When Powell allowed market based conditions to dictate the Fed Funds path, he indirectly also introduced a hawkish reaction function, if risk and term premias abate in coming weeks.
The ECB is closer to pausing than the Fed and the clear headline mandate may allow the ECB to throw in the towel on the hiking cycle earlier than peers. Tomorrow’s inflation data is key. Here is our chart-package.
Incentives will matter a lot in coming weeks and months if the Fed has actually paused. Interest rate volatility is likely to come down, which mechanically leads to increased risk appetite.
A pause is now the clear base case. The regional banking stress is now more equity/credit driven than deposit driven, which will be harder to backstop for the FDIC and the authorities. Will the ECB sound dovish?
Everything released from the US economy this week speaks in favour of a pause. The NFP and CPI reports hold the potential to alter that view but the bar is high. We think the hiking cycle is over.
The RBA paused with a hiking bias intact. Is this the short-term playbook for other Western central banks? RBNZ comes up later, while the ECB members have started to sound the alarm.