As central banks around the world respond to evolving economic landscapes, the focus now shifts to the Federal Open Market Committee (FOMC) in the US and the Bank of England (BoE). With the European Central Bank (ECB), Bank of Japan (BoJ), and Bank of Canada (BoC) decisions behind us, attention turns to potential shifts in policy settings, especially in light of progress on inflation. In this article, we delve into key developments in North America, Europe, and Asia, exploring the implications for global markets.
North America: The Resilient US Economy and FOMC Balancing Act
In the US, the year 2023 witnessed not just a sidestepping of recession fears but an acceleration in growth to a robust 2.5%. Despite 525 basis points in rate hikes since March 2022, the economy displayed remarkable resilience. This, coupled with the FOMC’s pivot, propelled Wall Street to record highs in early 2024.
The upcoming FOMC meeting (Tuesday, Wednesday) is expected to maintain a hold on rates, with a focus on the policy statement and Chair Powell’s press conference. Anticipated is a shift away from the tightening bias, echoing the subtle changes made in the December statement. Powell is likely to downplay the likelihood of rate cuts in the near term, emphasizing data dependency amid a resilient economy and inflation risks.
In the December FOMC the Fed made a subtle shift in the policy statement, inserting “any” into the key guidance sentence — “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time…” That shift supported expectations the FOMC was done with rate hikes. We expect a further shift this week and look for the Fed to remove the phrase “additional policy firming” as policy is on the way toward normalization. Powell, however, will use his press conference to impart a more neutral stance, awaiting more data to confirm inflation is on a sustainable downtrend to 2%. We continue to forecast rate cuts beginning in June, with 25 bps in easing in July and September as well, consistent with the 75 bps seen in the dot plot.
The Treasury’s borrowing projections and refunding announcement will impact yields, adding to the balancing act in fixed income. A data-rich week includes key reports like the January payroll report, January manufacturing ISM and Q4 productivity and unit labor costs.
UK: BoE Moving to a Neutral Stance?
The BoE is likely to maintain policy settings but may shift from its implicit tightening bias to a neutral stance. Caution on inflation risks and monitoring global developments will be key for Governor Bailey.
The central bank maintained its implicit tightening bias in December, but will have updated forecasts now with the publication of the new monetary policy report. Growth has been weaker than the BoE expected, and the correction in headline inflation quicker than anticipated. That will make a strong case in favor of taking out the tightening bias and moving to a neutral stance.
At the same time, Bailey is likely to signal ongoing caution with regard to inflation risks also in order to keep speculation of an early move under control. The BoE governor suggested recently that developments in the Red Sea are a factor the central bank is watching carefully. PMI reports already indicated that output price inflation is picking up as shipping costs rise. Furthermore, services price inflation remains high, and it is still not clear to what extent wage increases are being passed on. Officials will also want to see the spring budget, which is likely to bring pre-election tax cuts, before assessing the inflation outlook in detail. We continue to see the BoE waiting until after the ECB before cutting rates.
Asia: China’s Economic Challenges and Japan’s Data Deluge
Elsewhere, China’s PMIs take center stage as the People’s Bank of China (PBoC) implements a surprise RRR cut to address economic concerns. The official manufacturing PMI signals contraction, warranting attention amid efforts to stimulate the economy.
Japan’s data deluge includes unemployment, retail sales, industrial production, and more. Governor Ueda’s cautious optimism on inflation leaves room for potential action after April wage negotiations.
As the global economic stage evolves, central banks navigate uncertainties, and key economic indicators shape market sentiments. The FOMC, BoE, and developments in China and Japan are pivotal in determining the trajectory of global markets. Stay tuned for a dynamic week ahead, filled with crucial data releases and central bank decisions.
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Andria Pichidi
Market Analyst
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