Fed still sees three cuts this year, but slower easing thereafter

    Fed left interest rate unchanged at 5.25-5.50% as widely expected. The new economic projections and dot plots are clearly more hawkish than December’s. Yet, Dollar dips initially after the announcement, perhaps because they’re not as hawkish as feared.

    In the new median economic projections interest rate is still seen at 4.625% by the end of 2024. But federal funds are are now projection to decline slower to 3.875% by the end of 2025 (vs prior 3.625%), and then 3.125% by the end of 2026 (vs prior 2.875%). The long run federal funds rate is seen slightly higher from 2.5% to 2.6%.

    Looking at the details of the dot plot for end of 2024, nine members see interest rate above 4.75%, and 10 below that level. That is one member has shifted the stance (the split was 8-11 in December). Also, only one member expects interest rate to be below 4.50%. That is, Fed isn’t likely to cut more than three times this year, with higher risk of cutting less.

    Other forecasts see:-

    GDP growth:

    • 2024 GDP growth at 2.1% (upgraded from 1.4%).
    • 2025 GDP growth at 2.0% (upgraded from 1.8%).
    • 2026 GDP growth at 2.0% (upgraded from 1.9%).

    Headline PCE:

    • 2024 PCE inflation at 2.4% (unchanged).
    • 2025 PCE inflation at 2.2% (raised from 2.1%).
    • 2026 PCE inflation at 2.0% (unchanged).

    Core PCE:

    • 2024 core PCE inflation at 2.6% (raised from 2.4).
    • 2025 core PCE inflation at 2.2% (unchanged).
    • 2026 core PCE inflation at 2.0% (unchanged).

    Full FOMC statement here.

    Full Summary of Economic Projections here.

    ECB’s Lagarde sets conditions for June rate cut

      ECB President Christine Lagarde provided clarity in a speech on the conditions that would lead to a rate cut in June, highlighting reliance on “two important pieces of evidence” as pivotal to the central bank’s confidence on dialing back monetary restrictions. .

      Firstly, ECB anticipates receiving data on negotiated wage growth for Q1 by the end of May. Secondly, by June, ECB will have access to a new set of economic projections, enabling it to verify the validity of the inflation path forecasted in its March projection.

      After the first move, Lagarde emphasized to “confirm on an ongoing basis” that incoming data aligns with its inflation outlook. This approach underscores a commitment to data-driven policy decisions, maintaining a “meeting-by-meeting” stance that eschews any pre-commitment to a fixed rate path.

      Furthermore, Lagarde noted the enduring significance of ECB’s policy framework in processing incoming data and determining the appropriate policy stance. However, she also mentioned that the relative importance of the three criteria guiding these decisions would require regular reassessment.

      Full speech of ECB’s Lagarde here.

      UK CPI slows to 3.4% in Feb, core down to 4.5%

        UK CPI slowed from 4.0% yoy to 3.4% yoy in February, below expectation of 3.5% yoy. CPI core (excluding energy, food, alcohol and tobacco) slowed from 5.1% yoy to 4.5% yoy, below expectation of 4.6% yoy.

        CPI goods annual rate slowed from 1.8% yoy to 1.1% yoy, while CPI services annual rate eased from 6.5% yoy to 6.1% yoy.

        On a monthly basis, CPI rose 0.6% mom, below expectation of 0.7% mom.

        Full UK CPI release here.

        Fed’s dot plot: Three or just two rate cuts this year?

          Fed is widely expected to hold interest rates steady at the current range of 5.25-5.50% today. The focal point of today’s announcement, however, lies beyond the immediate rate decision; all eyes are on Fed’s updated economic projections and dot plot for insights into the path of monetary easing this year.

          The crux of the matter hinges on whether Fed’s new projections will continue to forecast three rate cuts within the year, and thus making June the likely month to commence.

          Alternatively, amidst recent data revealing the stubborn persistence of inflation, Fed might adjust its outlook to envision just two cuts for the year, which would likely postpone the initial reduction to the third quarter.

          The December dot plot presented a 8-11 split among Fed members, with 8 anticipating the federal funds rate to exceed 4.75% by year-end, while 11 predicted it would fall below this mark. A subtle but pivotal shift of just two dots would sway the balance to 10-9, leaning towards the scenario of only two rate cuts.

          Market expectations, as reflected in Fed fund futures, currently assign slightly over 60% probability to a June rate cut. By December’s end, there’s a 64% likelihood of the federal funds rate adjusting down to 4.50-4.75%.

          10-year yield retreated mildly overnight to close at 4.297, but there is no clear sign of topping yet. A hawkish FOMC result today, signalling fewer rate cut this year, could give TNX another push through 4.354 resistance, and thus pulling Dollar higher along. Yet, strong resistance is expected between 4.391 and 4.534 (50% and 61.8% retracement of 4.997 to 3.785) to limit upside, to complete the corrective rebound from 3.785.

          New Zealand Westpac consumer confidence rises to 93.2 in Q1, yet pessimism lingers

            New Zealand Westpac Consumer Confidence rose from 88.9 to 93.2 in Q1, marking its highest level in over two years. Despite this rise, the index continues to hover below the pivotal 100 mark, indicating prevailing sense of pessimism among New Zealanders regarding economic conditions. Present Conditions Index saw significant uplift from 77.1 to 85.1, while Expected Conditions Index advanced modestly from 96.7 to 98.6.

            Westpac’s analysis highlights that households are gradually feeling more optimistic about their financial situations, which has subsequently spurred an increase in “spending appetites”. This positive shift in consumer sentiment is observed across all income brackets, with “middle-income households exhibiting” the most marked improvement.

            Full New Zealand Westpac consumer confidence release here.

            Canadian CPI cools to 2.8% yoy in Feb, below expectations

              Canada’s CPI decelerated in February, registering an increase of 2.8% yoy, which fell short of anticipated 3.1% yoy. This slowdown from January’s 2.9% yoy offers a glimmer of relief as inflationary pressures show signs of easing. When gasoline prices are excluded, CPI was down from 3.2% yoy to 2.9% yoy. Gasoline prices themselves saw a modest uptick of 0.8% yoy, a notable recovery from -4.0% yoy decrease observed in the previous month.

              The more specific measures of inflation, which provide a clearer view of underlying trends, also reflected a cooling trend. CPI median, a measure that provides a middle ground by excluding extreme fluctuations, slowed from 3.3% yoy to 3.1% yoy, coming in below the expected 3.3%. Similarly, CPI trimmed, which removes the most volatile components, decreased from 3.4% yoy to 3.2% yoy. Lastly, CPI common, often regarded as a core measure that tracks common price changes across categories, decelerated from 3.4% yoy to 3.1% yoy, again missing the forecast of 3.4%.

              Full Canada CPI release here.

              ECB’s de Guindos and de Cos eye June for rate cut

                ECB Vice President Luis de Guindos emphasized the bank’s expectation of having “far more data” by June, which will be crucial for evaluating the appropriateness of a rate reduction.

                De Guindos also noted the current market optimism for a “soft landing” and the continued decrease in inflation. However, he warned “there could be a different situation that leads to an abrupt adjustment.”

                At the same event in Madrid, Governing Council member Pablo Hernandez de Cos conveyed a similar sentiment, suggesting that, based on current expectations and if macroeconomic and inflation forecasts hold, rate cuts could commence as early as June.

                However, de Cos was careful to clarify that this projection does not constitute “explicit monetary policy guidance” but rather but rather “guidance that is conditioned by the evolution of data and how they can surprise us in one direction or another.”

                German ZEW surges to 31.7 on ECB rate cut anticipation

                  German ZEW Economic Sentiment rose sharply from 19.9 to 31.7 in March , well above expectation of 21.0. Current Situation Index ticked up slightly from -81.7 to -80.5, below expectation of -80.0.

                  Eurozone ZEW Economic Sentiment rose from 25.0 to 33.5, above expectation of 25.4. Current Situation Index fell -1.4 pts to -54.8.

                  ZEW President Professor Achim Wambach highlighted the “significantly improving” economic expectations for Germany. A key factor contributing to this optimism appears to be the widespread anticipation of an interest rate cut by ECB “in the next six months”, as expected by over 80% of survey participants.

                  Additionally, Wambach pointed out that the German export sector stands to benefit from “increased economic expectations for China “and the anticipated depreciation of Dollar against Euro.

                  Despite these positive developments in sentiment, Wambach cautioned that the assessment of the current economic situation remains at a very low level. “This development somewhat diminishes the increased economic expectations,” he added.

                  Full German ZEW release here.

                  Swiss SECO lowers 2024 inflation forecasts sharply to 1.5%, keeps growth at 1.1%

                    The Swiss Federal Expert Group on Business Cycles maintained its expectation for modest GDP growth at 1.1% for 2024, with improvement to 1.7% in 2025. Uunemployment rate is projected to remain stable at 2.3% in 2024 before rising to 2.5% in 2025. Notably, inflation forecast for 2024 has been revised sharply down to 1.5% from an earlier estimate of 1.9%, and is expected to slow to 1.1% in 2025.

                    The group also outlined risks to the Swiss economy, including geopolitical tensions in the Middle East and Ukraine, which could disrupt commodity markets. Prolonged period of restrictive international monetary policy may dampen global demand, impacting Switzerland’s recovery. Specific concerns were raised about Germany’s industrial slowdown and China’s economic cooling, which could affect Swiss foreign trade.

                    Conversely, there’s a possibility that the recovery could outpace expectations, especially if global inflation decreases faster than anticipated, boosting consumer purchasing power and leading to quicker monetary policy easing. This scenario would likely stimulate demand further.

                    Full SECO release here.

                    BoJ ends YCC and negative rates as they have fulfilled their roles

                      In a landmark decision that marks a significant shift in Japan’s monetary policy, BoJ announced the termination of its Yield Curve Control framework and negative interest rate policy, signifying that these measures “have fulfilled their roles.”

                      This pivotal move is underpinned by BoJ’s assessment that a “virtuous cycle between wages and prices” has come in sight and that the long-standing 2% inflation target is on track to be “achieved in a sustainable and stable manner.”

                      Setting the overnight call rate to a range of 0-0.1%, the decision was reached with a majority vote of 7-2.

                      BoJ will continue its purchase of JGBs at “broadly the same amount as before,” ensuring a measure of stability in the bond market. This part of the decision was made with an 8-1 vote. Meanwhile, BoJ has pledged to “respond nimbly” in the event of a rapid rise in long-term interest rates

                      Additionally, BoJ has outlined plans to discontinue the purchase of ETFs and J-REITs, while the procurement of commercial paper and corporate bonds will be gradually reduced, aiming for discontinuation within approximately one year.

                      Full BoJ statement here.

                      RBA stands pat, not ruling anything in or out

                        RBA has opted to maintain cash rate target unchanged at 4.35% today, aligning with broad market expectations. The central bank’s stance reflects a cautious approach, emphasizing the prevailing uncertainty in both the global and domestic economic environments. RBA’s declaration that the path of interest rates remains “uncertain” and that it is “not ruling anything in or out” underscores a flexible policy outlook, leaving the door open for rate adjustments in the future, including the possibility of further hikes.

                        On the inflation front, RBA acknowledges a moderating trend, consistent with its latest forecasts. This moderation is attributed primarily to slowdown in goods inflation. However, services inflation remains stubbornly high, and ism ode rating at a slower pace. Wages growth, a critical factor in the inflation equation, appears to have peaked.

                        Addressing the economic outlook, RBA paints a picture of significant uncertainty. Internationally, questions loom over China’s economic outlook and the broader impacts of geopolitical conflicts in Ukraine and the Middle East. Domestically, uncertainties pertain to the lag effects of monetary policy adjustments, firms’ pricing decisions, wages dynamics, and household consumption patterns.

                        Full RBA statement here.

                        Eurozone CPI finalized at 2.6% in Feb, core CPI at 3.1%

                          Eurozone CPI was finalized at 2.6% yoy in February, down from 2.8% yoy in January. CPI core (excluding energy, food, alcohol & tobacco) was finalized at 3.1% yoy, down from prior month’s 3.3% yoy.

                          The highest contribution to the annual Eurozone inflation rate came from services (+1.73 percentage points, pp), followed by food, alcohol & tobacco (+0.79 pp), non-energy industrial goods (+0.42 pp) and energy (-0.36 pp).

                          EU CPI was finalized at 2.8% yoy. The lowest annual rates were registered in Latvia, Denmark (both 0.6%) and Italy (0.8%). The highest annual rates were recorded in Romania (7.1%), Croatia (4.8%) and Estonia (4.4%). Compared with January, annual inflation fell in twenty Member States, remained stable in five and rose in two.

                          Full Eurozone CPI final release here.

                          China’s industrial production expand 7% yoy, retail sales up 5.5% yoy

                            China’s industrial production grew 7.0% yoy in the January-February period , above expectation of 5.3% yoy During the same period, retail sales rose 5.5% yoy, below expectation 5.6% yoy.

                            Fixed asset investment rose 4.2% yoy, above expectation of 3.2% yoy. Investment into real estate fell by -9% yoy. Investment in infrastructure rose by 6.3% yoy while that in manufacturing increased by 9.4% yoy.

                            “The economy kept rebounding and improving in January and February with various policies taking effect. But we also need to see that the external environment is increasingly complex, grim and uncertain, and the problem of insufficient domestic demand still remains. The foundation for the economy’s rebound needs to be further solidified,” NBS said.

                            NZ BNZ services rises to 53.0, signs of early and strong growth emerge

                              New Zealand’s BusinessNZ Performance of Services Index climbed from 52.2 to 53.0 in February, marking its highest point since March 2023.

                              A closer examination of the index’s components reveals a generally positive picture. Activity and sales maintained steady pace, inching slightly up from 53.0 to 53.1. Employment saw modest increase, moving closer to the expansionary threshold by rising from 48.3 to 49.1. Notably, new orders and business surged significantly from 52.4 to 56.0, the highest level recorded since December 2022.

                              The feedback from businesses highlighted persistent concerns, with the proportion of negative comments standing at 57.3% in February, a slight improvement from December’s 58.7% but an increase from January’s 53.0%. Businesses continue to identify the cost of living as the primary factor influencing activity, alongside the difficulties posed by the overall economic conditions.

                              BNZ’s Head of Research Stephen Toplis said that “when we combine the PMI and PSI together to get an indicator of activity, there is a strong suggestion of growth returning later this year. The turnaround occurs a little stronger and earlier than we are forecasting but, whatever the case, it is a heartening sign”.

                              Full NZ BNZ PSI release here.

                              US Empire state manufacturing dives to -20.9, activity falls significantly

                                US Empire State Manufacturing Index fell sharply from -2.4 to -20.9 in March, well below expectation of -6.5. Looking at some details, new orders fell from -6.3 to -17.2. Shipments fell from 2.8 to -6.9. Prices paid fell from 33.0 to -28.7. Prices received ticked up from 17.0 to 17.8. Number of employments fell from -0.2 to -7.1. Average workweek fell from -4.7 to -10.4.

                                Richard Deitz, Economic Research Advisor at the New York Fed said: “Manufacturing activity fell significantly in New York State in March, with a decline in new orders pointing to softening demand. Labor market conditions remained weak as both employment and hours worked decreased.”

                                Full US Empire State Manufacturing release here.

                                Japan’s Shunto negotiations yield 5.28% pay rise, a 33-Year High

                                  Japan’s annual labor negotiations, known colloquially as “Shunto” or the “spring wage offensive,” have culminated in a remarkable outcome this year, with major firms agreeing to a pay increase of 5.28%—the highest in 33 years.

                                  This significant hike, announced by the country’s largest trade union group Rengo, surpasses the previous year’s increase of 3.80%. With wage talks for smaller companies anticipated to wrap up by the end of March, this development is a critical one in the context of monetary policy considerations by BoJ.

                                  This wage growth is likely to be viewed positively by BoJ officials, who are widely expected to be on the verge of ending the long-standing negative interest rate policy. However, the exact timing of such a policy shift, whether it could be announced as soon as next week’s meeting or delayed until April, remains a matter of speculation.

                                  A recent Reuters poll conducted between March 11 and 14 showed that out of 34 economists surveyed, only 12 anticipate a rate hike in the upcoming week. The majority, 21 out of 34, foresee such a move in April.

                                  Those in favor of an April decision point to BoJ’s access to more comprehensive information by then, including results from Tankan survey, insights from branch managers, and a new set of economic projections.

                                  Yet, history has shown that BoJ has a penchant for surprising the markets. This unpredictability serves as a reminder to never rule out the possibility of a sooner move.

                                  US treasury yields leap as markets question Fed’s easing path

                                    US Treasury yields surged overnight and pulled Dollar higher, in reaction to February’s stronger than expected PPI data. Despite prevailing expectations for the Fed to initiate rate cuts in June, the persistence of “sticky” inflation has led a reassessment of the loosening path throughout the year.

                                    Currently, Fed fund futures reflect diminished confidence, with the likelihood of three rate cuts by year-end, from current 5.25-5.50% down to 4.25-4.50%, falling below 70%. Some market participants appears to be speculating on a less dovish stance in Fed’s updated dot plot, set to be unveiled next week.

                                    Technically, 10-year yield’s strong rise overnight suggests that corrective rebound from 3.785 is still in progress. Break of 4.354 is possible. But for now, strong resistance is expected between 4.391 ad 4.534 (50% and 61.8% retracement of 4.997 to 3.785) to limit upside to complete the rebound.

                                    NZ BNZ manufacturing climbs to 49.3, a glimmer of hope in ongoing recession

                                      New Zealand BusinessNZ Performance of Manufacturing Index rose from 47.5 to 49.3 , marking the highest point in a year. However, the sub-50 reading indicates that the sector remains in contraction for the twelfth consecutive month.

                                      A closer examination of the components reveals a mixed bag of progress and setbacks. Production saw a significant leap from 42.9 to 49.1, reaching its peak since January 2023. Contrarily, employment edged down to the breakeven point of 50.0 from 51.3. New orders continued to struggle, remaining unchanged at 47.8 and indicating contraction for the ninth month in a row, reflecting the ongoing difficulty in securing new business. Finished stocks and deliveries both saw improvements, with deliveries crossing into expansion territory at 51.4, the highest since March 2023.

                                      Despite these developments, the sector’s sentiment remains cautious, with 62% of comments being negative in February, marginally less pessimistic than January’s 63.2% but more so than December’s 61%. The primary concerns among respondents were a lack of orders, both domestically and internationally, and a general slowdown in the economy.

                                      Stephen Toplis, BNZ’s Head of Research acknowledged that while New Zealand’s manufacturing sector “is still in recession”, the latest PMI data signals “there is light at the end of the tunnel”. The proximity of the PMI to the “breakeven” threshold and the positive differential between new orders and inventory suggest an upcoming increase in production.

                                      Full NZ BNZ PMI release here.

                                      US initial jobless claims falls to 209k vs exp 218k

                                        US initial jobless claims fell -1k to 209k in the week ending March 9, below expectation of 218k. Four-week moving average of initial claims fell -500 to 208k.

                                        Continuing claims rose 17k to 1811k in the week ending March 2. Four-week moving average of continuing claims rose 2k to 1799k.

                                        Full US jobless claims release here.

                                        US PPI up 0.6% mom, 1.6% yoy in Feb

                                          US PPI rose 0.6% mom in February above expectation of 0.3% mom. PPI goods rose 1.2% while PPI services rose 0.3% mom. PPI ex-food, energy and trade services rose 0.4% mom.

                                          For the 12-month period, PPI rose 1.6% yoy, above expectation of 1.1% yoy. That’s the highest level since September 2023. PPI ex-food, energy and trade services rose 2.8% yoy.

                                          Full US PPI release here.