The Week Ahead
Asset markets witnessed a roller coaster week amid key central bank decisions, which included the first Bank of Japan (BoJ) hike in 17 years, the steady Fed and the BoE, and the surprise 25bp cut, to 1.50%, by the Swiss National Bank. The UST yield curve repriced through the week. The yield on the 2-year closed the week 14bps lower at 4.59%, having spiked as high as 4.75% ahead of the Fed meeting. Meanwhile, the 10-year benchmark yield rallied 11bps to 4.20%. US equity markets once again charged to new highs; the S&P Index gained 2.29%. The DXY Index jumped 0.96%, having enjoyed the more dovish tilts from the SNB and BoE and the broadly strong S&P Global US manufacturing and US housing market prints.
In what was a very telegraphed move, the BoJ, after 17 years, shifted out of negative short-term rates and longer-term yield caps. The BoJ also said it stopped purchases of ETFs and Japanese real estate investment trusts. The central bank also pledged to gradually slow its purchases of commercial paper and corporate bonds, with an eventual end to the practice expected in around one year. During his press conference, Ueda stated that a “rapid” pace of rate hikes is unlikely amid the fragile economic outlook.
Later, the Fed held rates at 5.25-5.50%, as was largely priced in and expected, and there was no change to rhetoric. Surprisingly, the central bank continued to price in three cuts for 2024. However, the median dot plots for 2025 and 2026 were modestly revised with officials now forecasting three cuts next year (from four), followed by a further three cuts in 2026. In terms of economic forecasts, the projected change in real GDP was increased to 2.1% for 2024, from 1.4% in December. On inflation, the headline PCE projection was unchanged, while core PCE inflation forecasts were marginally higher at 2.6%, from 2.4%. The subject of quantitative tightening was also raised, given recent market speculation. Powell said: “It will be appropriate to slow the pace of run-off fairly soon”, adding that it is a debate amongst officials. However, he offered little in the way of a time frame given “there’s no dollar amount or percentage of GDP or anything like that” to mark against. Later in the week, Powell spoke “about not wanting the unemployment rate to get momentum,” suggesting the central bank would rather let inflation overshoot slightly, to avoid a spiral of job cuts. We also heard from the Fed’s Bostic, a dove, who said he only sees one cut this year. So, a mix of Fed rhetoric that will surely keep markets on their toes.
Over in the UK, the BoE also held rates, at 5.25%. Interestingly, it was the first time no members voted for a hike; instead, there was an 8-1 majority vote for a hold. This meeting followed the February CPI release, which saw price pressure ease considerably; year-on-year headline CPI was 3.4% (from 4%), and core fell to 4.5% (from 5.1%). There was little indication on timing for a cut, however, it was noted that the economy is moving in the right direction. On Friday, UK retail sales surprised to the upside, holding steady versus expectations for a contraction.
Away from central banks, Fitch upgraded Qatar’s long-term rating by one notch to AA, stable, in-line with Moody’s (Aa2) and S&P’s (AA) ratings. As with the recent Moody's upgrade, Fitch noted that the fall in the nation's debt to GDP coupled with Qatar’s strengthening external balance sheet, from an already strong level, led to the upgrade. The rating agency also stated that Qatar is likely to retain budget surpluses until the 2030s as a result of the North Field expansion.
In China, the PBoC set the renminbi fixing at a stronger-than-expected rate; sending a strong warning to speculators. Over the weekend, at the China Development Forum 2024, the Nation’s Premier Li Qiang signalled China's readiness to grant greater market access to foreign investors and companies. Li highlighted the strong resilience, vast potential, and vitality of the Chinese economy, emphasising that the fundamentals underpinning its long-term growth trajectory remain intact. He revealed that since the previous year, the Chinese government has taken steps to enhance and streamline services while establishing a regular communication channel with enterprises.
In what is a thin week for activity ahead of the Easter holidays, economic data and central bank rhetoric will likely dictate market direction. Later today we have US new home sales data, and the Fed’s Bostic and BoE’s Mann speak at separate events. On Tuesday, US durable goods and Conf. Board consumer confidence readings and the UK Parliament Liaison Committee questions to PM Sunak on the economy may be of interest. Eurozone economic and consumer confidence prints hit the screens on Wednesday, and we’ll hear from the ECB’s Cipollone. On Thursday, the UK and US GDP revisions, US personal consumption and Uni. Michigan consumer sentiment readings will garner market interest. The week ends with US personal income spending and wholesale inventories and US PCE deflator prints.
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