Closing 2021 with a full agenda for market participants

The close of 2021 it will take place under a true “stellar season finale,” with an agenda this week that will integrate the decisions of the world’s most important central banks. Consequently, the actions and bias that derive from the monetary policy announcements of the following days will be decisive for the dynamics in markets, at least until the first half of January when the operation reintegrates dynamism and with it the liquidity restores depth before the effect. of the holiday season.

The main focus will be on the final decision of the Federal Reserve Bank of this year. In addition to the fact that the market will closely follow the way in which it will express its notion of inflationary dynamics and the equilibrium of the labor market, in Banorte We hope that on December 15 the Fed announce an acceleration of tapering from January. In other words, the reduction in the amount of the asset purchase program is doubled from $ 15 billion to $ 30 billion.

The shock in markets and in growth expectations due to the impact of the Omicron variant of the virus in the last two weeks questioned whether the possible more restrictive bias of the Fed, as well as of other central banks, should, at least, moderate. However, recent relatively encouraging news on Omicron suggests that this risk is probably less than the most serious scenario the market ever incorporated.

Meanwhile, inflation dynamics continue to be clearly pressing in U.S and the global value chain experiences prevailing bottlenecks. In this sense, the Fed’s bias will probably continue to be directed towards tightening its monetary policy, with which the update of the economic estimates that it publishes quarterly will also be of great relevance, especially the Dot Plots, together with the conference of its president. Jerome Powell where he will articulate the decided strategy in more detail.

In this framework, immediately after the Fed, on December 16 the Bank of Mexico will announce its respective decision. At Banorte, we expect an increase in the reference rate of 50 bp to bring it to 5.50%, which would increase the magnitude of the hikes compared to the 25 bp increases that have been made in this year’s decisions. The latest survey of the banking sector published on December 7 reflects a total of 27 participants, with 5 expecting a move of 50bp with the rest estimating a rise of 25bp.

Meanwhile, the approximate market discount for the valuation in the short part of TIIE-28 derivatives reflects a probability of around 80% (~ + 40bp) for a 50bp adjustment. This divergence reflects the market’s perception of the central bank’s caution given the gradualness of recent adjustments, although it is true that the market discount has also been notably more sensitive to the recent reversal in Treasuries and subsequent rebound by latest upside surprises in local inflation.

Also on December 16, prior to Banxico, both the European Central Bank (ECB) as the Bank of england (BoE) their respective decisions will be announced. The former will probably also make adjustments to its purchasing packages, while the latter is going through a more complex context to raise its benchmark rate, as some participants anticipate.

However, this option should not be totally ruled out with the market assigning it a probability of around 40 percent. For his part, Japanese Central Bank (BoJ) will announce its decision on the night of December 14 (Mexico time) with few expected changes to its yield curve control strategy and the possibility of extension to the special stimulus program by the Covid-19 towards the following year.

As if that were not enough, the week’s agenda will also include the corresponding decisions of Norway, Chile, Hungary, Indonesia, the Philippines, Taiwan, Turkey, Colombia and Russia. Regarding the latter and except in the case of the Asian authorities, the bias in emerging regions will also impose relevant attention for Banxico’s decision, where just last week Brazil underpinned its strong restrictive bias by revising its benchmark rate upwards by 150 bp and indicate an adjustment of the same magnitude for its next decision in February.

* The author is deputy director of Fixed Income Strategy and Exchange Rate at Grupo Financiero Banorte.

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