A trader works as a screen displays a news conference by Federal Reserve Chairman Jerome Powell following the Fed’s rate announcement on the floor of the New York Stock Exchange (NYSE) in New York , July 26, 2023.
Brendan McDermid | Reuters
The world’s major central banks have suspended their interest rate hike cycles in recent weeks and, with data suggesting economies are slowing, markets are turning their attention to the first round of cuts.
The U.S. Federal Reserve, the European Central Bank and the Bank of England have raised rates significantly over the past 18 months in an effort to bring soaring inflation under control.
The Fed kept its benchmark interest rates steady in a target range of 5.25% to 5.5% for the second straight meeting on Wednesday, after ending a series of 11 hikes in September.
Although Chairman Jerome Powell was keen to reiterate that the Fed’s work on inflation is not yet complete, the annual increase in the Consumer Price Index (CPI) came in at 3.7 % in September, down from the peak of 9.1% recorded during the pandemic. June 2022.
Yet despite Powell’s refusal to close the door on further hikes in order to finish the job on inflation, markets interpreted the central bank’s tone as a slightly dovish pivot and rallied behind the decision.
The market is now closely anticipating a first cut of 25 basis points from the Fed on May 1, 2024, according to the CME group. FedWatch Toolwith cuts of 100 basis points now expected by the end of next year.
Since last week’s decision, U.S. nonfarm payroll gains have been weaker than expected for October, with below-trend job creation, slightly higher unemployment, and further deceleration in wages. . Although headline inflation remained unchanged at 3.7% annually from August to September, the core figure returned to 4.1%, having roughly halved over the past 12 months.
“Core PCE, which is the Fed’s preferred measure of inflation, is even lower, at 2.5% (3-month, annualized),” noted analysts at DBRS Morningstar.
“The lagged effects of a slowdown in the housing market are expected to reinforce the disinflationary trend over the coming months.”
But despite the accommodating data, in the short term American treasures reverse course to sell on Monday, which German BankJim Reid of , noted that investors were starting to “wonder whether last week’s talk of rate cuts was overdone.” The US economy is also proving more resilient than that of the UK and the Eurozone.
“For example, market pricing for the Fed now implies a 16% chance of another rate hike, up from 11% on Friday,” Reid said in an email Tuesday.
“Additionally, the forecast rate at the December 2024 meeting was up +12.4 basis points to 4.47%. So there was a clear, albeit partial, unwinding of last week’s movements. “
Reid also noted that this is the seventh time this cycle that markets have reacted noticeably to dovish speculation.
“It’s clear that rates aren’t going to keep rising forever, but on the previous six occasions we’ve seen hopes for short-term rate cuts dashed each time. Note that we still have inflation above average. objective in all G7 countries,” he said. added.
The ECB ended its run of 10 consecutive hikes last month to keep its benchmark interest rate at a record 4%, with euro zone inflation falling to a two-year low of 2 .9% in October and the base figure also continues to decline. .
The market also forecasts cuts of almost 100 basis points for the ECB by December 2024, but the first cut of 25 basis points is mainly planned for April, economic weakness across all 20 members of the currency bloc common fueling bets that the central bank will be the first to start relaxing its strict policy stance.
Gilles Moëc, chief economist at AXA Group, said October’s inflation figures confirmed and amplified the message that “disinflation was a reality for Europe”, justifying the ECB’s “new caution” .
“Of course, current disinflation does not rule out the possibility that a ‘resistance line’ will be found well above the ECB’s target. Yet confirmation that the Eurozone was flirting with recession in the summer The latter reduces this probability,” Moëc said in a research note Monday.
After the October meeting, ECB President Christine Lagarde rejected the suggestion of a rate cut, but National Bank of Greece Governor Yannis Stournaras has since openly discussed the possibility of a rate cut. mid-2024, provided inflation stabilizes below 3%.
“This implicitly argues in favor of a forward-looking version of monetary policy that takes into account lags to calibrate its position. Clearly, waiting for inflation to reach 2% before reducing rates would be ‘exaggerated’,” said Moëc.
“There is no doubt in our minds that the current data flow clearly favors the doves, but the hawks are far from giving up the fight.”
The Bank of England
The Bank of England on Thursday kept its key rate unchanged at 5.25% for a second consecutive meeting, after ending a series of 14 consecutive increases in September.
However, minutes of last week’s meeting reiterated the Monetary Policy Committee’s expectations that rates will need to remain high for longer, with UK CPI holding steady at 6.7% in September. Despite this, the market on Monday expected reductions of around 60 basis points by December 2024, albeit from the second half of the year.
Economists at BNP Paribas noted an “eye-catching” addition to the MPC’s guidance on Thursday, according to which its latest projections indicated that “monetary policy will likely need to be restrictive for a prolonged period.”
“Governor Andrew Bailey’s comments at the press conference indicated that these forecasts were not intended to dampen the market-implied policy rate trajectory that underlies his latest forecast of a 25 point reduction in base is not fully integrated until the second half of 2024.” they said.
“Instead, the intention was to indicate that cuts should not feature in discussions anytime soon.”
At Thursday’s press conference, Bailey highlighted the upside risks to the Bank’s inflation projections, rather than considering any suggestion of a cut on the horizon.
“While we don’t think this necessarily indicates a high risk of further hikes in the near term, we read this as a further sign that the MPC is not considering a rate cut and won’t for some time,” said BNP Paribas. added.