Goldman: Front-Loading Goes Global

Goldman Sachs note that “over the past two weeks, a series of hawkish pivots by central banks amidst persistently elevated inflation has resulted in record repricing of terminal rates across G10, increasing by anywhere from 25-80bp. Starting with the ECB's revealed openness to 50bp hikes, followed up by the Fed's 75bp hike, hawkish commentary from RBA Governor Lowe (which led our economists to now anticipate 50bp hikes at the next two meetings), a hawkish 25bp hike by the BoE (with an openness to larger increments at future meetings), and finally, a surprise 50bp hike by the SNB. Generally, regions where central banks have been the most aggressive with hawkish pivots have seen both the greatest extent of front-loading of hikes as well as some of the largest changes month-to-date to terminal rate repricing. Is there more to come? Barring a clear upward unanchoring of inflation expectations, for now, we think not. Additionally, we suspect low levels of liquidity have resulted in outsized moves - our estimate of the price impact coefficient of order flow at the front end in the U.S. shows significantly impaired market microstructure - so at least some portion of these changes could locally reverse. While we expect a pause for now, at least in the case of the early hikers, over time, the trajectory of inflation remains the key macro variable that will determine the realized terminal rates, and continued persistence on that front presents the risk of another leg of upward repricing.”