It has been a busy couple of weeks since the last update, with last week dominated by economic data and this week dominated by central bank meetings. We also saw the Russian Presidential election, where the re-election of Vladimir Putin for another six-year term will make him the longest serving Russian leader since Catherine the Great in the late 18th century.
The Presidential ‘election’ in Russia delivered the expected outcome, with Vladimir Putin securing a fifth Presidential term in office with a record 87% of the vote with turnout well over 70%. The outcome was a foregone conclusion given the Kremlin had outlawed all criticism of both Putin and the Ukraine war and had blocked any credible opposition candidates from running. Putin said the high turnout showed that he enjoyed overwhelming public support, and on his next six-year term, he said the main challenges were “achieving the goals of the special operation [in Ukraine] and strengthening our defence capacity and armed forces”. Putin said “all the plans we have created to develop Russia will certainly be carried out and their goals achieved”.
The economic data was dominated by employment and inflation news from the US, with the latter shifting expectations lower for rate cuts over the course of 2024. The US reported non-farm payrolls ahead of expectations, with 275,000 jobs created in February versus 200,000 expected; however, some of the other employment data was less positive, with negative revisions of 167,000 to prior numbers and the unemployment climbing to 3.9%, which is the highest level since late 2021. The inflation data caused more of a market reaction, with bonds selling off as February CPI picked up to 3.2% year on year, up from 3.1% in January and above of expectations for no change. The shorter-term data highlighted the risk of inflation levelling off above the Federal Reserve’s 2% target. Core CPI over the past 3 months, when annualised, is now 4.2% and PPI data has begun to reaccelerate. Against a backdrop of oil prices climbing on the back of supply squeezes, markets [before the Fed meeting calmed nerves] were reassessing the downward path of rates in the second half of this year.
The UK also reported employment and inflation data, with unemployment picking up slightly, to 3.9%. Payrolls increased by 20,000. Wage growth slowed to 5.6% in the three months to the end of January – a level the Bank of England remains uncomfortable with. The inflation data eased to 3.4% year on year in February, down from 4.0% in January, and lower than expected. Core inflation was also lower than expected, at 4.5%. CPI continues to be on track to dip below 2% in April’s data, with the first rate cut expected in June.
Elsewhere, the technical recession in Japan was revised away after the Q4 2023 growth figures were adjusted from -0.8% to +0.1%, meaning that two consecutive quarters of contraction have been avoided. China also saw some positive data with the publication of retail sales, industrial production and fixed asset investment data all showing growth year on year, and ahead of expectations. Given the ambitious 5% growth target set for 2024, we will need to see all parts of the Chinese economy continue to exhibit solid numbers to offset what is expected to be prolonged weakness in the property sector.
The Federal Reserve sent a positive signal to financial markets by upgrading their growth forecasts but making no changes to their forecast of three rate cuts over the course of this year. The Fed Funds Rate was unchanged at 5.5% but the ‘dot plot’ of members expectations for the future path of rates continued to suggest 75 basis points of cuts in 2024, though expectations for 2025 and 2026 increased slightly. The FOMC continue to see that “it will likely be appropriate to being dialling back policy restraint at some point this year” while wanting to gain “greater confidence that inflation is moving sustainably toward 2%”. The Fed revised their economic forecasts higher, with real GDP expected at 2.1% (1.4% previously), core PCE at 2.6% (2.4%) and unemployment 4.0% (4.1%). The subsequent press conference saw Fed Chair Jay Powell suggest the higher-than-expected inflation data in January and February did not alter the Fed’s base case, with the inflation story “essentially the same”. Market pricing for a June rate cut moved higher, up to 84%, and 84bps of cuts are priced before the end of the year. The meeting was the perfect outcome for financial markets, with the Fed relaxed about inflation, economic growth expected to pick up and monetary policy still on track to turn to an easing bias soon.
The Bank of England also sent encouraging signals that interest rates are on the cusp of being lowered, even as they kept rates on hold for a fifth consecutive meeting. The Monetary Policy Committee voted 8-1 to keep rates on hold, with one vote for a cut. This was the first time since September 2021 that there were no votes to raise rates. Governor Andrew Bailey noted that inflation did not need to get to target before rate cuts began – “what we have to do is be convinced it is going there; we should act ahead of time in that sense because we have to be forward looking”. The Bank sees inflation dipping below 2% by the summer but warned of “material risks” of higher prices as a result of global shipping disruption. Bailey still sounded upbeat though, saying “We do need to see further progress, but I do want to give this message very strongly we have had very encouraging and good news, so I think you know we can say – we are on the way.”
The Bank of Japan ended almost eight years of negative interest rates, voting to increase interest rates from -0.1% to a range between zero and 0.1%. This was the first interest rate hike in Japan since 2007. The bank also scrapped Yield Curve Control, which had kept yields on Japanese government bonds artificially low and ended ETF and REIT purchases. The bank did not completely close the door on unconventional monetary policy, with the door left open for further quantitative easing via the purchase of up to $40 billion a month in government bonds. While the exit from negative rates is a significant turning point in policy, the emphasis from the Bank of Japan was that policy would remain accommodative for now given the current outlook for the economy and inflation even as the bank said the 2% inflation target had “come into sight”. Governor Kazuo Ueda said that “there is still some distance to 2%, if we look at it from the perspective of the expected inflation rate… considering the gap I think we will conduct normal policy, keeping the importance of maintaining an accommodative environment in mind”. The policy shift was widely expected, not least given the first indications from the Shunto wage round pointed to wage settlements of 5.3% – the highest level since 1991. However, Japan still appears to be some way off an aggressive tightening cycle as we have witnessed in the UK, US and eurozone over recent years. With Japan only recently emerging from deflation, the Bank of Japan believes they have scope to keep policy loose for some time yet in the hope that inflation will settle over time around their 2% target.
It has been a very encouraging week with dovish signals from central banks in the US, UK and Japan, even as the latter raised interest rates. The Bank of England and European Central Bank are closing in on their inflation targets, and rate cuts look likely by June. There was some concern in markets that the Federal Reserve may send a more hawkish signal with the US, for now, facing stickier inflation. However, this inflation is against a backdrop of an economy that still appears in solid health with the lagged impact of the rate hikes we have seen in the past two years failing to significantly slow the economic momentum. Market expectations for rates have moved a lot since the start of the year but investors have grown comfortable with rates staying somewhat higher for longer because the economic momentum has continued which in turn translates into healthy corporate earnings. The positive signals from the central banks this week that cuts are coming are supportive for risk appetite and in the absence of data or newsflow to disrupt this narrative, the path of least resistance for markets appears to be higher for now.
Have a good weekend; there will be a break next week for Easter so the next update will be Friday 5th April.
Kind regards,
Anthony.
