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Since the Federal Reserve’s January policy meeting, chair Jay Powell has pushed back against market bets on rapid interest rate cuts. Some analysts expect that pushback to continue when minutes of that meeting are published on Wednesday, particularly given recent signs of stubborn inflationary pressures.
The Fed kept rates on hold at the current range of 5.25 to 5.5 per cent last month, and reiterated that policymakers expect to cut rates only three times this year. Before the meeting, the market had been pricing in as many as five cuts in 2024, betting that the central bank would start easing policy in the first half of the year. The meeting, and two higher than expected inflation reports since have brought market expectations closer in line with the Fed’s.
Peter Tchir, head of macro strategy at Academy Securities, expects the Fed will re-emphasise its hawkishness, maintaining that there is more progress to be made on inflation before officials are prepared to cut interest rates.
While the minutes do reflect what was said at the last meeting, it is generally understood that the Fed can highlight certain discussions in order to convey policy messages, according to Tchir. “Minutes are a policy tool in their own right, rather than simply reflecting the meeting,” he said.
“I think we’re going to see this ongoing hawkish tilt, pushing back against the market which got ahead of itself in terms of rate cuts. Now we’ve seen CPI and PPI come in hot, the Fed will make sure the minutes push back on those rate cut expectations,” Tchir added. Kate Duguid
Is activity still slowing in the eurozone?
Data released on Tuesday is expected to show that the eurozone’s economic downturn eased in February, though most analysts say it will take several months for the region to return to growth.
Economists polled by Reuters expect S&P Global’s flash eurozone composite purchasing managers’ index, a closely watched measure of business activity across the bloc, to rise to 48.9 in February — below the 50 threshold that separates expansion from contraction but an improvement on last month’s reading of 47.9.
Nomura economist George Buckley said: “The euro area PMIs have been materially weak since mid-2023. We think this might continue in February.”
The data will be closely scrutinised by the European Central Bank, which investors expect to begin cutting interest rates around June. With inflation on the retreat, monetary policy is now “constraining growth”.
Emmanuel Cau, head of the European equity strategy at Barclays, argues that the much stronger performance of the US — where gross domestic product rose 3.3 per cent in the final quarter of 2023 — had overshadowed improving conditions across the Atlantic.
“Without getting carried away, we see some green shoots in the [European] economy,” said Cau, adding that the bank’s economists expect a small acceleration in GDP growth into mid-year from the “current quasi-recession level”.
The European Commission agrees, though it last week downgraded its forecasts for eurozone growth this year. The Commission now expects GDP to rise 0.8 per cent in 2024, down from 1.2 per cent in its autumn forecast. George Steer
Is the UK rebounding after slipping into recession?
After the UK economy slipped into a technical recession in the second half of last year, investors will be watching business activity data next week for signs of a recovery.
Economists polled by Reuters forecast that S&P’s composite PMI index will show continued expansion in February on Thursday, slipping slightly to 52.7 from 52.9 the previous month. A reading above 50 indicates a majority of businesses reporting improved activity.
A weaker PMI reading could fuel fears of a further downturn after a larger than expected 0.3 per cent fall in fourth-quarter GDP reported this week. That could prompt investors to increase their bets on how much the Bank of England will cut interest rates this year, as they did after this week’s lower than expected inflation figures and disappointing GDP release.
However, Philip Shaw, an economist at Investec, expects the index to rise to 53.4, fuelled by an acceleration in services activity. He expects the manufacturing sector to remain stuck in a downturn, with the index barely moved from the previous month to 47.5.
Shaw explained that growth in the services sector should be helped by “looser financial conditions” as borrowing costs decline on expectations of rate cuts. “January’s cut in Employees’ National Insurance Contributions probably gave the economy a bit of additional momentum as well,” he said. Shaw also expects a further improvement in consumer confidence helped by lower than expected inflation in January and the easing of mortgage rates.
Such figures would “hint at good prospects of an increase in GDP over the first quarter, signalling an end to the recession during the second half of last year”, he added. Valentina Romei
Source: Economy - ft.com
