Holding Patterns

By Jane Foley, Head of FX Strategy at Rabobank

Right from the very first week of the year, Fed officials and other G10 central bankers have had reasonable success in pushing back against market expectations for early rate cuts. Following the blow-out January US labour report and candid remarks from Fed Chair Powell in the same week, the market has all but lost interest in the chances of a move by the FOMC as soon as next month.  No central banker wants to be remembered as the policymaker that cut rates too soon and threw disinflationary pressures off course. That said, while Rabobank retains the forecast that the Fed’s first move is unlikely to be before June, there is still considerable market interest in a potential rate cut as soon as May. Today’s release of the US January CPI inflation data will provide the next test of how close the Fed is to achieving its goal of returning price pressures back to the 2% level and of reducing rates this spring. The market consensus stands at 2.9% y/y for the headline number, down from 3.4% y/y previously. The market median for the core CPI inflation number is 3.7% y/y down from 3.9% y/y. (ZH: The final number came in superhot compared to estimates and slammed shut the door on any early rate cuts).

Yesterday’s release of the NY Fed’s survey of US consumer inflation expectations showed no movement over the 1- and 5-year horizons. These held at 3.5% y/y and 2.5% y/y respectively.  However, expected inflation over 3 years dropped to 2.35% in January from 2.6% previously. This was the lowest in nearly 11 years.

While the signalling from the report was not clear-cut, with the inflation uncertainty index rising in both 1 and 3 years, there was other good news. The median for commodity price growth expectations fell. This included goods such as fuel, food and rents which should be encouraging for Fed doves.

That said, comments from Fed Governor Bowman yesterday were designed to reign in any optimism. She remarked that rate cuts in the “immediate future” would not be appropriate.

The S&P may have closed off its intraday highs last night, but the ability of the index to push beyond the 5000 level appears to signal confidence in the outlook for the US economy or/and the likelihood that Fed rates are on the brink of pushing lower. Recently, concerns over the breadth of the rally and the number of firms that are experiencing a boost to their stock price again came to the fore. That said, the FT is reporting that yesterday more than two-thirds of the stocks in the S&P finished higher. Yesterday Nvidia Corp. overtook Amazon to become the fourth most valuable US company. Arm holdings was a strong performer on the back of market excitement over the firm’s spending on AI. The fourth day of the Lunar New Year holiday ensured a quiet session in Asia overnight with markets closed in China, Hong Kong, Taiwan, and Vietnam. In Japan, the Nikkei 225 continued to push higher on the back of gains in the tech sector. The weakness of the JPY is also a supportive factor for the exporter heavy Nikkei.

The FT is reporting that the EU is proposing to sanction three Chinese companies and one Indian business as part of its latest move to pressure the Russian economy. If approved, this would be the first time that businesses inside China and India have been directly impacted by EU sanctions.  Under the terms, EU companies would be banned from dealing with the listed companies. Businesses in Turkey, Thailand, Sri Lanka, Serbia and Kazakhstan would also be on the list. 

European officials have been reacting to comments from former US President Trump that Moscow could do “whatever the hell they want” with Nato members that failed to meet the alliance’s spending target of 2% of GDP. Nato secretary-general Stoltenburg warned that Trump’s outburst undermined “all of our security, including that of the US”.