In focus today
It is rate review day for several central banks, as we look to both the Swiss National Bank (SNB, 9.30 CET), Norges Bank (10.00 CET), and Bank of England (BoE, 13.00 CET) to publish their decisions.
We believe that inflation within the target rate (and below the SNB’s forecast), a strong CHF, and quarterly meetings favour a 25bp rate cut from the SNB.
The BoE should keep the policy rate unchanged in line with both consensus and market pricing (for more details, see our Bank of England Preview, 15 March).
We expect Norges Bank to keep the policy rate unchanged at 4.50% and reiterate the signals that the first rate cut will most likely come in September. Most tension is linked to whether the low inflation figures for February imply that Norges Bank can open the possibility for an earlier cut.
We also receive a slew of March PMIs from the US and euro area. In the US we broadly expect to see signs of gradually cooling services growth and modest recovery in manufacturing. Euro area PMIs will also be very interesting as February service PMIs rose above the 50 mark, which indicates positive growth, for the first time since July. We expect that services remained above 50 in March as rising real wages and a strong labour market set the scene for decent services consumption. Manufacturing PMIs unexpectedly declined to 46.5 in February. However, this was entirely driven by Germany, whereas euro area manufacturing PMIs excluding Germany increased to 49.1. Based on inventory dynamics and leading indicators from Asia, we anticipate manufacturing PMIs increased in March. Yet, the German industry likely remained a drag on the euro area PMI.
Overnight, Japanese CPI inflation for February is released. Tokyo inflation indicated that price pressures remain aligned with an annual 2% inflation.
Economic and market news
What happened overnight
Dovish signals from Asia, with China’s central bank deputy governor saying there was “room” to cut the reserve requirement ratio, and BoJ governor Ueda saying the BoJ would maintain “accommodative” monetary policy to support the economy.
Japanese PMIs improved with services at 54.9 (prior: 52.9) and manufacturing at 48.2 (prior: 47.2). A tourism rebound has provided benign demand conditions for services despite domestic consumers’ loss of purchasing power. Manufacturing remains in contraction, but the decline seems to be slowing, with firms helped along by the weak yen. Since the BoJ hike earlier this week the yen has weakened further, especially vis-á-vis the euro, although price action against the dollar reversed slightly after yesterday’s FOMC meeting.
What happened yesterday
As expected, the Fed kept its monetary policy unchanged, with the updated dot-plot still showing three 25bp rate cuts for 2024. Markets took this as a dovish signal, as recent upside surprises in inflation and growth have sown doubt whether the US is on its way to target inflation. The EUR/USD traded higher as of this morning and US equity markets rallied with several indices hitting record highs.
UK headline CPI printed slightly lower than expected at 3.4% (cons: 3.5%) and core at 4.5% (cons: 4.6%). EUR/GBP was a touch higher on release, but the price action reversed again as service inflation printed slightly higher than expected and in line with BoE forecasts.
Lagarde reiterated that we will know much more by June about monetary policy and highlighted wage growth, profit margins and productivity growth as key factors in assessing when the ECB can exit the “holding” phase and enter the “dialing-back” phase of monetary policy.
Equities: Global equities were higher yesterday with yet another set of all-time-high closings. FOCM and not least a dovish, very positive, joking, and importantly “higher for longer” Powell was the big driver behind the increase. It was no surprise that it resulted in a strong cyclical rotation where maybe the most surprising part was growth stocks doing fairly well and small caps outperforming. In US yesterday, Dow +1.0%, S&P 500 +0.9%, Nasdaq +1.3% and Russell 2000 +1.9%. Asian markets are sharply higher this morning led by South Korea up almost 3%. Flash PMI out of Japan boosting the already positive sentiment following FOMC. US and not least European futures are higher this morning.
FI: The US curve bull steepened yesterday as the FOMC stuck with the median projection of 75bp worth of rate cuts in 2024, though the policy rate trajectory for 2025 and beyond was lifted slightly. Markets added 8bp to the front-end pricing of US rate cuts in 2024, now standing at 82bp. 2Y UST yields dropped 7bp throughout the session, while the 10Y point slipped 2bp. EGB markets were in a waiting mode ahead of the FOMC with only marginal changes throughout the day.
FX: A dovish Fed sent US rates lower and EUR/USD higher yesterday. EUR/USD climbed back above 1.09. JPY dropped further yesterday – in particular vis-à-vis the EUR with EUR/JPY rising above 165. The big central bank week continues today, where we look for a rate cut from the SNB to weigh on CHF.
, Norges Bank (10.00 CET), and Bank of England (BoE, 13.00 CET) to publish their decisions.){kind=link}