Germany on brink of recession as economy shrinks; central banks may raise interest rates to 15-year highs this week – as it happened

German GDP shrank by 0.2% in Q4 2022, worse than expected, as investors anticipate borrowing costs to be hiked again this week

• Bank of England poised to raise interest rates for 10th time in a row
• Ryanair reports bumper profits amid pent-up demand

Bond prices have rapidly rebounded since the start of the year from last year's historic sell-off, as markets bet that interest rate rises will slow and, in the case of the US Federal Reserve, even go into reverse, the Financial Times points out.

But some investors have doubts, the FT says, so this week's central bank decisions could cause jitteriness - as higher interest rates will slow growth.

[It] is going to be super difficult again for the Fed to...get inflation down to that magical 2 per cent number without putting us into a recession."

The credit markets are effectively pricing in a no-recession outcome. But that's not the consensus base case that most economists are forecasting."

We expect the hawks to still prevail - for now. Most clearly so at the ECB. In a shaky December compromise, some hawks bended to slowing the rate hikes to 50bp in exchange for hawkish forward guidance and a binding commitment to quantitative tightening. Some doves have revoked this truce recently, pushing for smaller hikes after Feb. as headline inflation eased into single digits.

Yet more likely, the ECB will stay the course. Amid high core CPI (up 5.2% in Dec.), economic resilience (we no longer expect a winter recession), rising wages and hawkish pledges by President Lagarde we see the hawks still prevailing. Markets underestimate the terminal rate, which is at 3.5% in our books.

The Fed's Dec. dots suggest further moves in both March and May. Markets, cheered by moderating inflation and weaker leading indicators, don't buy this any longer. Dovish FOMC members are stressing more eagerly the Fed's dual mandate (inflation and employment).

Ultimately, though, led by Chair Powell, the FOMC is still likely to lean towards a steady approach to inflation fighting as fin. conditions have recently eased. So expect the outlook language of ongoing increases" (plural) to be maintained in the statement.