Markets Not Holding Back On Rate Hike Bets

By Bloomberg commentator Laura Cooper

Markets grappling with central bank reaction functions aren’t holding back on tightening bets. Rate hike expectations over the coming year have risen across major advanced economies as markets reprice growth prospects. Yet the upbeat growth narrative isn’t warranted everywhere — with policy makers likely to push back against premature tightening bets.

The global reflation trade emanating from the U.S.-led fiscal impulse and vaccine rollouts is evident in money markets’ implied trajectories for policy tightening. Norway leads G-10 hiking bets followed by Canada and New Zealand. Except, policy makers here have maintained their dovish stance given uncertain economic prospects — it sets up for markets to reprice upbeat bets, with policy makers likely to push back in the week ahead.

The challenge facing policy makers is multi-fold. The European recovery is lagging on account of sluggish vaccine rollouts, extended lockdowns and a weaker fiscal impulse than the U.S. The U.K. recovery prospects are challenged by post-pandemic uncertainty, with BoE’s Andrew Bailey confirming as much today. And while the Nordics could be better positioned to match market expectations after experiencing a shallower output decline than peers, Canada continues to struggle in vaccine rollouts. And it’s unlikely many of these central banks will precede the Fed.

After years of struggling to generate demand side price pressures, markets pricing in tightening outside of the U.S. could be getting ahead of themselves. One thing is becoming clear – market bets on synchronized global growth, and subsequent rate hikes, look overdone with a spillover to respective assets ahead.