Will the priced tightening come to pass?
Of course more signs of a deteriorating growth outlook would mean not only that the window to deliver on the priced tightening cycle in full will close, but also that central banks will then have to tread more carefully.
Markets' aggressive pricing and the widening spreads is doing part of the central banks’ job
Markets' aggressive pricing and the widening spreads is doing part of the central banks’ job as financial conditions are already tightening considerably. This also means that central banks may eventually not have to do as much as is priced. Our own economists for instance still see the ECB hiking by only 100bp through early 2023.
But near term, central banks may show little desire to turn more dovish just yet. Quite the opposite, as long as inflation remains their primary concern. While the front end of yield curves remain susceptible to ever more aggressive pricing of central bank tightening, it puts the back part of yield curves in the position to express fears over the economic outlook for now.
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