Global Economy & Markets, Weekly Roundup 26/03/24
Central banks on track to start cutting rates in mid-2024
Risk assets remained well bid in the past fortnight, as central banks reiterated their intention to lower rates in the second quarter of the year despite volatile inflation. Moreover, in a surprise move, the Swiss central bank (SNB) cut policy rates by 25 basis points to 1.50% due to significantly lower inflation projections.
The Federal Reserve kept, as expected, the target range for the Federal Funds Rate at a range of 5.25% - 5.5% maintaining its median projection for 75 basis points of cuts by the end of 2024. US real GDP growth and core inflation projections for 2024 were revised higher.
Equity majors reached fresh record highs, with the S&P500 up by +1.8% in the past fortnight (+9% YtD). Euro area and Japanese equities followed suit, with the Bank of Japan increasing its short-term policy rate at a range of 0.0% - 0.1% from -0.1% and exiting the negative interest rate regime it has been into since early-2016.
The Bank of Japan judged that the prospects of CPI excluding fresh food (+2.8% yoy in February 2024) settling in a sustainable and stable manner in the medium-term at levels consistent with its price stability target of 2% have strengthened.
The increased confidence comes mainly as a virtuous cycle between wages and prices is underway, on the back, inter alia, of the annual wage negotiations (“Shunto”) between corporates and workers’ unions, so far pointing to weighted average gains of +3.7% yoy for base pays.
Furthermore, the yield curve control policy (YCC), via targeting a 10-year Japanese government bond yield of “around zero” with an upper bound of +1.0% being the main reference point, ended. Still, government bond purchases will continue.
The BoJ noted that a gross monthly pace of circa JPY 6 trillion (annualized pace of 12% of GDP) will be maintained. Such a pace would roughly match the amount of maturing securities, suggesting minor purchases in net terms. The BoJ will proceed with additional JGB purchases only in case of a rapid rise in long-term interest rates.
At the same time, purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) are discontinued. Having said that, no purchases had been made in recent months and only minor ones in 2023. The above decisions suggest that the stock of BoJ’s balance sheet will remain elevated and broadly stable at 130% of 2023 GDP.
The Bank of England stood pat, as expected, with the Bank Rate at 5.25%. Two out of nine voting members who previously judged an interest rate hike as being appropriate, no longer hold that view. In addition, Governor Bailey acknowledged “things move in the right direction” for interest rate cuts, albeit refraining from explicitly placing that prospect in the visible horizon. UK Gilts overperformed, with 10-Year interest rates declining by -6 bps to 4.0% and 2-Year interest rates by -4 bps to 4.19%.
Overall, long-term core global Government bond yields moved slightly lower after the central bank meetings last week, albeit have remained in a range in the past six weeks due to inflation uncertainty. Note that market expectations have been settled closer to Authorities’ views.
Risk assets remained well bid in the past fortnight, as central banks reiterated their intention to lower rates in the second quarter of the year despite volatile inflation. Moreover, in a surprise move, the Swiss central bank (SNB) cut policy rates by 25 basis points to 1.50% due to significantly lower inflation projections.
The Federal Reserve kept, as expected, the target range for the Federal Funds Rate at a range of 5.25% - 5.5% maintaining its median projection for 75 basis points of cuts by the end of 2024. US real GDP growth and core inflation projections for 2024 were revised higher.
Equity majors reached fresh record highs, with the S&P500 up by +1.8% in the past fortnight (+9% YtD). Euro area and Japanese equities followed suit, with the Bank of Japan increasing its short-term policy rate at a range of 0.0% - 0.1% from -0.1% and exiting the negative interest rate regime it has been into since early-2016.
The Bank of Japan judged that the prospects of CPI excluding fresh food (+2.8% yoy in February 2024) settling in a sustainable and stable manner in the medium-term at levels consistent with its price stability target of 2% have strengthened.
The increased confidence comes mainly as a virtuous cycle between wages and prices is underway, on the back, inter alia, of the annual wage negotiations (“Shunto”) between corporates and workers’ unions, so far pointing to weighted average gains of +3.7% yoy for base pays.
Furthermore, the yield curve control policy (YCC), via targeting a 10-year Japanese government bond yield of “around zero” with an upper bound of +1.0% being the main reference point, ended. Still, government bond purchases will continue.
The BoJ noted that a gross monthly pace of circa JPY 6 trillion (annualized pace of 12% of GDP) will be maintained. Such a pace would roughly match the amount of maturing securities, suggesting minor purchases in net terms. The BoJ will proceed with additional JGB purchases only in case of a rapid rise in long-term interest rates.
At the same time, purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) are discontinued. Having said that, no purchases had been made in recent months and only minor ones in 2023. The above decisions suggest that the stock of BoJ’s balance sheet will remain elevated and broadly stable at 130% of 2023 GDP.
The Bank of England stood pat, as expected, with the Bank Rate at 5.25%. Two out of nine voting members who previously judged an interest rate hike as being appropriate, no longer hold that view. In addition, Governor Bailey acknowledged “things move in the right direction” for interest rate cuts, albeit refraining from explicitly placing that prospect in the visible horizon. UK Gilts overperformed, with 10-Year interest rates declining by -6 bps to 4.0% and 2-Year interest rates by -4 bps to 4.19%.
Overall, long-term core global Government bond yields moved slightly lower after the central bank meetings last week, albeit have remained in a range in the past six weeks due to inflation uncertainty. Note that market expectations have been settled closer to Authorities’ views.