Fed Turns Dovish, BOJ Hikes

For the week ending 22 March 2024

As of midday Friday, global equities were positive on the week in response to dovish pivots by many global central banks. The yield on the benchmark US 10-year note declined 9 basis points to 4.21% while the price of a barrel of West Texas Intermediate crude oil was little changed. Volatility, as measured by the CBOE Volatility Index (VIX), declined to 12.9 from 14.5 last Friday.

MACRO NEWS

BOJ ends negative interest rate policy

For the first time in 17 years, the Bank of Japan raised interest rates to a range of 0.0% to 0.1%, making it the last central bank to end its negative interest rate policy, which has been in place since 2016. Additionally, the BOJ ceased its yield curve control and purchase of risky assets meant to stimulate an economy that had been deflationary for some time. The move was expected as it came on the back of inflation running above target for over a year, as well as strong wage data. 

Fed confirms three rate cuts in 2024

The US Federal Reserve held the benchmark federal funds rate steady in the range of 5.25% to 5.50% at this week’s Federal Open Market Committee meeting but reiterated that it still expects a cumulative 0.75% in rate cuts in 2024. This stance on cuts was perceived as dovish by the market as both GDP and core inflation estimates were revised up for the year. Despite the three 25-basis-point rate cuts envisioned for this year, longer-term dot-plot projections indicated a slower pace of cuts moving forward as Fed Chair Jerome Powell said the path back to 2% inflation is likely to be bumpy. The Fed made no decisions on the balance sheet; however, it communicated that it is likely to slow the pace of balance sheet runoff soon.

US housing starts and existing home sales outperform

US housing starts and existing home sales rose to their highest levels since May 2022 and February 2020, respectively, beating estimates. The resale market, which has seen inventory levels plummet as mortgage rates have remained high, also saw contract closings increase 9.5% month over month while residential starts increased 10.7%. The expectation of declining mortgage rates, which have been high for some time, helped fuel the jump in listings of existing home sales. Despite this, homebuilders have continued to benefit from the overall lack of existing home inventory.

US PMIs indicate economic growth still strong

The US flash composite purchasing managers’ index came in at 52.2 in February. Typically, a reading above 50 indicates expansion in the private sector while one below 50 indicates contraction. The strong showing was driven by a continued improvement in manufacturing PMIs, which came in at 52.5, above estimates. Services PMIs registered at 51.7, below the prior reading but still in expansion territory. In Europe, Germany, France and the United Kingdom, manufacturing PMIs stayed below 50, although the UK saw an improvement in business activity.

QUICK HITS

The Swiss National Bank became the first developed market central bank to begin its cutting cycle, reducing its target rate by 0.25% to 1.5%.

The Bank of England held its benchmark interest rate steady at 5.25%; however, the Monetary Policy Committee tilted more dovishly as more committee members withdrew their support of additional rate hikes.

US jobless claims declined by 2,000 from previous readings and remained near historically low levels. Continuing claims were little changed, indicating a still-strong labor market.

Japan’s headline and core CPI measures are at a year-over-year rate of 2.8%. Market participants are expecting further monetary policy tightening later this year, although the range of terminal rate levels is still low and narrow.

New Zealand unexpectedly entered a technical recession in the final quarter of 2023, with GDP declining 0.1% following a 0.3% decline in Q3. High interest rates have driven down consumer spending and investment as the Royal Bank of New Zealand has held its cash rate at 5.5% for nearly a year and last month indicated it does not intend to lower rates until next year.

The Royal Bank of Australia held its cash rate at 4.35% and removed any references to further rate hikes. Australian unemployment declined to 3.7% as the labor market and economy continued to show resilience in the face of more restrictive monetary policy.

Hong Kong–listed Chinese stocks declined by the most in nearly two months as weak earnings and a declining yuan dampened investor sentiment.

Canada’s CPI came in a less-than-expected 2.8% year over year, increasing investor expectations of a June rate cut.

Turkey raised its one-week repo rate 500 basis points to 50% ahead of local elections. The country hopes to support its currency, which has sold off amid inflation of over 70%.