Erste Asset Management

The hour of the hawks

The hour of the hawks
The hour of the hawks
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The financial markets are facing high uncertainty on several levels. This concerns inflation, economic growth, monetary policy and geopolitics both in the short term (this year) and in the long term. The markets are trying to deal with this uncertainty.

The hope that there will be no further increase in commodity prices due to the absence of quantity restrictions on commodities (export restrictions on the part of Russia and / or import restrictions on the part of the West) has led to price increases in equities and a narrowing of credit spreads in recent days. If the economic impact of the war in Ukraine does not upset the economic expansion, the pressure on central banks to raise key interest rates to higher levels sooner and faster will increase. At the same time, however, the risk of a failure of the peace talks and further sanctions remains considerable.

Pressure on central banks increases

From a market perspective, the most important event in the past few days was the further increase in expectations of a key interest rate hike in the USA (mini interest rate shock). In the meantime, a key interest rate of just under 2.5% has been priced in for December 2022 and an interest rate of just under 3% for December 2023. The decisive factor was a speech by Fed Chairman Powell entitled “Restoring Price Stability”. Little was new in terms of content, but the tone was even more hawkish than the Federal Open Market Committee press conference a few days earlier. The speech described the labour market as very strong and inflation as far too high. The answer to three self-asked questions was clearly “hawkish”, i.e. focused on achieving the inflation target in a hawkish tone.

  1. What will be the impact of the Ukraine war? Answer: No particular concern discernible.
  2. How likely is it that monetary policy can lower inflation without triggering a recession? Answer: The Fed will do its best to successfully meet this challenge. The economy is very strong and well positioned to cope with tighter monetary policy.
  3. What will it take to restore price stability? Answer: If it is appropriate to raise the policy rate by more than 25 basis points (25 basis points = 0.25 percentage points) at one or more meetings, we will do so. And if we conclude that we need to adopt a restrictive stance (above a neutral policy rate level), we will do that too.

US-Bond yields (3M, 10Y constant maturity; – 10 years)

Source: Refinitiv Datastream/Fathom Consulting as of 31/03/2022

Inflation higher than expected

Inflation rates in February were in many cases higher than expected (OECD area: 7.7% yoy). Energy prices recorded the strongest increase. Food price inflation was equally remarkable. It is worth noting that core inflation (excluding food and energy) was also strong. High core inflation rates are an important argument for central banks in advanced economies to bring forward or accelerate the cycle of interest rate hikes. With the war in Ukraine, commodity prices have risen further. Mainly because of this, the first inflation reports for March show further increases in inflation (Germany: 2.5% monthly / 7.6% annual). Inflation rates could continue to climb in the coming months. This is also indicated by the preliminary Purchasing Managers’ Index for March: Companies’ selling prices continued to rise in March. Consumers’ inflation expectations are also on the rise. The risk of secondary round effects is greater the lower the unemployment rate (low at 5.3% in the OECD area) and the stronger the economy is growing (the less the economy is affected by the war in Ukraine).

Purchasing managers’ indices remain robust

On a positive note, the preliminary Purchasing Managers’ Indices for the advanced economies for the month of March showed only a comparatively small impact of the war in Ukraine on activity. Moreover, the strong increase in the purchasing managers’ index for the service sector since January can be attributed to the diminishing negative influence of the omicron variant. From a central bank perspective, this reduces the concern of triggering a recession with key interest rate hikes.

The expectation and sentiment indicators, on the other hand, point to a clear deterioration. In the aggregate purchasing managers’ report, the component “future production” shows a clear decline. On the business side, the sharp decline in the expectations component of the IFO-report in Germany in March stands out. The value has approached the pandemic low of April 2020. Similarly, consumer sentiment in the Eurozone is only just above the pandemic low according to the European Commission’s March report. These reports point to downside economic risks that are greater in Europe and the Eurozone, respectively, than in the US.


In the US, swift rate hikes to levels of 2.5% by the end of 2022 and 3% by the end of 2023 have become likely. In March, the Fed already raised the key interest rate for the first time by 0.25 percentage points to 0.5% (upper band for the key interest rate). At the next two central bank meetings, the key interest rates could even be raised by half a percentage point each. Although the European Central Bank will only proceed moderately because wage growth is significantly lower in the Eurozone and economic risks are greater, an exit from the negative interest rate policy this year is likely. The key interest rate for the deposit facility is currently at minus 0.5%. By the end of 2022, this rate could be raised to zero percent.

Legal note:

Prognoses are no reliable indicator for future performance.


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