Nertu
When I was a kid, spring was an exciting time of year. We knew it was getting warmer and summer vacation was just around the corner, but we didn’t know when it would arrive (it depended on how many snow days there were). (The end date of classes may differ by a few days.)
Still, the expectations we all shared were broadly positive, and I believe markets are in a similar period of expectations this spring, waiting for various central banks to start cutting interest rates.
While the exact timing is unclear, we expect it to happen soon. And the wait is generally going well, with major stock indexes around the world rising. Record high In the last few weeks.
So where do we stand as May ends? Here’s what I predict will happen during the month of May: June central bank meetings.
Bank of Canada: June 5
Canadian inflation data came in last week, showing strong progress with the Consumer Price Index (CPI) increasing 0.5% month-on-month and 2.7% year-on-year in April.1 This is as expected and the slowest pace in the past three years.
More importantly, core CPI, which excludes food and energy prices, rose 0.1% from the previous month for the fourth consecutive month, suggesting that inflation remains well contained.1
The Bank of Canada is focused on core inflation, as explained in its April Monetary Policy Statement: “The Governing Council is particularly monitoring developments in core inflation and continues to focus on the balance of demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behavior.”2
This is the last CPI reading before the Bank of Canada meets in June, and I believe that a rate cut in June has significantly increased the likelihood. On the other hand, the Bank of Canada may still be reluctant to act given the possibility of the Fed raising rates, as stated in the Federal Open Market Committee minutes and some Fed commentary.
This would spell trouble for the Canadian currency and cause it to fall in value against the US Dollar. There is a 50/50 chance of a rate cut at the Bank of Canada’s upcoming meeting.
European Central Bank: June 6
In my view, it seems very likely that the ECB will cut interest rates at its June meeting. Inflation developments have been significant. The April Eurozone inflation report showed headline CPI at 2.4% y/y and core CPI at 2.2% y/y. Services CPI remains strong but has slowed significantly to 3.7% y/y.3
Also encouraging is the just-released decline in consumer inflation expectations in April, with inflation now expected to be 2.9% one year from now, the lowest since September 2021.
And the forecast for the next three years rose to 2.4% from 2.5%.Four At the moment, we have seen a re-acceleration in labor costs per hour, but I think it is highly unlikely that this will stop the ECB from cutting interest rates in June.
US Federal Reserve: June 12
of Federal Reserve The Fed is likely to take no action at this meeting. On the bright side, April CPI data showed progress toward containing inflation resumed after some stagnation in the first quarter.
Additionally, the University of Michigan’s final reading of consumer inflation expectations for May was lower than expected. Inflation expectations It’s firmly in place, but it’s clear that’s not enough to satisfy the Fed.
Over the past few weeks, several Fed speakers have said they need more data before they feel confident about starting to cut rates, and I think Fed Governor Chris Waller summed up the majority of Federal Open Market Committee (FOMC) participants in his comments last week.
“Unless the labor market weakens significantly, we need several more months of favorable inflation data before we feel comfortable supporting an accommodative stance for monetary policy.”Five
This follows the release of the minutes from the May FOMC meeting, which was more hawkish than expected and saw some participants signal a willingness to raise rates if necessary.
This weekend sees the release of the Fed’s preferred inflation metric, the Personal Consumption Expenditures Price Index, which will of course be closely watched and will have market-moving power. However, this alone will likely not be enough to move the Fed. That said, I still think a rate cut in Q3 is likely.
Notably, Asian central banks are likely to wait for the Fed to start cutting rates, given the need to defend their currencies in the face of a strong US dollar.
Bank of Japan: June 17
The Bank of Japan (BOJ) appears to be on track to achieve its goal of sustainably achieving 2% inflation after decades of being below target. Japan’s inflation rate was 2.5% year-on-year in April, while core CPI, which excludes fresh food but includes fuel costs, rose 2.2% year-on-year. This marks the second consecutive month of moderation in inflation, but still remains above the central bank’s target.6 Moreover, consumer inflation expectations have risen recently, making it easier for the Bank of Japan to raise interest rates again.
The BOJ appears to have another objective: helping strengthen the Japanese yen, which is facing downward pressure. Bank of Japan Governor Kazuo Ueda has expressed confidence in the Japanese economy.
“We continue to believe that the Japanese economy will recover, even when we look at the data released after the Bank of Japan’s policy meeting in April.”7
As expected, the Bank of Japan has taken a more hawkish stance in recent weeks. While no rate hike is expected in June, one or more hikes before the end of 2024 are increasingly likely. This has had an impact on the Japanese government bond market, with the 10-year government bond yield rising above 1% for the first time in 11 years.8
Reserve Bank of Australia: June 18
Inflation is more entrenched in Australia, and there are growing concerns that the Reserve Bank of Australia (RBA) may raise interest rates this year. I don’t think that will happen, but I expect the RBA to be one of the latecomers when it comes to cutting interest rates.
Bank of England: June 20
The UK’s April inflation report showed significant progress in inflation, but less than expected. Particularly disappointing was the very modest progress in services inflation. In my view, a rate cut at the June meeting is clearly unlikely, but progress in services deflation could be enough to persuade the Bank of England to cut rates in August.
Global central banks are moving in roughly the same direction
These divergences in near-term policy expectations have given rise to an active carry trade, in which investors borrow in low-interest rate currencies and put the money into currencies where interest rates are expected to remain higher for a longer period.
We expect this trend to continue in the near term, as interest rate cuts will obviously be phased in some countries, some earlier, some later, but we expect all of these central banks to start cutting interest rates in 2024, just as all primary school children will eventually be on summer vacation.
And I expect most or all of these central banks to continue down a path of gradual monetary easing (or, in the case of the Bank of Japan, gradual tightening), which would likely create a favorable environment for risk assets.
footnote
1 Source: Statistics Canada
2 Source: Bank of Canada press release, April 10, 2024
3 Source: Eurostat
4 Source: European Central Bank, 28 May 2024
5 Source: Reuters, “Fed officials urge patience on timing of rate cuts,” May 21, 2024
6 Source: Ministry of Internal Affairs and Communications
7 Source: Bank of Japan
8 Source: Bloomberg, as of May 24, 2024
Important Information
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Image: Walter Bibikow/Getty
All investments involve risks, including the risk of loss.
Past performance is no guarantee of future results.
It is not possible to invest directly in an index.
This does not imply a recommendation of any investment strategy or investment product to any particular investor, who should consult with a financial professional before making any investment decision.
Stock prices generally fluctuate, sometimes significantly, in response to company-specific activities and general market, economic and political conditions.
Risks of investing in securities of foreign issuers, including emerging market issuers, may include foreign currency fluctuations, political and economic instability, and foreign taxation issues.
Disinflation refers to a short-term slight decline in the inflation rate.
The Consumer Price Index (CPI) measures changes in consumer prices.
Core inflation excludes food and energy prices, while headline inflation includes these.
Personal Consumption Expenditures (PCE) or PCE Index measures the price changes of consumer goods and services. The expenditures included in the index represent actual household expenditures in the United States.
The Federal Open Market Committee (FOMC) is a 12-member committee of the Federal Reserve that meets regularly to set monetary policy, including the interest rates charged to banks.
The Survey of Consumers is a monthly telephone survey conducted by the University of Michigan that provides an index of consumer sentiment and inflation expectations.
The opinions expressed above are those of the author. May 28, 2024These comments should not be construed as recommendations, but rather as illustrative of a broader theme. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from expectations.
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