Global Economy & Markets, Weekly Roundup 16/09/24
The ECB cut rates as widely expected, while the Fed decision will take center stage this week
Global equity markets rose significantly in the past week due to the prospect of aggressive Fed easing. The MSCI ACWI rose by +3.0% wow (+13.7% YtD) with Technology leading the increase.
Government bond yields continued to retreat in anticipation of the Fed meeting on September 18th. The US Treasury 10-Year bond yield decreased by -6 bps wow to 3.65%, its lowest level since mid-2023, while the 10/2s curve remained upward slopping (+7 bps) following two years of inversion. The German 10-Year bond yield has stabilized at circa 2.15% post ECB.
US inflation decelerated by -0.4 pps to a 3½-year low of +2.5% yoy in August, while the FRB Cleveland’s Inflation model points to a further deceleration in September (+2.3% yoy). With job creation slowing and the unemployment rate up by 0.4 pps in the past twelve months, the Fed is expected to cut interest rates on Wednesday, probably by 25 bps to 5.0% - 5.25%. The FOMC’s median interest rate projection (FFR) for 2024 and 2025 is expected to move significantly lower (current projections of 5.1% and 4.1%, respectively).
Derivatives tied to the FFR reflect about a ½ likelihood that the Fed will reduce its policy rate by 50 bps this week. In addition, financial markets expectations, according to EUR overnight index swaps, price in cumulative cuts of -165 bps by end-2025 by the ECB. A large synchronous monetary easing has been built lately into asset pricing, with price to earnings ratios remaining above 21x in the US and real yields down by 50 basis points in the past two months.
The European Central Bank on September 12th cut the Deposit Facility Rate (DFR), the main rate via which the monetary policy stance is steered in the current environment of elevated liquidity (€3.1 trillion or 21% of euro area GDP), by -25 basis points to 3.50%, acknowledging the progress in inflation deceleration. As previously announced, the spread of DFR to the Main Refinancing Operations (MRO) rate was reduced to 15 bps (current MRO: 3.65%).
The ECB continued to refrain from any explicit guidance regarding the next rate decisions, safeguarding the biggest possible flexibility. At the same time, the medium-term economic outlook was roughly unchanged, and the ECB continues to envisage headline inflation approaching the target of +2.0% in H2:2025.
Short-term projections were revised lower for real GDP growth and higher for core CPI. With services inflation remaining sticky (+4.2% yoy in August) and with headline inflation expected to temporarily increase to +2.6% on average in Q4:2024 from +2.3% in Q3:2024 due to base effects, the ECB could skip the October meeting, before lowering interest rates anew in December.
The Bank of Japan officials have suggested that further rate hikes could be on the cards, albeit such a decision is not anticipated as soon as at the upcoming meeting (due on September 20th). Recall that the short-term policy interest rate was increased to +0.25% in late-July, from a range of 0% to +0.1%. The JPY/USD pair has broken through the JPY/USD140 threshold for the first time since mid-2023, with the Japanese currency up by +13% in the past two months.
Finally, the Bank of England is also expected to stand pat on Thursday (Bank Rate: 5.0%).
Global equity markets rose significantly in the past week due to the prospect of aggressive Fed easing. The MSCI ACWI rose by +3.0% wow (+13.7% YtD) with Technology leading the increase.
Government bond yields continued to retreat in anticipation of the Fed meeting on September 18th. The US Treasury 10-Year bond yield decreased by -6 bps wow to 3.65%, its lowest level since mid-2023, while the 10/2s curve remained upward slopping (+7 bps) following two years of inversion. The German 10-Year bond yield has stabilized at circa 2.15% post ECB.
US inflation decelerated by -0.4 pps to a 3½-year low of +2.5% yoy in August, while the FRB Cleveland’s Inflation model points to a further deceleration in September (+2.3% yoy). With job creation slowing and the unemployment rate up by 0.4 pps in the past twelve months, the Fed is expected to cut interest rates on Wednesday, probably by 25 bps to 5.0% - 5.25%. The FOMC’s median interest rate projection (FFR) for 2024 and 2025 is expected to move significantly lower (current projections of 5.1% and 4.1%, respectively).
Derivatives tied to the FFR reflect about a ½ likelihood that the Fed will reduce its policy rate by 50 bps this week. In addition, financial markets expectations, according to EUR overnight index swaps, price in cumulative cuts of -165 bps by end-2025 by the ECB. A large synchronous monetary easing has been built lately into asset pricing, with price to earnings ratios remaining above 21x in the US and real yields down by 50 basis points in the past two months.
The European Central Bank on September 12th cut the Deposit Facility Rate (DFR), the main rate via which the monetary policy stance is steered in the current environment of elevated liquidity (€3.1 trillion or 21% of euro area GDP), by -25 basis points to 3.50%, acknowledging the progress in inflation deceleration. As previously announced, the spread of DFR to the Main Refinancing Operations (MRO) rate was reduced to 15 bps (current MRO: 3.65%).
The ECB continued to refrain from any explicit guidance regarding the next rate decisions, safeguarding the biggest possible flexibility. At the same time, the medium-term economic outlook was roughly unchanged, and the ECB continues to envisage headline inflation approaching the target of +2.0% in H2:2025.
Short-term projections were revised lower for real GDP growth and higher for core CPI. With services inflation remaining sticky (+4.2% yoy in August) and with headline inflation expected to temporarily increase to +2.6% on average in Q4:2024 from +2.3% in Q3:2024 due to base effects, the ECB could skip the October meeting, before lowering interest rates anew in December.
The Bank of Japan officials have suggested that further rate hikes could be on the cards, albeit such a decision is not anticipated as soon as at the upcoming meeting (due on September 20th). Recall that the short-term policy interest rate was increased to +0.25% in late-July, from a range of 0% to +0.1%. The JPY/USD pair has broken through the JPY/USD140 threshold for the first time since mid-2023, with the Japanese currency up by +13% in the past two months.
Finally, the Bank of England is also expected to stand pat on Thursday (Bank Rate: 5.0%).