Markets
Tomorrow’s FOMC meeting has been somewhat overlooked recently. The US central bank started 2026 on the back of three consecutive 25 bps rate cuts as downside employment risks warranted pre-emptive action on the notion that monetary policy could move from restrictive to neutral given falling upside inflation risks and strengthening confidence in the inflation outlook. At the start of the year, the Fed shifted to a wait-and-see mode as the labour market showed signs of stabilization. The equilibrium is precarious as a shrinking labour supply (immigration crackdown) balances the unemployment rate against relatively weak job growth, but it’s an equilibrium still. This allowed the Fed to switch the needle back to (goods) inflation which has been on the rise since US President Trump’s protectionist trade agenda got installed. The Fed’s preferred core PCE deflator accelerated from a 2.6% Y/Y low last year in April to 3.1% in January (highest since March 2024). These developments even urged uber-dove and Trump-disciple Miran into acknowledging that he would raise his end-of-year projection for the Fed funds rate from a 2-2.25% low in the dot plot to 2.5%-2.75% which would ceteris paribus still be the low point by the way. In the December dot plot, the median forecast projected room for one additional 25 bps rate cut over the course of 2026 and another one in 2027.
7 out of 19 Fed members in December already flagged a preference to hold rates steady over 2026. Minutes of the January FOMC meeting showed that several participants would’ve supported two-sided language on the rate path, putting the door open fore a rate hike if necessary. They also cautioned that easing policy further in the context of elevated inflation readings could be misinterpreted as implying diminished commitment to the 2% inflation objective. The start of the US-Israeli war against Iran adds to upside inflation risks in first instance through the energy channel. US diesel retail prices today hit $5/gallon for the first time since December 2022 compared to half of that price ahead of the war. Our in-house nowcast shows that, if petrol prices ($4.33 currently) join diesel in surpassing this psychological mark, PCE and CPI inflation would rise to 3.8% and 4% respectively by April. This compares with the latest prints of 2.8% (PCE, January) and 2.4% (CPI, February). That scenario also raises the risk of secondary effects on top of those stemming from tariff/goods inflation. In this context, it is very unlikely that the policy statement, the quarterly projections or Fed Chair Powell’s press conference will still pave the way for a rate cut this year. At the end of February, US money markets discounted 2.5 rate cuts by December with the policy rate bottoming out around 2.75%-3% next year. Now, Fed funds futures only discount one Fed rate cut this year which would most likely be the final one than this cycle but might be pushed further in time. That leaves more room for repositioning in bear flattening fashion especially as we don’t exclude inflation hawks to put rate hikes in their forecasts. Such hawkish outcome would add to overall USD strength since the beginning of March, denting risk sentiment.
News & Views
The Swiss National Bank barely, if any, intervened in FX markets in the final quarter of last year, data from its annual report revealed today. The central bank over the course of 2025 bought FX worth CHF 5.2bn but earlier data showed that the tally already stood at CHF 5.18bn after the first nine months of last year. The bulk occurred in Q2, after US president Trump unveiling his tariff plan sparked haven flows to the Swiss franc. The Iran war that erupted early March did the same, luring SNB officials from the shadows to signal their willingness to intervene in the market, if needed. The strong franc has always been a key focus for the SNB since it dampens imported inflation, especially at a time where it is already at the low end of the 0-2% target. The central bank is meeting on Thursday with EUR/CHF just inches away from the 0.90 record low (barring the 2015 episode) seen in early March.
The EU’s foreign policy chief Kaja Kallas has pushed back against a call by Belgian PM De Wever to normalize (trade) ties with Russia and regain access to cheap Russian energy. In an exclusive interview with Reuters, Kallas said she doesn’t see the appetite De Wever sees in other EU leaders to do so, adding that “if we go back to business as usual, we will have more of this, more wars.” Since the Ukraine war, Dutch TTF gas futures have settled at structurally higher levels than before. The Middle East conflict pushed prices to the highest since February 2025.
