Markets
The Fed’s policy rate was left unchanged at the March meeting yesterday (4.25-4.5%). The decision was a unanimous one. It was accompanied with a slower pace in QT with the cap on the UST roll-off lowered from $25bn to $5bn. Fed Waller opposed against the latter, favouring to hold the pace steady. The possibility of a slower pace was first discussed in January, amongst others in anticipation of the debt ceiling getting raised at some point in time. After that Treasury is likely to refill their coffers in a frontloading move (thus heavily tapping market liquidity). This could happen as soon as June. The Fed’s updated forecast scream stagflation risks: growth was revised lower to 1.7% this year (from 2.1%) and the economy will no longer expand above potential (1.8%) in the years after. Inflation got a bump mainly for this year (2.7% headline PCE, 2.8% core) amid import tariffs. Chair Powell said these cost push factors were probably “transitory”. In a higher-inflation environment (compared to Trump’s first term), we’re not so sure. Uncertainty on GDP, the unemployment rate and PCE forecasts is very high and risks are heavily skewed to the downside for the first and to the upside for the latter two. Governor’s policy rate forecasts underwent a broad shift higher across the horizon, but median forecasts remain unchanged for now: two cuts in 2025 and 2026 and one more in 2027. That triggered a relief rally in US Treasuries. Powell still held an optimistic view during the presser, which we think doesn’t really capture the forecast narrative. He noted weakness in soft indicators but these are not yet filtering through in the hard data. It’s not until they do that the Fed’s willing to reprioritize growth over inflation. US yields fell between 6.7 and 3.5 bps lower in a bull flattener. Money market expectations stayed broadly unchanged with a first, full cut priced in for July at the earliest. Stocks jumped up to 1.4% (Nasdaq). The dollar retreated from the intraday highs. EUR/USD kept the 1.09, but barely. It’s still struggling this morning ahead of an important EU summit the next two days during which EU leaders are to agree on specific defense spending measures. The EC further detailed its ReArm Europe proposal yesterday. It allows 1.5% of GDP in defense spending to be exempted from the 3% deficit rule for the next four years, starting in 2025. A flurry of ECB speeches are a wildcard for trading. The UK’s labour market report on balance came in close to expectations. But with the Bank of England meeting scheduled later today (status quo expected), sterling’s initial reaction is muted. EUR/GBP trades unchanged around 0.838.
News & Views
The Brazilian central bank hiked its key policy rate as flagged by another 100 bps (third time straight), to 14.25% and bringing the Selic Rate now above the post-Covid peak of 13.75%. Brazilian growth and the labor market remained strong, though there are some early signs of growth moderation. Headline inflation and measures of underlying inflation remain above the inflation target (3% +-1.5%) and have again increased recently. Risks remain tilted to the upside. Inflation expectations moved up further to 5.7% and 4.5% respectively for this year and next and are at risk of deanchoring for longer. Persistent services inflation and a weaker currency (mix from domestic loose fiscal agenda and external trade policies) are threats as well. The BCB commits to another rate hike at its next meeting (May 7) but of a lower magnitude following a small (and premature?!) downward revision to its Q4 2026 inflation forecast from 4% to 3.9%.
The Aussie dollar manages to limit losses this morning (AUD/USD 0.6336) despite a big miss in February labour market figures. Employment fell by 52.8k with consensus expecting 30k growth. January numbers were downwardly revised from 44k to 30.5k as well. Details showed both lower full time occupations (-35.7k) and less part time jobs (-17k). The unemployment rate stabilized at 4.1%, but that was mainly because of a big setback in participation rate, from 67.2% to 66.8%. The Bureau of Statistics specifically referred to fewer older workers (>= 55 years) returning to work in February. We don’t expect this weak figure to derail February RBA plans from gradual rather than consecutive rate cuts. Money markets still bank on a status quo at the next, April 1st , meeting. The kiwi dollar failed to profit from stronger Q4 GDP numbers (+0.7% Q/Q vs 0.4% expected & -1.1% Y/Y) which were mainly boosted by tourism. Domestic demand remained rather soft.
