The Fed wants to cut
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
The generally dovish tone of central bank comments last week—with rate cuts still on the cards in June in the US, the euro area and the UK—meant that equity markets had another positive week. In general, stock market gains looked more evenly spread than at the start of the year, when performance was dominated by a small number of US tech-related stocks. One of strongest indexes last week was the TOPIX, up 5.3% i in yen. Although the Bank of Japan ended its negative interest rate policy, participants seemed assured at the lack of guidance toward further tightening as well as an exporter-friendly decline in the yen. Government bond yields fell in Europe and the US, reflecting growing confidence on the path towards rate cuts, with the short end of the US Treasury yield saluting Fed officials’ unchanged ‘dot plot’ prediction of three 25 bps cuts this year. The Swiss franc lost ground against the euro and the US dollar after the Swiss National Bank became the first rich-country central bank to cut rates, while the drop in US Treasury yields helped gold to a positive performance.
QUOTE OF THE WEEK
“The economy is performing well,” Fed Chair Jay Powell said on Wednesday. “We continue to make good progress on bringing inflation down.”
KEY DATA
S&P Global’s composite purchasing manager index (PMI) for the euro area rose to a preliminary 49.9 in March from 49.2 in February, with services activity expanding, but manufacturing output still in contraction. But national surveys painted a brighter picture. The ZEW Institute’s monthly survey of German economic sentiment rose strongly this month, to 31.7 from 19.9 in February. The Ifo business climate index also showed a rise in German business sentiment.
Business activity in the US continues to expand, with S&P Global’s composite PMI coming at 52.2, slightly below February’s 52.5. Also in the US, the NAHB National Housing Market index rose to 51 in March.
Chinese retail sales and industrial production data improved in the first two months of 2024. Industrial production jumped 7% in those two months year-on-year (y-o-y), and retail sales rose 5.5%. However, property investment (-9% y-o-y) and new construction (-30%) continued to decline.
MARKETS VIEW
As the Fed looks to cut rates, the big focus this week will be the release of US core PCE inflation on Friday, and consumer sentiment data on Thursday. We expect the Fed, the ECB and the BoE to start cutting in June, although risks are skewed towards the Fed easing less than expected this year.
While Australia’s central bank said last week it was “not ruling anything in or out”, central banks’ overall dovish tone helped equities and Swiss and Japanese equities are supported by currency depreciation. The soaring share price of a social media network at its stock market debut may prove a pivotal moment for IPOs and a catalyst for PE. Events in Washington (a narrowly averted government shutdown) and Moscow (the fallout from a deadly attack) highlight political risk, against which we like gold as a hedge.
