The market was treated to comments from 3 key central bankers including Fed’s Powell: ECB Pres. Lagarde, and Fed Gov. Jefferson.
Fed Chair Powell shifted his views. He highlighted that despite the strong performance of the U.S. economy, there has been a persistent lack of progress on inflation this year, with recent data showing that core PCE inflation is expected to stabilize at around 2.8% for March. He noted that the labor market is moving towards a better balance, showing strength but with gradually moderating wage pressures. Despite this, the data have not increased confidence in controlling inflation. Powell emphasized the Fed’s cautious approach, particularly in not overreacting to last year’s declines in inflation. He stated that the restrictive monetary policy currently in effect needs additional time to demonstrate its full effects and stressed that this scenario of inflation is not driven by overheated demand. The Fed aims to maintain transparency and predictability in its policies, acknowledging their global impact, and has learned from past supervisory shortcomings, ensuring a more forceful oversight approach moving forward.
What is maybe more important is things that Powell did not say. More specifically, prior to today Powell had said:
“If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year”
That sentiment was not expressed today, keeping the door open for no cuts this year. Currently, there is only an 18% chance of a cut in June, a 43% chance in July and a 69% chance in September. Remember, the Fed had still projected three cuts by the end of the year.
Fed Gov. Jefferson also spoke (voting member). He addressed concerns about persistent inflation in a recent statement, indicating that if inflation continues to outpace expectations, it may be necessary to maintain the current restrictive monetary policy stance for an extended period. He noted that the economic outlook remains uncertain, with recent data showing both job gains and inflation rates exceeding projections. For instance, headline PCE inflation was recorded at 2.7% over the past 12 months, with core PCE at 2.8%, according to Fed staff estimates. Despite significant strides in reducing inflation, Jefferson emphasized that the goal has not yet been fully achieved.
Jefferson’s baseline expectation is that inflation will continue to decline under the current policy rate, while the labor market remains robust and economic forces continue to rebalance. He anticipates a slight slowdown in economic growth for Q1 2024 compared to the last quarter of 2023, though data from retail sales in February and March suggest that the economy will remain solid.
Notably – and like Powell – Jefferson made no mention of policy easing in his latest remarks, contrasting with his previous statements in February when he suggested that easing might be appropriate later in the year.
In contrast to the Fed members ECB President Christine Lagarde, in an interview on CNBC, indicated that the European Central Bank is poised to reduce interest rates soon, assuming there are no significant unexpected developments. She noted that geopolitical events have so far had a minimal impact on commodity prices and that a disinflationary process is unfolding as anticipated by the ECB. While not committing to a specific path of rate cuts, Lagarde underscored the necessity for caution due to ongoing uncertainties and stressed the importance of data in guiding ECB decisions. She declined to comment on market expectations for three rate cuts in 2024 but expressed confidence that the current restrictive rates are effectively impacting inflation.
Lagarde pointed out that the journey towards the ECB’s 2% inflation target is expected to be uneven, with inflation rates likely to experience fluctuations. She highlighted a distinct difference in consumer behavior between the U.S. and EU, noting that European consumers are more cautious and tend to save more, whereas American consumers are more inclined to spend. This difference is amplified by the higher fiscal support in the U.S., which was directly aimed at consumers. In her comments, Lagarde emphasized that the ECB’s policies are independent of the Federal Reserve, focused instead on exchange rates and the overall value of the currency. She concluded by reiterating the ECB’s commitment to maintaining price stability and achieving the 2% inflation target, while refusing to speculate on the potential for the EURUSD to reach parity.
BOE’s Bailey also commented on the disparity between US and Europe inflation saying that there is more demand pressure in the US
The EURUSD is modestly lower on the day and given the fundamental differences from the central bankers, suggest the EURUSD should remain more under pressure (EUR selling and USD buying). The GBPUSD is also much lower in what was a up-and-down trading day for that pair.
In other markets as the day comes to a close:
- Crude oil closed near on it changed at $85.32 as a markets digested that Israel was planning on a retaliatory strike against Iran.
- Gold prices in a up-and-down trade are trading down $-3.53 or -0.14% at $2379.
- Bitcoin fell to a low $61,654 but has rebounded toward the middle of the trading range to $62,949 currently.
The US equity market, major indices were mixed with the Dow Industrial Average rising thanks to a 6% gain in Unitedhealth (after earnings). The S&P and NASDAQ both fell modestly:
- Dow industrial average +0.17%
- S&P index, -0.21%
- NASDAQ index, -0.12%
European indices were hit hard today and close down by -1.40% to -1.82%:
- German DAX, -144%
- France CAC, -1.40%
- UK FTSE 100, -1.82%
- Spain’s Ibex, -1.50%
- Italy’s FTSE MIB -1.65%
US yields moved higher as markets continue to adjust to potential the Fed is on hold for 2024:
- 2- year 4.989%, +5.1 basis points
- 5-year 4.703%, +5.8 basis points
- 10-year 4.667%, +3.9 basis points
- 30-year 4.764%, +2.5 basis points