Interest rate outlook
US rate expectations
EU rate expectations
Official Policy Rates
Insights
CONCEPT
Interest rates are the primary tool central banks use to influence economic activity, inflation, and employment. Here we monitor both (1) market expectations on future interest rates, derived from daily-traded FED fund & EURIBOR futures, and (2) the official policy rates in US and Europe, and their differential.
CURRENT READINGS
- Investors are pricing-in STABLE interest rates in US, TIGHTER interest rates in EU over the next 6 months. In more detail, market participants expect US rates to move by 0bps over the next 6 months with no further change to 1 year from now. In Europe, they predict rates to move by 25bps in 6 months with no further change to 1 year from now.
- Looking at US-EU rate policy divergence, the current spread (1.70%) is high and is changing direction, moving lower after earlier gains. Interest rate levels between the two regions are quite different at this point. Such divergence should push US bond yields to be clearly higher than EU ones, and should also support the USD (ignoring other factors).
MARKET IMPLICATIONS
Rate expectations are an absolutely key indicator to understand what markets expect from central banks going forward. Tighter rates make borrowing becomes more expensive for both businesses and consumers, spending is squeezed and savings increase. If tightening goes on for long enough, tighter monetary policy will ultimately lower inflation but also slower economic growth. Bond yields increase in such scenario (their price decrease) while stocks can do well as long as growth is robust, or fade otherwise. Lower rates make money cheaper and thus stimulates the economy by encouraging investment, hiring and consumer spending. Both equities and bonds do benefit.