Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
The European Central Bank (ECB) kept key interest rates unchanged in March, as widely expected by the markets. Greater focus was on the new staff macroeconomic projections, which indicated a softer path for headline and core inflation and near-term growth prospects. The Governing Council noted that most measures of inflation have declined further but stressed that domestic price pressures remain high. This is in part due to strong wage growth, which is a critical data point for the ECB’s rate decisions (see Chart of the Month). President Christine Lagarde stressed the ECB’s data-dependent approach, stating that they will know a little more in April and a lot more in June. This can be seen as a continuation of her guiding market participants towards a June cut, which aligns with our base case for the ECB.
Source: Bloomberg, data as of 28 March 2024
UK Market Update
The Bank of England (BoE) maintained the bank rate at 5.25% in March, with only one dissenting voice preferring a cut. This was the first time since September 2021 that nobody voted for a rate hike. Markets reacted strongly to the change of sentiment, fully pricing in three 25 basis points (bps) base reductions for the year. August remains the most likely month for the first cut, but pricing for June reflects a greater than 50% chance of a reduction ahead of the Summer. Governor Andrew Bailey signalled that the bank was “not yet at the point where we can cut interest rates, but things are moving in the right direction.” UK Consumer Price Index (CPI) inflation fell to 3.4% in February from 4% in January, while core inflation fell to a two-year low of 4.5% from 5.1%. Services CPI, a key metric for the BoE, eased to 6.1% from 6.5%, which aligns with the BoE’s latest inflation projections.
Source: Bloomberg, data as of 28 March 2024
US Market Update
The Federal Reserve unanimously voted to leave interest rates unchanged in March. We took the main message to be that the Federal Open Market Committee remains on a careful transition toward rate cuts and that, before cutting, it still needs greater confidence that inflation is sustainably heading to 2%. Notably, the Summary of Economic Projections were updated, with GDP growth revised higher to 2.0%-2.4% from 1.2%-1.7% in December. The unemployment rate was revised lower to 3.9%-4.1% from 4.0%-4.2%. The Fed’s favoured inflation gauge, core Personal Consumption Expenditures Price Index, was revised higher to 2.5%-2.8% from 2.4%-2.7%. Elsewhere, the Fed’s “dot plot” of projections of the federal funds rate still indicated that the median outcome remained at three rate cuts for the year. Chair Jerome Powell noted the Fed makes decisions “meeting by meeting” and, therefore, has not made any decisions about rate cuts at future meetings.
Source: Bloomberg, data as of 28 March 2024
Looking Ahead
The well-communicated cautious rhetoric by central banks last month, coupled with the resilient economic data, continues to reduce the total amount of easing and the timing of the initial cut. Our view has consistently been that central bankers have been gaining confidence that their tightening cycles are impacting inflation. However, they require further information before they can declare victory. The persistence of critical indicators such as wage and services inflation reduces the likelihood that the central banks will move too quickly. The pace and timing of any cuts will be data-dependent. At this juncture, we believe further information on inflation and wages is required before cutting cycles commence, which will likely take several months. We believe this data dependence means central banks will approach the rate-cutting cycle cautiously.
Chart of the Month
Source: Bloomberg as of 31 March 2024
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