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Summary
- We think the Fed will stay on hold and keep three 2024 cuts in their forecast when they meet on Wednesday.
- The Bank of England will also likely keep rates steady, with CPI dictating the tone.
- Yet Tuesday’s BoJ meeting could bring the first hike in a generation following the strongest shunto wage negotiation since the early 1990s.
- In EM, central banks in Taiwan, Indonesia, Czechia, Brazil and Mexico meet, with a range of policy options in the cards.
US: The Fed Keeps the Faith
The Federal Reserve (Fed) meets on Wednesday. We expect them to hold rates steady, stick to their disinflation narrative, and retain three cuts for 2024 in their Summary of Economic Projections (SEP). We make three points:
- The Fed could lift its growth forecast, but this would not impact the fed funds rate (FFR) trajectory as recent data indicates the regime of disinflation with strong growth continues.
- The Fed will likely hint at a June cut based on sequential decreases in core Personal Consumption Expenditure (PCE), faster services disinflation, and continued labour market rebalancing.
- The Fed will probably communicate plans to taper quantitative tightening (QT).
Aside from this, a slew of data is due. Among them, we expect housing market data (Monday, Tuesday and Thursday) to show general improvement in support of lower housing inflation. Business surveys come Thursday: expect manufacturing surveys to contract or move sideways and services PMIs to move sideways also.
Markets We Are Watching
- It is all about STIR markets this week as we watch to see if the Fed shifts its median 2023 dot to signal two cuts this year rather than three. We could also see an increase in the median 2025 dot to signal one less cut (four to three). This would also tie into a slower ‘last mile’ of inflation. While none of these are our base case, if we do see such a shift watch Z4Z5 SOFR spreads (currently -0.725). We have seen steepening in the last week following CPI and PPI, and we could more cuts being priced out of the curve.
- We watch the US 2s10s curve, which is still inverted by 41 bps and has flattened further in recent weeks. If we see a higher median 2025 dot, or stronger growth forecasts, we could see the start of bear steepening.
Europe & UK: Current BoE Policy to Persist
The Bank of England (BoE) will announce policy on Thursday. Expect bank rate to remain unchanged, with little else of note given the lack of forecast updates or presser. Again, though, we make three points:
- Voting pattern: the market seems to be mostly looking for an unchanged voting pattern from last time (1-6-2 for a cut-pause-hike). We think the risk is skewed towards Haskel choosing to back a pause.
- Wednesday’s CPI will influence the voting pattern. Another undershoot in core and services vs February’s Monetary Policy Report (MPR) could prompt Mann to vote for a pause.
- Consensus forecasts are for +3.5% in the headline and +4.6% in core. We lean to the downside, with our bottom-up model for core suggesting +4.4% is possible. Meanwhile, the BoE’s November MPR forecast has +3.5% headline and +4.9% core, so actual outturns seem likely to undershoot in core.
Markets We Are Watching
- We watch 10-year Gilt yields this week ahead of the BoE. Since November, 2% has acted as resistance and presented a good buying opportunity. Given our dovish tilt on the BoE, we look to go long Gilts around this area.
- While we watch for a potential bear steepening in the US, we think a bull steepening is more likely in the UK. The UK 2s10s curve is currently inverted by 20 bps, and a more dovish outcome this week could see the curve flatten (2s trade at the same level as 10s).
Rest of G10: BoJ to Make a First-in-a-Generation Move?
All eyes turn to the Bank of Japan (BoJ) on Tuesday. We expect them to end negative rates following the strongest shunto wage negotiations since the early 1990s – something we have expected since early February.
Importantly, a hike would not be the start of an aggressive BoJ tightening cycle. It simply reflects a need to leave negative rates. Inflationary pressures have not strayed from target, while labour cash earnings have normalised, and the economy is faring fine.
Elsewhere, we expect core inflation could print 0.1pp above forecast:
- CPI: MH forecast +2.9% vs consensus at +2.9%.
- CPI exc. fresh food: MH forecast +2.9% vs consensus at +2.8%.
- CPI exc. fresh food and energy: MH forecast at +3.4% vs consensus at +3.3%.
Markets We Are Watching
- We do not think a BoJ hike will translate into JPY strength. USD/JPY has historically shifted little around hikes, and the market appears to have already priced the event. Instead, US fundamentals remain in the driving seat.
- However, Japanese government bond (JGB) yields could rise further. They have risen 5bps on average following previous yield curve control tightenings and 10bps following rate hikes.
Emerging Markets: A Central Bank Flurry
We get a wealth of central bank action in emerging markets this week. Here are our calls:
- Taiwan: we expect CBC to keep rates unchanged at 1.875%, in line with consensus, on 21 March. While the CBC hinted at a shift to an easing bias at its previous meeting, CPI inflation has remained high.
- Indonesia: We expect BI to keep its policy rate unchanged at 6% on 20 March, in line with consensus. Inflation picked up to 2.8% YoY in February though remains within BI’s target range of 1.5%-3.5%.
- Czechia: A 4.9pp drop in YoY inflation since the last policy meeting will not mean accelerated rate cuts from the CNB. Although headline inflation is back at target, core remains elevated, as does services inflation. Expect a 50bp cut to 5.75%.
- Brazil: We expect BCB to cut rates by 50bps to 10.75% on 20 March, in line with the earlier guidance from the central bank and widely expected by the market.
- Mexico: We expect Banxico to cut rates by 25bps to 11% on 21 March. The market is split on this with a minority expecting an unchanged decision. We think the cut will be a close call, likely with split voting.
Key Market Movers From Last Week
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.