Expectations for how drastically central banks need to tighten monetary policy to fight soaring inflation have taken another leap higher. Thereby shaking up global markets and rattling investors.
Among the eye-catching moves from monetary authorities in recent days have been a 75-basis-point increase from the Federal Reserve. The largest U.S. rate rise in nearly three decades, The Swiss National Bank’s first hike in 15 years, and another 25-basis-point increase by the Bank of England.
Investors are bracing for more bold moves. In the United States, Fed funds futures on Friday were pricing in a 44.6% chance that the fed funds rate will reach 3.5% by the end of the year. That is, from the current 1.58% level, and that probability was less than 1% a week ago.
Worries that the Fed’s aggressive rate hike path will push the economy into recession have grown in recent days, slamming stocks. The index’s 6% decline this week has put it on pace for its worst weekly drop since March 2020. Europe’s Stoxx 600 index (.STOXX) is down about 17% this year, while Japan’s Nikkei share average (.N225) is off about 10%.
Shifting rate expectations have also sparked big swings in bond and currency markets. The ICE BofAML MOVE Index (.MOVE), which tracks Treasury volatility, stands at its highest level since March 2020, while the Deutsche Bank Currency Volatility Index (.DBCVIX), which measures expectations for gyrations in FX, has also headed higher this year.
Money markets now price in around 272 basis points of hikes by July 2023, putting rates at 2.1% by that date. That compares with a rise to 1.5% by early 2024, priced at the start of June.
In Australia, futures show markets braced for the benchmark cash rate, currently at 0.85%, breaching 4% next year. Which is against central bank officials’ guidance for a peak in rates around 2.5%.
Britain’s benchmark rate is now at its highest since January 2009, when borrowing costs slashed as the global financial crisis raged.