting Thailand's king, a crime punishable by 15 years in prison. Many protesters banged pots and pans, borrowing from nightly displays of discontent in neighbouring Myanmar at last week's coup, while some held Myanmar flags to show support for the country's pro-democracy movement. The Bangkok demonstration had originally been organised to show solitary with protesters in Myanmar, but it morphed into calls to change or end the strict "lese majeste" law after the four activists were detained on Tuesday.

  • Army War College Commandant Suspended Pending Investigation

    Maj. Gen. Stephen J. Maranian has been suspended until the completion of an investigation.

  • Dominion says it had to hire detectives to track down Sidney Powell to serve her with its $1.3 billion lawsuit

    Dominion Voting Systems is suing Sidney Powell, a Texas lawyer who pushed a false conspiracy theory that the company helped President Biden defeat former President Donald Trump, for defamation, but it hasn't be easy tracking her down to serve her with the $1.3 billion, the company said in a court filing Tuesday. Dominion had to hire private investigators to chase Powell "across state lines," incurring "unnecessary expenses for extraordinary measures to effect service," the company said. A lawyer for Powell, Howard Kleinhendler, disputed Dominion's claim, telling Politico his client "regularly travels as part of her work," and in recent months "has had to take extra precautions concerning her security, which may have made serving her more difficult." But "Ms. Powell had no reason to evade service as she looks forward to defending herself in court," he added. Powell requested more time to respond to Dominion's lawsuit in a court filing Monday. Dominion said it has no problem giving Powell until March 22 to respond but wanted to note its troubles reaching her for "the record." Powell spent months pushing baseless claims about the November election, including one that Dominion was part of a global communist plot, involving the late Venezuelan dictator Hugo Chavez, to flip the election to Biden. She served for a while on Trump's legal team before he temporarily cut ties with her after a particularly off-the-rails press conference. Powell was kicked off Twitter for spreading QAnon conspiracy theories after the Jan. 6 assault on the U.S. Capitol. More stories from theweek.comTrump's dumbfounding defenseTrump the phone guy is backThe 2021 Oscars will be broadcast from multiple locations

  • Lawyer gains national attention after appearing as cat on Zoom hearing

    A West Texas judge has a word of caution to those attending court hearings via Zoom: Always check for filters before logging on.

  • Mom charged with abuse after 12-year-old daughter’s suicide, Missouri authorities say

    Her daughter died by suicide on New Year’s Day. Now a Missouri mom is charged in the death.

  • Stimulus checks would be capped at $100,000 income under Democrat plan. What we know

    Here’s who would get stimulus checks under the plan by House Democrats.

  • Former Israeli ambassador calls out Biden with awkward tweet for not calling Netanyahu

    Ambassador Danon tweeted out a list of ten countries whose leaders Mr Biden has spoken to and added: 'Might it now be time to call leader of Israel, closest ally of US?'

  • Singaporean Professor Lectures for 2 Hours, Dies Inside After Realizing He was Muted the Whole Time

    Dong Wang is an associate professor from the Department of Mathematics at the National University of Singapore (NUS). YouTube users who claim to be in the class reported that they had done "all sorts of things" to get his attention, but he simply ignored them.

  • Trump reportedly avoided calling Biden a 'predator' in ads because it would 'open up his own can of worms'

    Former President Donald Trump apparently had his limits when it came to attacking his political rivals. Throughout the 2020 campaign season, Trump had the final say over which campaign ads made it onto the air and which were tossed out. He made those decisions at regular White House viewing sessions, where his top White House aides and campaign officials would gather to laugh at and workshop ads, including some too "out there" even for the former president, Axios reports. A few times a month, former Trump campaign manager Brad Parscale would bring his laptop to the White House and sit "so close" to Trump that it sometimes "bothered" him, a source tells Axios. Parscale would then play through a reel of campaign ads, including many inspired by "young, pro-Trump fans who sent their ideas" to him, Axios continues. One targeted CNN's Don Lemon and his coverage of the Black Lives Matter protests, while another showed President Biden coughing to allege he was unwell, a source said. Trump would often "burst out laughing" at some of the wilder spots, but then conclude they were too "brutal" or "weren't worth the backlash" he'd get, the source told Axios. One subject Trump particularly avoided was Biden's inappropriate touching of women, Axios reports. At one point, Trump's campaign drew up an ad featuring clips of women who'd accused Biden of inappropriate contact, and then finished with a clip of Vice President Kamala Harris declaring "I know a predator when I see one." But as one source close to the campaign said, "He never wanted to run the predator or women's-style ads against Biden, because he was afraid he was going to open up his own can of worms." Read more about Trump's campaign ad critiques at Axios. More stories from theweek.comTrump's dumbfounding defenseTrump the phone guy is backFed Chair Powell says lower unemployment rate hides true 'deterioration' of labor market

  • Car of missing Texas woman found in lake 30 years after disappearance

    Carey Mae Parker was 23 when she went missing from Quinlan, Texas on March 17, 1991.

  • Roadside shooting of Yale graduate student may have been targeted, say police

    Police think violence may have happened after Connecticut car crash

  • Another winter storm brings more snowfall to Northeast

    Another winter storm is bringing additional snowfall to the Northeastern United States on Tuesday with the region expected to pick up several more inches of accumulation on top of a major snowstorm that hit the region Sunday. The National Weather service said Tuesday's snow was expected to come down at its steadiest in the Boston region in the mid- to late afternoon. Logan International Airport advised travelers to check with their airline on the status of their flight due to the wintery weather and to allow for extra time to get to and from the airport.

  • Trump still hasn't conceded his election loss. But his impeachment lawyer Bruce Castor did, several times.

    Former President Donald Trump was, by all accounts, furious at his impeachment trial defense team, especially lead lawyer Bruce Castor, panned across the board for his odd, rambling opening statement. "Cocooned at his Mar-a-Lago estate, Trump watched as his defense attorneys responded to an emotional presentation by House impeachment managers with a series of dry, technical, and at times meandering arguments about due process and the constitutionality of the proceedings," Politico reports. "As they droned on, he grew increasingly frustrated with the sharp contrast between their muted response and the prosecution's opening salvo." But Trump, watching the trial on Newsmax, wasn't just dismayed at Castor's low-energy performance and the bad reviews from allies and senator-jurors, Politico reports. Castor declined to use "graphics or a video — tools his TV-obsessed client had hoped to deploy." And the former president was upset Castor "wore an ill-fitting suit and at one point praised the case presented by the Democratic House impeachment managers," The Washington Post adds, even though Trump himself was reportedly also impressed with the impeachment managers and their video presentation. And Castor notably "did what Trump himself has not: conceded Joe Biden won the presidential election," The Associated Press notes. He called Trump a "former president," said he "was removed by the voters," and argued that Americans are "smart enough to pick a new administration if they don't like the old one, and they just did." Trump continues to insist falsely that he actually won the election, and this "big lie" — that the election was "stolen" from him — undergirds his entire impeachment trial. Castor was using Trump's status as former president to make his case, rejected by the Senate, that it's unconstitutional to try a president after he leaves office. In fact, "Trump initially pushed his impeachment lawyers to make the baseless case that the election was stolen," the Post reports, "an approach they ultimately rejected while still arguing that the First Amendment protects their client's right to share misinformation and false claims." More stories from theweek.comTrump's dumbfounding defenseTrump the phone guy is backThe 2021 Oscars will be broadcast from multiple locations