INTRODUCTION
While it’s still too early to call the end of the global tightening, we can at least see it from here. The breadth and pace of this global monetary tightening cycle has been staggering. However, even when the hikes end, interest rates are likely to remain high for quite some time even as Quantitative Tightening (QT) will continue apace. In other words, markets are too complacent about the global liquidity and growth outlook. Exhibit A is today’s RBA hawkish surprise. In this piece, we focus on the Developed Markets monetary policy outlook, and will focus on Emerging Markets in a subsequent piece.
RECENT DEVELOPMENTS
The Reserve Bank of Australia sent a message that should reverberate across global markets. By hiking rates unexpectedly today, the RBA action underscored just how difficult it is proving to get stubbornly high inflation back to target. Simply put, it is obvious that interest rates around the world will go higher for longer. It’s really that simple and so any notions of quick monetary policy pivots are misguided. We believe that any easing by the major central banks is a 2024 story. Period. In particular, we continue to believe that the markets are underestimating the Fed’s capacity to tighten policy and to then keep it there for an extended period. This should be a huge, huge wakeup call for investors that have become way too complacent about a Fed pivot.
MAJORS
The Fed: Began March 2022; 475 bp of tightening so far; 25 bp more priced in; easing cycle priced to start in November; 125 bp of easing seen over the next 12 months and 225 bp over the next 24 months; likely to hike 25 bp May 3
The ECB: Began July 2022; 350 bp of tightening so far; 75 bp more priced in; easing cycle priced to start in Q1 2024; 50 bp of easing seen over the next 12 months and 125 bp over the next 24 months; likely to hike 25 bp May 4
The BOJ: Has not started tightening yet; tightening cycle priced to start in December; 15 bp of hiking seen over the next 12 months and 30 bp over the next 24 months; just kept policy on hold
The BOE: Began December 2021; 415 bp of tightening so far; 75 bp more priced in; easing cycle priced to start in Q1 2024; 50 bp of easing seen over the next 12 months and 125 bp over the next 24 months; likely to hike 25 bp May 11
The SNB: Began June 2022; 225 bp of tightening so far; 50 bp more priced in; easing cycle priced to start mid-2024; no easing seen over the next 12 months and 25-50 bp over the next 24 months; likely to hike 25 bp June 22
DOLLAR BLOC AND SCANDIES
The BOC: Began March 2022; 425 bp of tightening so far; no more priced in; easing cycle priced to start in December; 75 bp of easing seen over the next 12 months and 175 bp over the next 24 months; likely to pause June 7
The RBA: Began May 2022; 375 bp of tightening so far; no more hikes priced in; easing cycle priced to start Q1 2024; 25 bp of easing seen over the next 12 months and 50 bp over the next 24 months; just hiked 25 bp
The RBNZ: Began October 2021; 500 bp of tightening so far; 25 bp more priced in; easing cycle priced to start Q4; 50 bp of easing seen over the next 12 months and 175 bp over the next 24 months; likely to hike 25 bp May 23
Norges Bank: Began September 2021; 300 bp of tightening so far; 25 bp more priced in; easing cycle priced in to start Q1 2024; 25 bp of easing seen over the next 12 months and 100 bp over the next 24 months; likely to hike 25 bp May 4
Riksbank: Began April 2022; 350 bp of tightening so far; 25 bp more priced in; easing cycle priced in to start Q1 2024; 25 bp of easing seen over the next 12 months and 100 bp over the next 24 months; just hiked 50 bp
QUANTITATIVE TIGHTENING (QT)
No one is really talking about the fact that even when the many of the major central banks stop hiking rates, they will still be tightening via QT.
The Fed: QT began June 2022 with the Fed initially allowing $30 bln UST and $17.5 bln MBS to roll off each month; that pace increased to $60 bln UST and $35 bln MBS currently; the recent bump up in the balance sheet is due to use of the bank backstops; this is not QE per se but rather it is a temporary boost that will unwind when the emergency funding is paid back.
The ECB: QT began March 2023 with the ECB allowing EUR15 bln of its APP holdings to run off each month through June 2023; the hawks want to quicken the pace but we do not expect any announcement until the June meeting, with a possibly faster pace beginning in July; emergency PEPP holdings will be maintained steady through 2024.
The BOJ: The BOJ is still passively expanding its balance sheet; under Yield Curve Control, it must buy whatever amounts of JGBs are needed to keep the 10-year yield below the YCC ceiling at 0.50%; we believe the end of YCC is likely in H2 but the BOJ has given no hints about QT.
The BOE: QT began February 2022 with the BOE allowing maturing holdings to roll off; starting November 2022, the BOE began active QT by selling holdings of gilts and corporate bonds.
Riksbank: QT began April 2023 with the Riksbank actively selling SEK3.5 bln ($340 mln) per month in government bonds.
INVESTMENT IMPLICATIONS
With global liquidity set to tighten further well into 2024, we believe many asset classes will remain at risk. Liquidity-driven trades, especially equities, must recognize that the Fed and others are not going to pivot and flood the world with liquidity anytime soon. Rates are going higher for longer and that needs to be priced in. From a fundamental standpoint, assets that rely on strong global growth are also at risk, including commodities and Emerging Markets. Bottom line: the days of easy money are over and unlikely to return for quite some time.
