Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
The European Central Bank’s (ECB) Governing Council maintained their three key interest rates for the third successive month, as widely anticipated by the markets. The tone of the discussion became slightly dovish and more favourable to medium-term cuts (in the summer at the earliest), as suggested by President Christine Lagarde’s statements during the month. The council outlined that “the declining trend in underlying inflation has continued”, while the reference to “domestic price pressures remain strong” was removed. The statement also highlighted “tight financing conditions are dampening demand, and this is helping to push down inflation”. The future course of policy remains data-dependent, and the statement continued to stress that policy rates will be maintained at current levels for a sufficiently long time to substantially contribute to the ECB’s inflation goal. These comments moved market expectations of a first cut to April, from March, with a 90% chance of an April cut priced in. We think this is still too early and that June is more likely.
Source: Bloomberg, data as of 31 January 2024
UK Market Update
As expected, the Bank of England’s (BoE) Monetary Policy Committee left the bank rate unchanged at 5.25%, but the voting split surprised markets. Two committee members preferred a 25 basis point rate increase while one member favoured a 25 basis point rate cut, with six voting to keep the rate unchanged. The updated economic forecasts indicated that risks to the committee’s inflation forecast are now more balanced, although key indicators of inflation persistence remain elevated. Governor Andrew Bailey reiterated that the committee needs to become more confident in the persistent fall of inflation. Indeed, December’s annual inflation data surprised to the upside for both headline (4% from 3.9%) and core inflation (unchanged at 5.1%), reminding markets that the road to 2% remains bumpy. Bailey stated the BoE has moved from asking “How restrictive do we need to be?” to “How long do we need to be restrictive for?”.
Source: Bloomberg, data as of 31 January 2024
US Market Update
The Federal Reserve’s Federal Open Market Committee (FOMC) concluded its first meeting of 2024 by keeping rates unchanged, as widely expected by the markets. The FOMC’s policy statement highlighted that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%”. Chair Jerome Powell further clarified that a March rate cut was unlikely. Markets took heed by meaningfully reducing the implied likelihood of a March cut to approximately 35% from over 70% earlier that day. During the press conference, Powell noted that the FOMC believes that the federal funds rate is “likely at its peak for this tightening cycle” and that, if the economy evolves as widely expected, they would likely start cutting rates “at some point this year”. But he stressed that they are “prepared to maintain the policy rate at its current range for longer, if appropriate”.
Source: Bloomberg, data as of 31 January 2024
Looking Ahead
As universally expected, the Fed, ECB and BoE kept their policy rates unchanged in their first policy meetings of 2024, but these meetings were far from dull. All three central banks were cautiously optimistic. They have made good progress on the inflation front, but the job is not yet done, and more data is required before they can start their much-anticipated cutting cycles. Crucially, they took the first transitionary steps by removing the specific reference to additional tightening in their forward guidance and concluding that interest rates are sufficiently tight. The central banks are gaining confidence that their tightening cycles are finally having the desired impact on inflation. However, we believe they will err on the side of caution to avoid loosening too early. Further information on inflation and wages is required before they will feel comfortable commencing their cutting cycles. We agree with the market that cuts are coming this year, but we still believe that the market’s timing and magnitude are too aggressive.
Chart of the Month
Source: Bloomberg as of 31 January 2024
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