After some volatile weeks, markets were relatively calm this week, as there were no big surprises, also not from the US central bank. As expected, the Fed did not change interest rates, but the bank lowered its forecast for GDP growth this year from 2.1% to 1.7%, while increasing its inflation forecast from 2.5% to 2.7%, both consistent with a larger effect of tariffs. Whether that speaks for higher or lower interest rates than would otherwise be the case depends on whether tariffs are expected to persistently lift inflation and not just cause a one-off price increase. Fed chair Powell seems to think that a persistent effect is unlikely, and markets reacted to the adjustments by sending yields slightly lower, also because 18 out of 19 members of the monetary policy committee indicated that they see risks for growth mostly to the downside, whereas the outlook was balanced 12 months ago. As we see it, the US economy is slowing down somewhat, and there is a good case for the Fed to gradually make monetary policy less restrictive. However, unemployment is low, and the bank is not in a hurry, and our main scenario is for them to wait and see what happens politically also at the May meeting before cutting in June.
In Europe, the German parliament as expected passed the large fiscal spending bill of the incoming government before the old parliament is dissolved and the new one takes over next week. Many interesting and potentially market moving decisions remain though, as the plan must be implemented and the new government formed.
Like the Fed, the Bank of England kept rates unchanged while signalling that it still sees room for cuts later. The Swedish Riksbank also held steady but here, the signals are not for more cuts, see also page 3. The Swiss national bank did cut rates amid the very low inflation there, and as widely expected the Bank of Japan did not change rates this time but given the renewed vitality in the economy, we see a strong case for more rate hikes in the future.
China published data for January and February (at the same time because of the Chinese New Year holiday), with upside surprises in retail sales and home sales, but continued decline in house prices. It is a strong priority for the government to get consumer spending going, and stabilisation in the housing market is seen as a precondition for that. This week, the State Council presented a plan to ‘vigorously boost’ consumer spending. If successful, that would also have implications for global goods demand.
The ECB has stated that incoming data will determine whether rates are cut in April, and one of the crucial data points in that regard is likely to be the March PMIs out on Monday. The growth picture has improved somewhat this year, and we expect that to continue driven by manufacturing, despite the great uncertainty. We also get the first March inflation numbers (for France and Spain) on Friday.
The US data calendar for the coming week is fairly light, with the Conference Board’s consumer confidence on Tuesday as a potential highlight. In the UK, Chancellor Reeves will present the Spring Statement where the Labour government faces some tough choices in meeting its fiscal objective while aiming to improve the UK economy’s growth prospects.
