Fed Waller Suggests Delaying Rate Cuts by a Few Months (!) Should Not Have Substantial Impact

Markets

“What’s the rush?” Fed governor Waller briefly and brightly summed up the string of Fed comments overnight (impact to be reflected in European open given Japanese close). The strength of the economy and recent inflation data mean it is appropriate to be patient, careful, methodical, deliberative… you name it! The Fed is in no great urgency to ease monetary policy. In absence of major economic shocks, Waller suggested that delaying rate cuts by a few months (!) should not have a substantial impact on the real economy in the near term. Fed vice-chair Jefferson joined the chorus by stressing the danger of easing too much/too soon as it can lead to a stalling or reversal in inflation progress. Fed governor Cook repeated the mantra that more evidence is needed to judge that inflation is on a sustainable path to the 2% inflation target. Apart from hawkish Fed comments, economic activity data yesterday confirmed the current global picture: Europe is slowly recovering from a standstill with (German) manufacturing still a drag. UK growth holds up better than expected and the US economy hums along after beating the recession odds in 2023. Meanwhile, European selling pressure remains elevated/rising on the back of wage dynamics. US weekly jobless claims continue to point at a tight US labour market (201k). The combination of Fed speak (Jefferson), eco data and risk sentiment (huge rally on stellar Nvidia earnings) pushed core bonds lower with front ends of the curve underperforming. US yields added 4.6 bps (2-yr) to 0.3 bps (10-yr) with the very long end outperforming (-2.2 bps). German yield changes varied between +5.2 bps (2-yr) and -3.3 bps (30-yr). The euro made an attempt to take out 1.09 after European PMI’s but the move lacked dash. Eventually the pair closed near opening levels around 1.0820 in a technical move which suggests that this week’s comeback is already running out of steam. Major European and US equity benchmarks ended with gains of 1.2% to almost 3% (Nasdaq).

Today’s eco calendar is empty apart from ECB consumer inflation expectations. General risk sentiment and technical factors can guide trading. Recent string of data and central bank speak suggests a firm floor below core bond yields short term. Short term underperformance of US Treasuries can help balancing the dollar even in case of bullish risk sentiment. Thursday’s PCE deflators are the next benchmark.

News & Views

GfK UK Consumer confidence unexpectedly dropped in January for the first time in four months. The headline index eased from -19 to -22, while a small further improvement was expected. The setback was visible in most sub-indices of the survey. Consumers turned less optimistic both on the economic situation last year (-43 from -41) as on expectations for next 12 months (-24 from -22). Climate for major purchases was seen deteriorating from -20 to    -25. UK consumer also turned less positive over their personal finances over the previous year. Expectations on personal finances for the next 12 months were unchanged. The sub-index on savings intentions rose from 27 to 29. The overall headline confidence index substantially improved throughout last year as inflationary pressures eased, but now shows tentative signs of topping out even as the PMI’s yesterday (composite at 53.3) suggested that growth in the UK might on a better footing.

Chinese new home prices declined again in January (-0.37% M/M), the eighth consecutive monthly decline. Prices were down 1.24% Y/Y. Also prices of used houses fell further at the start of the year (-0.67% M/M; -4.45% Y/Y). The January data illustrate ongoing pressure in the real estate market which weighs on confidence and hampers the overall economic performance of the Chinese economy. There were some very tentative signs of bottoming/improvement. The number of cities (total number 70) that reported a monthly decline in new home prices eased from 62 to 56, with 11 cities including Shanghai reported a monthly rise. Chinese Banks earlier this week sharply reduced the 5-yr Prime loan rate by 25 bps to 3.95% in an effort by policy makers to support the ailing real estate market.