Rate hikes by year-end

• RBNZ: 76 bps (70% probability of no change at the next meeting)
• ECB: 64 bps (88% probability of rate hike at the next meeting)
• BoE: 48 bps (83% probability of no change at the next meeting)
• BoJ: 46 bps (75% probability of rate hike at the next meeting)
• BoC: 41 bps (99% probability of no change at the next meeting)
• RBA: 25 bps (88% probability of no change at the next meeting)
• Fed: 20 bps (99% probability of no change at the next meeting)
• SNB: 19 bps (98% probability of no change at the next meeting)

There weren’t material changes in market pricing this week but what is catching everyone’s attention is the increase in Fed’s rate hike bets.

This is due to the prolonged US-Iran stalemate and the Strait of Hormuz closure, which is keeping oil price elevated as we approach the June FOMC meeting. As a reminder, the June meeting is going to have the SEP and the dot plot, so we might be in for a hawkish surprise if nothing changes before then.

The US data has been showing resilience and the Fed has been slowly abandoning the easing bias with more and more policymakers talking about the need of keeping all options on the table, and some explicitly bringing up rate hike possibilities. That was also signalled in the FOMC meeting minutes.

Today, we might get a taste of the impact of a hawkish Fed on the markets. In fact, we have Fed’s Waller speaking on the Economic Outlook. The economic outlook speeches generally contain policy signals. Fed’s Waller has been a great “leading indicator” for Fed policy in this cycle, and I think the market would react in a big way if he were to change his dovish stance now.

He’s been worrying about the labour market, but the data has been pointing to resilient conditions. What is more in tension now is inflation and if he switches his focus back to that, it might be taken as a signal for potential rate hikes.