Clear signals expected for US interest rate hike in March

Next week, the FOMC, the US Federal Reserve's monetary policy-making body, meets. The meeting will receive a lot of attention from the markets, as indications are expected as to when the first rate hike can be expected. At the beginning of the year, a number of FOMC members argued for an early first-rate move. This bias should be confirmed next week and we expect clear indications for a rate hike at the March meeting. We, therefore, bring forward our expectations for the first-rate move of 0.25% from May to March. Isolated market expectations of a 0.5% rate hike in March, on the other hand, should be disappointed. The FOMC would thus signal haste and interest rate expectations would probably rise in the markets for the rest of the year. This could trigger another wave of selling, which the FOMC wants to prevent, especially in the equity markets.

The interest rate trend beyond that remains uncertain. With four rate hikes this year, the markets are betting on relatively continuous development. However, in our view, there are a number of risks to this. The current COVID-19 wave has led to daily new infections that are many times higher than previous waves. This should dampen the economy during the first months of the year. Added to this are the risks of a military conflict between Russia and Ukraine. The impact will depend on what sanctions the US and Europe decide to impose and how Russia responds.

It is clear that inflation rates will fall in the course of the year, as strong price increases will drop out of the calculation. The question is whether new inflationary pressures will emerge from elsewhere. Wage growth has indeed accelerated significantly during the last six months, but sectors that were hit hard by the effects of the pandemic (leisure, transport) have contributed significantly to this. The most important question for the development of monetary policy will be how many more Americans will return to the labor market and thus ease the tensions. We believe there will be many more once the pandemic subsides.

We remain more cautious than the market. However, recent statements by Federal Reserve officials now lead us to expect two rate hikes this year.

EZ – Important sentiment data expected

PMI data for the Eurozone will be published next week (January 24). This is the first important data point for the economy in 2022. In December, manufacturing sentiment stabilized at a high level as supply chain problems gradually eased. In contrast, service provider sentiment has weakened, due to rapidly rising new COVID-19 infections.

We expect purchasing manager sentiment to stabilize to a large extent in January, although there may already be a slight brightening among service providers. Due to the Omicron variant, the infection figures in all Eurozone countries have risen rapidly and significantly since the beginning of January. However, the example of the United Kingdom shows that the Omicron wave should quickly subside again after around three weeks. The UK will therefore lift all Corona measures (including no more mandatory masks, no more verification of vaccination or test certificates) as early as next week. Although the way in which the pandemic is being dealt with differs greatly from country to country in Europe, this outlook should brighten the mood of service providers in the Eurozone somewhat in January.

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