Aurelia Butler

(Reuters) – Investors tweaked views about the European Central Bank’s policy path to the dovish side on Thursday, and bond yields hit one-week lows after the Federal Reserve indicated 75 basis points of monetary easing in 2024 and the Swiss National Bank cut rates.The euro zone market reaction to the Bank of England (BoE) was muted while gilt yields extended their fall slightly.Money markets priced in a 90% chance of an ECB rate cut by June from less than an 80% chance late on Wednesday. They discounted more than 90 bps in 2024 from 85 the day before.Federal Reserve Chair Jerome Powell said on Wednesday that recent high inflation readings had not changed the underlying “story”. Bank of England Governor Andrew Bailey said Britain’s economy was “moving in the right direction” for the central bank to start easing its policy. The BoE left rates unchanged.”All in all, the impact of the Fed and the SNB on the euro area is limited,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.Germany’s 10-year government bond yield, the euro area’s benchmark, dropped 4 bps to 2.39%.The SNB was the first major central bank to dial back tighter monetary policy to tackle inflation. Analysts had expected a first move in June. “(The) Fed’s expectation for the economic growth in the U.S. questions the possibility of three rate cuts in 2024,” van Leenders added. “However I expect the ECB to be able to ease its monetary policy even if the Fed should hold in June.”Fed funds futures traders are now pricing in a 66% probability that the Fed will begin cutting rates in June, up from 59% on Tuesday, according to the CME Group’s (NASDAQ:CME) FedWatch Tool.”The risk to our Fed call of a June start and 125 bps of cumulative cuts are clearly tilted towards a later start and fewer cuts,” said Xiao Cui, senior economist at Pictet Wealth Management. “If inflation fails to moderate in March, that would significantly reduce the odds of near-term policy easing.”The Swiss 2-year yield, more sensitive to expectations for policy rates, fell 14 bps to 0.98% and was on track for its biggest daily fall since December. “That should allow for additional rate cuts by late 2024,” said Aaron Hurd, senior portfolio manager at State Street (NYSE:STT) Global Advisors, mentioning global disinflation and a downtrend in Swiss services inflation.Money markets fully price a cumulative 75 bps of SNB rate cuts by September 2024.Gilt 2-year yields was down 12 bps at 4.11%; it was at 4.14% before the BoE,Italy’s 10-year yield fell 5.5 bps to 3.65%.The gap between Italian and German 10-year yields – a gauge of the risk premium investors ask to hold assets from the euro area’s most indebted countries – was at 125 after hitting 115.4 last week, its lowest in over two years.Investors closely watched the spreads’ tightening across bond markets as they turned a blind eye to the rising Italian budget deficit and reckoned that a resilient economy would control the country’s critical debt-to-GDP ratio. More

The S&P 500 closed 1.15% higher at 18,240 Wednesday, while Bitcoin rose sharply to reclaim $67,000 after falling as low as $60,000 earlier. Meanwhile, bond yields fell into the red, with the 2- and 10-year notes slipping to 4.57% and 4.22%, respectively.The Fed maintaining interest rates on Wednesday marked the fifth consecutive policy meeting without change.The decision underscores the central bank’s strategy of waiting for additional data before considering rate reductions.Despite aggressive rate hikes over the past two years aimed at combating high inflation, Fed Chair Jerome Powell emphasized that the Fed is not yet prepared to ease borrowing costs, amidst ongoing challenges of high interest rates and inflation for Americans.Speculation from Wall Street suggests a potential first cut could occur in the summer.In the latest economic projections, the Fed signaled a revision in its rate cut expectations, foreseeing fewer reductions in 2025 and 2026 compared to December’s forecast. While still anticipating three rate cuts this year, officials expect slightly higher interest rates in the long term.The Fed’s revised forecasts indicate an expectation of higher “core” inflation, excluding food and energy prices, than previously anticipated.Chair Powell highlighted the delicate balance the Fed faces between cutting rates too soon and delaying necessary adjustments, emphasizing a “wait-and-see” stance given the current economic stability and growth.“It is consequential,” Powell said. “Fortunately, with the economy growing, with the labor market strong and inflation coming down, we can approach that question carefully and let the data speak on that.”Meanwhile, economic growth projections have also been adjusted upwards, with a brighter outlook for this year.“The economy is strong, the labor market is strong and inflation has come way down,” he said.The Atlanta Fed’s latest projection predicts a solid 2.1% annual growth rate for the first quarter, following two consecutive quarters of robust growth, showcasing the strength of the country’s economy.BofA: “During the press conference Chair Powell did not push back against 2024 cut expectations despite higher inflation data in January and March, while the median “dot” continued to signal three cuts this year, although by a smaller margin. Our economists are also calling for three Fed cuts in 2024.”Morgan Stanley: “We continue to expect the first rate cut in June, and four 25bp cuts in total this year followed by an additional 200bp in 2025. By the June 12th FOMC meeting, core PCE inflation will be running at 2.6%Y, in line with what we think the FOMC will view as a comfortable inflation rate to start normalizing policy.Citi: “We continue to expect the first cut from the Fed in June. In our base case where the labor market weakens, we expect the Fed to cut at every subsequent meeting for 125bp of cuts total this year. Should labor market data hold up, the Fed still seems set on cutting rates at least 75bp (quarterly cuts) justified by slower (if still elevated) inflation.”Nomura: “We maintain our expectation of just two rate cuts this year, in July and December. The dot distribution suggests the FOMC is divided between two and three cuts this year, and policymakers are likely to be sensitive to upside surprises in inflation data. Powell signaled that an adjustment to balance sheet policy is likely to occur ‘fairly soon.’ We interpret this to mean an announcement reducing the pace of treasury QT is likely at the May meeting, with implementation beginning in June, slightly earlier than our previous expectation of June announcement, effective in July.”UBS: “The press conference, combined with the SEP details, leads us to believe Chair Powell remains comfortable with three 25-bp rate cuts this year. While the median assumption in the SEP revised up in 2025 to three cuts, our assessment is that Chair Powell at the moment assumes a 25-bp rate cut at each SEP meeting would probably be appropriate, but that’s a long way off. As he said this afternoon, a lot can happen between meetings.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Turkey’s central bank surprised economists and investors on Thursday with a big rate rise as policymakers seek to cool runaway inflation and halt an accelerating capital flight among local savers. The central bank increased its main interest rate by 5 percentage points to 50 per cent. Most economists had expected it to hold rates steady ahead of local elections on March 31, according to a poll by Reuters.Policymakers cited a “deterioration in the inflation outlook”, adding that the “tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed”. The decision, which comes just weeks after chair Fatih Karahan indicated the central bank had probably ended its cycle of big rate increases, highlights the extent to which Turkey’s economic situation has worsened this year despite a sweeping policy overhaul that kicked off in June. The centrepiece of the new programme has been a reversal of the low-rate policies President Recep Tayyip Erdoğan had pursued for years and which had ignited runaway inflation. The central bank has increased rates by 41.5 percentage points since Erdoğan’s re-election in May last year.But other factors including a 49 per cent increase this year in the minimum wage and increasing costs of imported goods caused by a slumping lira have made it challenging for the central bank to get a grip on inflation. Investors and economists have broadly applauded the new economic programme, which has been credited with steering Turkey away from a potential balance of payments crisis or even the imposition of capital controls.However, many think that the country’s economic management team, led by finance minister Mehmet Şimşek, has failed to move fast or far enough to win the battle against inflation — prompting renewed concerns as some data worsened this year.Consumer prices increased 4.5 per cent in February from January alone, bringing the annual growth rate to 67 per cent. The central bank predicts inflation will rise towards 80 per cent by the summer — close to its recent peak of 85.5 per cent in 2022 — before easing sharply to 36 per cent by year end. “The decision to respond so quickly to the recent strong inflation figures and hike rates before the local elections is clearly a very encouraging signal for the policy shift and should help to maintain investor confidence,” said Liam Peach at Capital Economics in London, who expects a further increase next month.Thursday’s rate rise will help to bridge a gap between the rate of inflation and the interest rates that Turkish savers can earn from holding liras in their bank account that has sent them rushing to find alternatives, such as foreign currencies and stocks. Savers have also been concerned that the central bank, which many economists believe has kept the lira’s losses steady in recent months, will allow it to fall more freely after the March 31 local elections. In a sign of how local savers are shifting away from the lira, the currency has fallen 9 per cent against the dollar since the start of the year. Meanwhile, the central bank’s foreign currency war chest, which had been refilled since the economic overhaul began last summer, has started dwindling again. Net foreign assets, a key proxy for Turkey’s foreign currency reserves, fell to $7.2bn this week from $30.8bn in December, according to Financial Times calculations based on central bank data. The total amount that Turkish residents are holding in foreign currency bank deposits has risen by about $6bn this year to $128bn, according to data from the country’s banking watchdog. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Bank of England has kept UK interest rates on hold at 5.25 per cent, pushing sterling lower as the central bank signalled it is edging closer to cutting borrowing costs.Governor Andrew Bailey said things were “moving in the right direction” on inflation after the BoE’s Monetary Policy Committee maintained the benchmark rate at its 16-year high for the fifth successive time.Two members who had previously called for higher interest rates dropped their demands, instead voting with the majority for unchanged rates.After Thursday’s announcement, sterling fell against the dollar to trade down 0.4 per cent on the day at $1.273.Interest rate-sensitive two-year gilt yields dropped from 4.14 per cent ahead of the announcement to 4.11 per cent. The FTSE 100 index was 1.5 per cent higher.Traders in swaps markets moved to fully price in three 0.25 percentage point cuts this year. They put the likelihood that rate cuts would begin by June at 75 per cent, up from around 70 per cent earlier in the day.The BoE’s decision to keep rates at 5.25 per cent, which was in line with market expectations, came a day after the US Federal Reserve also kept interest rates on hold.“In recent weeks we’ve seen further encouraging signs that inflation is coming down,” Bailey said. “We’re not yet at the point where we can cut interest rates, but things are moving in the right direction.”While political pressure for cuts is likely to intensify ahead of the UK general election expected this year, the BoE has argued it needs more evidence that price pressures are easing before it lowers interest rates.The bank noted on Thursday that official data has shown inflation has fallen “relatively sharply” since the last MPC meeting in February.In figures published this week, headline consumer price inflation for February dropped more than expected to 3.4 per cent — the lowest rate since 2021.The BoE now expects inflation to fall slightly below its 2 per cent target in the second quarter of the year, as wage growth slows.But it warned that inflation remains “elevated” for service prices, which rose at an annual rate of 6.1 per cent last month.At this week’s meeting, all but one of the nine MPC members voted to keep rates on hold, with Jonathan Haskel and Catherine Mann dropping their previous calls for quarter-point rises. One member, Swati Dhingra, continued to vote for an immediate cut. More

ZURICH (Reuters) -The Swiss National Bank cut its main interest rate by 25 basis points to 1.50% on Thursday, a surprise move which made it the first major central bank to dial back tighter monetary policy aimed at tackling inflation.The central bank, in the first rate decision since long-serving Chairman Thomas Jordan said he would step down in September, also cut its interest rate on sight deposits to 1.50%.The SNB’s decision, its first rate cut in nine years, kicked off a busy day for central banks in Europe, with the Bank of England and Norwegian central bank also announcing their latest policy decisions. The Norges Bank kept its rates on hold and economists also expect no change from the Bank of England.The SNB move wrong-footed markets, sending the Swiss franc to an eight-month low against the euro and Swiss government bond yields tumbling, while boosting Zurich-listed shares. A majority of analysts polled by Reuters had expected the usually conservative SNB to keep rates on hold at 1.75% and wait at least another three months before moving.”SNB is the first central bank to declare victory over inflation,” said Karsten Junius, chief economist at J.Safra Sarasin, who had expected a rate cut.The step follows a drop in Swiss inflation to 1.2% in February, the ninth month in succession that price rises have been within the SNB’s 0-2% target range.”The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective,” Jordan told reporters, noting how Swiss inflation has held below 2% for several months.”According to our new forecast, inflation is also likely to remain in this range over the next few years.”The SNB said it was taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc in real terms over the past year. The cut would support economic activity, it added.Before the decision, Swiss industry had urged the central bank to broaden its focus from fighting inflation to help them deal with the strong franc, which was eating into profits.Philipp Burckhardt, Fixed Income Strategist and Portfolio Manager at Lombard Odier IM, said Thursday’s move was a logical consequence of current conditions and signalled more cuts ahead.”This is also an ideal farewell gift from Thomas Jordan, who can now clearly set the direction for his successor,” he said.ECB, FEDAsked what was it like for the SNB to go first with policy easing, Jordan said: “For us, it’s not a question of whether we’re the first or last, we make the decision at the moment when we’re convinced that it’s a good time to make that decision.”He also rejected the notion the cut was a parting gift, and declined to be drawn into discussing whether there would be any further rate moves this year.”We give no forward guidance regarding our future interest rate decisions, but it’s clear we will look at the inflation forecast in three months,” he told a press conference. “If necessary, we will adjust monetary policy at that time.”The European Central Bank is expected to make its first reduction in borrowing costs in June after it kept its interest rates on hold earlier this month. The U.S. Federal Reserve on Wednesday left its benchmark interest rate unchanged but retained its outlook for three cuts this year.Not all central banks are moving in the same direction. On Tuesday, the Bank of Japan ended eight years of negative interest rates with its first interest rate hike in 17 years and on Thursday central banks in Taiwan and Turkey surprised markets by raising rates, citing inflation concerns.Economists said the SNB’s rate cut was a bold move given the central bank’s usual caution.”The SNB’s decision is a surprise, but was always a possibility because of the low inflation in Switzerland,” said UBS economist Alessandro Bee.”It’s a brave move to go before the ECB and Fed, although the SNB will not see it that way, and they probably believe the other central banks will also cut rates later this year.”In its updated economic projections, the SNB dialled down its inflation forecasts, expecting it to average 1.4% in 2024, down from its December prediction for a rate of 1.9%.Inflation is expected to finish next year at 1.2%, down from 1.6% previously forecast. More

Stay informed with free updatesSimply sign up to the More

After years of tension, Turkey launched a diplomatic charm offensive in 2020 to mend ties with Gulf countries, namely the United Arab Emirates (UAE) and Saudi Arabia. Ankara already has a trade agreement, dubbed a comprehensive economic partnership agreement, with the UAE.Since then, Ankara has signed deals worth billions with Gulf nations, including Qatar, with which it enjoys strong ties.”The agreement will liberalize trade in goods and services, facilitate investments and trade, and increase our country’s trade with the region,” Bolat said on social media platform X.Ankara believed the talks would be completed as soon as possible, he added, saying the pact would lead to one of the world’s largest free trade areas, between Turkey and members of the GCC, with a total value of $2.4 trillion.The GCC groups Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and Bahrain.In a statement, GCC Secretary General Jasem al-Budaiwi said the accord to launch FTA talks “is a demonstration of the robust and strategic partnership between the GCC countries and Turkey.”He said it showcased successful cooperation between the GCC and Turkey across various fields, including commerce, economics, and finance. As ties have improved, Gulf Arab nations are looking to Turkey for help developing local industries and technology transfer in their ambitious effort to diversify their economies away from oil. Last week, Turkey and Britain said they would launch talks on an expanded FTA to include goods and services in the deal. More