Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 23/09/24
The synchronization of global monetary easing (Fed, PBOC) supports sentiment
Risk assets behaved orderly following a relatively big-size cut by the Fed in the past week. Global equity markets increased and corporate bond spreads narrowed, albeit in a volatile fashion. The MSCI ACWI rose by +1.3% wow (+15% YtD), while the S&P500 posted fresh all-time highs (5719). On Tuesday 24th, the PBOC lowered interest rates and reserve requirements, inter alia, in order to support the Chinese economy. As a result, the CSI 300 surged by +4.3% (-2.3% ytd).
Short-term government bond yields were broadly flat as the Fed decision has been discounted. Long-term yields rose across the board, albeit remain significantly lower compared with their end-July levels (US 10-Year yield: +8 bps wow to 3.73% | German 10-Year yield: +7 bps wow to 2.22%). On Monday 23rd, following significantly weaker-than-expected PMI data, German government bond yields declined, as expectations for a more dovish ECB monetary policy response increased.
Specifically, the German 2-Year yield declined by -9 bps to 2.16%, while the 10-Year yield fell by -5 bps to 2.17%. As a result, the yield curve dis-inverted for the first time since November 2022. The French-German spread has widened anew (78 bps), as political uncertainty offset the downward pressures from the weak French PMI data, with 10-Year OAT and Bonos yields neck to neck for the first time since 2007 (2.95%).
The euro area composite PMI, released on Monday 23rd, revealed a more subdued outlook for economic activity. The index fell below the expansion/contraction threshold of 50.0 in September (48.9) for the first time since February, undershooting consensus expectations for 50.5. New business declined for a 4th consecutive month, while the new orders component recorded its steepest decline since January, suggesting weak growth prospects.
The Federal Reserve lowered the policy rate by -50 bps to a range of 4.75% - 5.0%. The reduction is the first following a 14-month period of the FFR being held steady at the multi-year highs of 5.25% - 5.5%. The decision was not unanimous (11-1 in favor of a -25 bps cut).
The Fed lowered the FFR due to greater confidence that inflation is moving sustainably towards the 2% target and due to concerns regarding the labor market. The risks to achieving the employment and inflation goals were viewed as having come roughly in balance.
Following the latest decision, the Fed’s median interest rate assumption (FFR) for 2024 and 2025 moved significantly lower (effectively by -75 bps), to 4.4% & 3.4%. Note that the median “dot plot” masks a somewhat less dovish composition of assumptions. Derivatives tied to the FFR point to investors’ expectations for -75 bps by end-2024 and further -125 bps during 2025 to end the year at 2.75% - 3.0%.
The Bank of Japan (BoJ) stood pat, as expected, with the short-term rate at +0.25%. BoJ Governor K.Ueda suggested that rate hikes are on the cards if the economy evolves as anticipated.
Finally, the Bank of England (BoE) also stood pat, as expected (Bank Rate: 5.0%). The strong consensus in the Committee (8 members versus only one dissenting in favor of a -25 bps cut), suggests a high bar for a rate reduction to come as soon as in the next meeting on November 7th.
Risk assets behaved orderly following a relatively big-size cut by the Fed in the past week. Global equity markets increased and corporate bond spreads narrowed, albeit in a volatile fashion. The MSCI ACWI rose by +1.3% wow (+15% YtD), while the S&P500 posted fresh all-time highs (5719). On Tuesday 24th, the PBOC lowered interest rates and reserve requirements, inter alia, in order to support the Chinese economy. As a result, the CSI 300 surged by +4.3% (-2.3% ytd).
Short-term government bond yields were broadly flat as the Fed decision has been discounted. Long-term yields rose across the board, albeit remain significantly lower compared with their end-July levels (US 10-Year yield: +8 bps wow to 3.73% | German 10-Year yield: +7 bps wow to 2.22%). On Monday 23rd, following significantly weaker-than-expected PMI data, German government bond yields declined, as expectations for a more dovish ECB monetary policy response increased.
Specifically, the German 2-Year yield declined by -9 bps to 2.16%, while the 10-Year yield fell by -5 bps to 2.17%. As a result, the yield curve dis-inverted for the first time since November 2022. The French-German spread has widened anew (78 bps), as political uncertainty offset the downward pressures from the weak French PMI data, with 10-Year OAT and Bonos yields neck to neck for the first time since 2007 (2.95%).
The euro area composite PMI, released on Monday 23rd, revealed a more subdued outlook for economic activity. The index fell below the expansion/contraction threshold of 50.0 in September (48.9) for the first time since February, undershooting consensus expectations for 50.5. New business declined for a 4th consecutive month, while the new orders component recorded its steepest decline since January, suggesting weak growth prospects.
The Federal Reserve lowered the policy rate by -50 bps to a range of 4.75% - 5.0%. The reduction is the first following a 14-month period of the FFR being held steady at the multi-year highs of 5.25% - 5.5%. The decision was not unanimous (11-1 in favor of a -25 bps cut).
The Fed lowered the FFR due to greater confidence that inflation is moving sustainably towards the 2% target and due to concerns regarding the labor market. The risks to achieving the employment and inflation goals were viewed as having come roughly in balance.
Following the latest decision, the Fed’s median interest rate assumption (FFR) for 2024 and 2025 moved significantly lower (effectively by -75 bps), to 4.4% & 3.4%. Note that the median “dot plot” masks a somewhat less dovish composition of assumptions. Derivatives tied to the FFR point to investors’ expectations for -75 bps by end-2024 and further -125 bps during 2025 to end the year at 2.75% - 3.0%.
The Bank of Japan (BoJ) stood pat, as expected, with the short-term rate at +0.25%. BoJ Governor K.Ueda suggested that rate hikes are on the cards if the economy evolves as anticipated.
Finally, the Bank of England (BoE) also stood pat, as expected (Bank Rate: 5.0%). The strong consensus in the Committee (8 members versus only one dissenting in favor of a -25 bps cut), suggests a high bar for a rate reduction to come as soon as in the next meeting on November 7th.