To Cut or Not to Cut
Risk assets finally took a pause for breath this week as prospects that an initial interest-rate cut could be delayed by policymakers weighed on equity markets. The MSCI World Equity Index declined -0.4%, with the bellwether S&P 500 Index returning -0.8%, the technology centric Nasdaq -0.9%, and the Euro Stoxx -0.7%.
A major theme so far in 2024 has been the continued headline resilience of the global economy, led by the US. Continued hot macro data alongside growing concerns over a potential reacceleration of inflation as oil and commodity prices surge, are forcing a significant shift in the view over the path for expected rate-cuts this year.
Interest rates remain elevated in the context of recent history, yet this has seemingly done little to hold back the US labour market. March’s monthly jobs report, arguably the most important economic data point alongside inflation, revealed a gain of 303,000 jobs versus c. 205,000 expected, the strongest figure in ten months. Meanwhile, the unemployment rate improved to 3.8% from 3.9% the prior month.
The economic releases were accompanied by vociferous language from prominent central bankers on the need to stress patience and data dependency, and, in the case of Minneapolis Fed President Neel Kashkari, caution that the Fed might not yet be done with its tightening cycle.
These comments, so soon after Chairman Jerome Powell’s recent appearance at the March Federal Open Market Committee (FOMC) meeting in which he demonstrated resolve towards maintaining cuts, has vexed investors and reignited concerns over a hyper-reactive Fed and inconsistent messaging. The VIX index, a closely watched indicator used as a barometer to measure to greed and fear, jumped 23% at one point, before settling to close +4% on the week.
Bond markets took fright as markets reconfigured their interest rate expectations, with the yield (prices move inversely to yields) on US Treasury government bonds rising 11 basis points to the highest level in four months, whilst UK GILT yields and Eurozone yields rose 15 basis points and 14 basis points respectively. As it stands, two cuts are now expected in 2024 from the US Federal Reserve versus nearly seven at the beginning of the year.
Elsewhere, there was better news for European policymakers as March’s inflation report revealed a steeper than expected decline, with consumer prices rising at an annual rate of +2.4% YoY in March versus +2.6% YoY expected. The noise is building over whether the European Central Bank now finds itself in a position to be first to cut rates, and possibly cut further, than the Fed this year.
For the second week in a row, precious metals and oil posted solid price gains. The yellow metal (gold, +3.9%) finds itself at new all-time highs, with potential protagonists including record central bank buying, the whiff of an inflation reacceleration, and a mounting US debt problem which, at current interest rate levels, is becoming increasingly more expensive to service.
Silver (+11%) has also joined the party. With inherent inflationary attributes and longstanding supply constraints, silver also has the highest electrical conductivity of all metals, making it integral to manufacturing processes including semiconductor chips, printed circuit boards, and mobile phones.
As for the energy commodities basket, and oil in particular, recent geopolitical developments have given an upside bias to the price as concerns linger over running hot wars, and potentially new ones.
Looking ahead to this week, investors will be closely watching the Consumer Price Index (CPI) inflation report, scheduled for release on Wednesday, to assess whether the trend of slightly hotter than expected inflation extended into March. The minutes of the Federal Reserve meeting from the 19 and 20 March will also be released, and heavily scrutinised, for additional clues on the likely policy path ahead.