Economic data has proven resilient this year, leading to a more cautious narrative from central banks and triggering markets to rethink the magnitude and timing of monetary policy easing. At the start of 2024, futures markets indicated that the first interest rate cuts would be as early as March. Now, they indicate May.
European and U.S. central banks have stressed in the latest round of meetings that it is too early to sound the victory bell on inflation given that indicators such as wage inflation remain sticky. We believe central banks need more convincing of inflation’s demise, meaning rate cuts may not come until mid-year.
Usage of an important Federal Reserve facility, the Reverse Repo Facility (RRP), has declined sharply. Increasing Treasury bill supply, competing demand for cash and rising average maturities in money market funds have contributed to the decline. This combined with tight year-end liquidity conditions caused a spike in the SOFR rates around the year-end turn, but we believe this is a temporary phenomenon and market participants should not draw any ominous conclusions.
In the last half of 2023, investors through the futures market have deepened their expectations of Bank of England rate cuts in 2024 as inflation has abated. While the bank has given no indication that it’s ready to cut rates, investors expect 0.74% in rate cuts by the end of 2024.
In October investor focus shifted from the front-end to the back-end of the yield curve. The aggressive sell-off seen in longer dated bonds, coupled with significant underperformance caught the attention of investors as the rise in yields caused financial conditions to tighten. This poses the question, will tighter financial conditions likely affect the impact...
Despite elevated levels of inflation throughout 2023, there are encouraging signs that peak levels have passed and that the U.S., European and U.K Central Banks have reached the summit of their respective rate hiking cycles. However, the road to their magical 2% target remains uncertain, and we are not yet at a declaration of victory; as such Central Banks remain open to further hikes should inflation see upward pressure in the coming months.
For most of H1 2023, the composite PMIs stayed in expansionary territory as the acceleration in services sector offset the downturn of the weaker manufacturing sector. However, the past month indicated a fast deceleration in the services component, dragging the composite PMI into contractionary territory across the UK and EU economies. An advanced decline in...
As US core inflation shows signs of trending back toward the Fed target of 2%, the diverging trends of the ECB and BoE are apparent. Whilst core price momentum has slowed in the Eurozone, the UK is still in the midst of spiralling wage price increases, leaving the BoE in a precarious position. The three...
Stickier than expected UK core inflation, buoyed by continued upward pressure from wage growth, has forced the market to significantly revise policy expectations from the Central Bank, in turn causing the UK yield curve to invert sharply and reach levels not seen since the LDI crisis.
UK headline CPI fell below 10% for the first time since September 2022. Some might have expected the drop in headline inflation to give the market and the BOE some solace but core inflation (ex food and energy) reaccelerated to a 31 year high. Core inflation is proving “sticky” which is a concern for the...
Investors found solace as the US regional banking woes didn’t morph into a more systemic banking crisis. This relief was reflected by markets repricing their expectations of any imminent monetary policy easing by the Fed. Nevertheless, the US regional banking crisis seems far from over, and all eyes are on any second round economic impacts...
The markets expectation for rate cuts in the second half of the year is mainly driven by concern of a potential recession as opposed to lower inflation. That concern has been sparked by SVB’s collapse and what it could mean for future credit growth, with both supply and demand under pressure. For those who want...
More resilient economic growth, strong labour markets and stickier core inflation has caused the market to revaluate its “pivot” thesis and all but abandon any hope of rate cuts during 2023. For those who want further insights on Eurozone, UK and US markets you can read the latest monthly market update here.
With signs inflation has peaked and may be turning, the Central Bank jumbo hiking cycle is coming to an end. If the market’s inflation expectations for 2024 are correct (inflation closer to the 2% target) it would allow central banks to unwind their restrictive monetary policy to a more neutral level, resulting in interest rate...