Markets
Let’s dive right into yesterday’s Fed meeting. There’s an interesting divide between markets’ and our interpretation. For the former it was nothing but an outright dovish, cuts-are-coming-soon tribute. The three major US stock indices simultaneously closed at record highs. US yields turned south, slipping more than 8 bps at the front. The dollar tanked. EUR/USD bounced of an intraday low around 1.084 to finish around 1.092. DXY returned sub 104 to 103.38. USD/JPY aborted the test of the 2022-multi-decade high while still closing the day with net gains (151.26). This sharp reaction was mainly rooted in the March dot plot confirming the three 2023 rate cuts from December. After two CPI beats, ongoing strong hiring and broad economic resilience, some feared the Fed would have backtracked. Chair Powell also downplayed the consensus-topping inflation outcomes, saying “they haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%.” The updated forecasts tell us a completely different story. Growth was revised upwards across the policy horizon, especially for this year (2.1% from 1.4%). Unemployment rate saw some minor downward revisions from already low levels. Core PCE was lifted from 2.4% to 2.6% this year before easing to 2.2% and 2% in the years thereafter with FOMC participants in a shift with December seeing upside (instead of balanced) risks. The 2024 policy rate median prognosis indeed reflects three cuts. But the Fed removed one rate cut for both 2025 (3.75-4%) and 2026 (3-3.25%). In addition: the neutral rate gently nudged higher. It’s marginal (from 2.5% to 2.6%) but highly symbolical. The forecast distribution has generally shifted higher with the one for the equilibrium rate in particular catching the eye. There are now 7 out of 18 members seeing a neutral rate of at least 3% compared to 4 in December and only one member (down from 3) believes the neutral rate is <2.5%. Gut feeling tells us that yesterday’s market reaction won’t last very long. It takes one good labour market report, consensus-topping inflation outcome or other high-profile data point for markets to reconsider. Fortunately for the Fed, these won’t show up on the eco calendar for at least another week. There are, however, the PMIs today. The US edition is usually of secondary importance (compared to the ISMs), but a strong reading may already challenge yesterday’s market view. Those for the euro area are expected to further bottom out. The services series in particular is seen edging further north of 50. Bear in mind, though, that the EMU wide figure has been dramatically weighed down by the German and to a lesser extent the French malaise. EMU PMIs ex Germany and France already suggested moderate expansion. Barring a major upside surprise, however, we don’t expect them to alter ECB-forged expectations for a June rate cut. Breaking above EUR/USD 1.0981 (March interim high) looks implausible, especially should US Treasuries underperform in some counteraction today.
News & Views
The Czech National Bank cut its policy rate by 50 bps to 5.75% in a split decision. Two out seven governors voted in a favour of a 75 bps rate cut. Czech inflation declined to the CNB’s 2% inflation target, but risks to the outlook remain modestly inflationary. Therefore, the CNB will continue with a cautious approach when it comes to further rate cuts taking into account FX developments, the effect of fiscal policy on the economy, the labour market situation and the evolution of domestic and external demand as well. EUR/CZK ticked lower from 25.30 to 25.20 after the expected CNB meeting outcome. CZK swap rates added 3 to 4 bps.
Australian employment growth surged by 116.5k in February (vs 40k expected). Both full-time occupations (78.2k) and part-time jobs (38.3k) contributed. January figures were upwardly to 15.3k. The unemployment rate dropped from 4.1% to 3.7% (vs 4% consensus) though the participation rate only slightly advanced from 66.6% to 66.7%. The large increase in employment in February followed larger-than-usual numbers of people in December and January who had a job that they were waiting to start or to return to. This translated into a larger-than-usual flow of people into employment in February and even more so than February last year. Seasonally adjusted monthly hours worked rose by 2.8%. Following today’s labour market data, money markets pushed their expected start to a rate cut cycle lower from August to September. AUD swap rates add 6 to 8 bps across the curve this morning, pushing AUD/USD from the low 0.65 area yesterday morning to 0.6630 currently, approaching first resistance at 0.6639.
