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Bitcoin and Equities Roll Over as Markets Digest Another Round of Rate Hikes: MacroSlate Report

Here’s a look at the Fed’s, ECB’s, and BOE’s CPI and rate hikes.

A further drop in CPI to 7.1% on December 13 was met by an expected rally in equities and a drop in the US dollar and treasury yields. Powell raised interest rates by 50 basis points on December 14 to a new federal funds rate target of 4.25%-4.5%.

Headline inflation fell from 7.7% to 7.1%, offset by a 0.5% drop in core goods prices and a 1.6% drop in energy prices.

Core goods inflation has remained below 4% since peaking at more than 12% in February. However, excluding energy, service inflation rose to 6.8%. Services inflation will remain elevated as the job market in the United States remains strong; however, this could change in 2023.

The fed raised rates by an expected 50bps to set the new fed funds target of 4.25%-4.5%, and the tone from Powell remains unchanged “ongoing” rate hikes and “we will stay the course until the job is done”. Powell anticipates that inflation will continue to fall slowly as the labor market remains tight. Despite falling house and goods prices, 55% of core CPI continues to rise rapidly.

The market is still at odds with the Fed over futures fed funds rates. The market expects the fed funds rate to peak at 4.8% in May 2023, then fall to 4.5% by December 2023.

Each dot on the DOT plot, which depicts federal funds rate projections, represents the viewpoint of a Fed policymaker. The Fed’s projected funds rate at the end of 2023 is higher than the market’s, revised from 4.6% to 5.1%; seven Fed officials predict a rate above 5.1% and ten above 5%.

On December 15, the Bank of England raised the bank rate by 50 basis points to 3.5%. The BOE raised interest rates for the ninth time in a row. Furthermore, inflation in the United Kingdom may have peaked, as inflation expectations outperformed market expectations, and inflation fell from 11.1% to 10.7%, with the core rate falling to 6.3% from 6.5%.

Furthermore, the ECB raised interest rates from 1.5% to 2% and announced plans to reduce its balance sheet.

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