Eyes on Fed, ECB Rate Decisions and NFP Report
The US Federal Reserve (Fed) and the European Central Bank (ECB) are expected to announce their interest rate decisions today and tomorrow, respectively. The Fed’s governing board meeting is overshadowed by concerns over the regional banking sector that suffered one more blow over the weekend when JPMorgan stepped in to take over the troubled First Republic Bank.
The week that started with the Reserve Bank of Australia (RBA) delivering an unexpected rate hike will close with the US Nonfarm Payrolls report which will likely give a valuable insight into how the labour market reacts to the Fed’s monetary policy tightening strategy.
The International Monetary Fund’s (IMF) Regional Economic Outlook for Middle East, Central Asia and North Africa suggested that “economic growth in the Middle East, North Africa and Central Asia regions will slow in 2023, underlining the need to accelerate structural reforms.” The IMF report said that “Real GDP growth in the Middle East and Central Asia is forecast to fall to 2.9% in 2023, from 5.3% last year, before improving to 3.5% in 2024.”
Fed Interest Rate Decision
On Wednesday evening, the Fed will announce its interest rate decision. The CME FedWatch Tool gives an 86.1% (Wednesday morning) probability of the Fed raising its benchmark interest rate by 25 basis points. As many market analysts suggest that a rate hike is anticipated, economists will scrutinise the Federal Open Market Committee (FOMC) statement for signs of an upcoming monetary policy tightening pause.
ING’s economists noted in their report that “a no-change decision would be seen as very dovish given the Fed commentary over recent weeks. It would suggest that the Fed has received news that the latest banking stresses are causing major issues, and this would be the catalyst for a sharply weaker dollar and lower Treasury yields. We don’t believe we are there yet. Nonetheless, the uncertainty and nervousness that banking stresses are causing rule out a very hawkish 50bp hike. We are forecasting a 25bp hike on 3 May, which is the consensus view.”
ECB Interest Rate Decision
The ECB’s interest rate decision will be following suit on Thursday afternoon. The eurozone’s central bank is likely to raise borrowing costs, with economists arguing between a 25 or a 50-basis points rate hike. Consumer prices across eurozone countries grew by 7% in April on an annualised basis, 0.1% more than the 6.9% figure recorded in March.
Market analysts at ANZ bank wrote in a report that “the ECB is not yet able to contemplate pausing its tightening cycle. We forecast a 25bp rate rise this week as the ECB balances the lagged effects of previous rate hikes, recent banking turmoil and further tightening. Clearly, if core inflation is still ratcheting higher in annual terms and both bank lending conditions and credit are holding up well, the ECB could opt for a 50bp rise.”
Analysts at ING suggested that “sticky inflation data clearly stresses the need to continue hiking but with last week’s weaker-than-expected GDP growth report and today’s weak loan growth and loan demand data, the case for slowing down the pace and size of rate hikes has become stronger.”
US Nonfarm Payrolls April Report
Another important data release will be the US Nonfarm Payrolls report on Friday. The Bureau of Labour Statistics (BLS) will publish the report that shows the state of the labour market and is taken into consideration by the Fed’s board members when deciding on monetary policy adjustments. Economists suggest that the US economy added 160k jobs in April.
Wells Fargo analysts commenting on the Job Openings and Labor Turnover Survey (JOLTS) for March, published on Tuesday, noted: “The labour market remains tight with openings and quits still above pre-pandemic levels and involuntary separations just getting back to what prevailed in 2018-2019. But a clear trend is emerging, and we expect labour demand to keep receding in the months to come. We look for another step down in the pace of job growth in Friday's employment report, with more weakness to come later this year and into 2024.
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