Weekly Focus: Softer inflation, harder central banks

In a week dominated by central bank meetings, the end result was a more hawkish impression despite inflation data for November generally surprising to the downside. In the US, the Fed hiked by 50bp as expected, but with 17 out of 19 FOMC members indicating a Fed funds rate above 5% in 2023 and Chairman Powell saying that the labour market is extremely tight and wage growth high. However, Powell also left a door open for more modest rate hikes in the future, and markets seem to have interpreted the meeting as more or less neutral. Markets were also supported by November inflation data being lower than expected, at just 0.1% m/m for headline CPI and 0.2% m/m for core. However, we note that wage-sensitive components of CPI did not really slow down, and we also see the Fed’s message as rather hawkish, pointing to high rates being maintained for long.

The ECB also delivered a 50bp rate hike as expected but with a clear message that rates are going up and that this will not be the last 50bp hike. ECB projections showed inflation exceeding the 2% target even in 2025 and the recession in 2023 being very mild if rates follow pre-meeting market pricing, which also clearly indicates that there is need and room for more hikes than that. ECB President Lagarde did not find much comfort in euro area inflation declining to 10% y/y in November, saying that it will likely rise again in January and February, which we agree with. Markets reacted with a large rise in especially 2 year yields and a stronger EUR, and we have updated our ECB call to expect a peak of 3.25% for the deposit rate in 2023. Much will depend on how inflation and other key variables actually develop over the coming months. PMI data for December rose but remain below 50, so indicating continued but slightly milder decline.

The Bank of England was also part of the 50bp hiking club, but was more dovish in its message than the Fed or the ECB, given the weakening of the British economy. But the Swiss central bank followed the trend with a hawkish message accompanying its 50bp rate hike, saying a bit like the ECB that the recession will be mild and that current monetary policy is not tight enough to bring inflation to target. Intervention to support the CHF is also clearly still a tool they can use to bring price growth down. Finally, Norges Bank was surprisingly hawkish, see the Scandi Update section.

During the coming week, we expect the Bank of Japan to stick to its outlier position as a central bank not tightening monetary policy, as inflation in Japan largely remains an imported phenomenon.

This is the final Weekly Focus in 2022, and over the holidays, we will among other things be keeping an eye on how the Covid situation develops in China, where wide spread contagion could affect supply chains and domestic demand. The US job report for December in the first week of the new year will be important to watch, given the Fed’s concern over the labour market.

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