Evelyn Reynolds

High corporate valuations could pose a significant risk to financial stability, the IMF’s director of monetary and capital markets said Tuesday.
Market “optimism” has stretched company valuations to a point where that could become vulnerable to an economic shock, Tobias Adrian told CNBC.
“There’s always this question, if a negative shock were to hit to what extent do we see a readjustment of pricing,” he said.

Financial Counsellor and Director of the Monetary and Capital Markets Department Tobias Adrian hold the press briefing of the Global Financial Stability Report at the International Monetary Fund during the 2024 Spring Meetings of the International Monetary Fund (IMF) and the World Bank Group in Washington DC, United States on April 16, 2024.
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High corporate valuations could pose a significant risk to financial stability as market optimism becomes untethered from fundamentals, the IMF’s director of the Monetary and Capital Markets Department said Tuesday.
Financial markets have been on a tear for much of this year, buoyed by falling inflation and hopes of forthcoming interest rate cuts. But that “optimism” has stretched company valuations to a point where that could become vulnerable to an economic shock, Tobias Adrian said.

“We do worry in some segments where valuations have become quite stretched,” Adrian told CNBC’s Karen Tso Tuesday.
“It was led by tech last year, but at this point, it’s really across the board that we have seen a run up in valuations. There’s always this question, if a negative shock were to hit to what extent do we see a readjustment of pricing,” he said.
Adrian, who was speaking on the side lines of the IMF’s Spring Meeting in Washington, said that credit markets were a particular area of concern.

“I would point to credit markets, where spreads are very tight even though borrower fundamentals are deteriorating, at least in some segments,” he said.
“Even riskier borrowers are able to issue new debt, and that’s at very favourable prices,” he added.

Real estate risks

The IMF’s financing concerns also extend to the property market, and chiefly commercial real estate, which Adrian said had grown “somewhat worrisome.”
Medium and small-sized lenders in particular could be vulnerable to commercial real estate shocks as the sector has come under pressure from a shift to remote work and online shopping, he said.
“There’s really a nexus between exposure of some banks, particularly middle sized and smaller banks, to commercial real estate that also tend to have [a] fragile funding base. Sort of the combination of having a risk exposure to commercial real estate, and this fragile funding that could in some scenarios, reignite some instability,” Adrian said.

The IMF on Tuesday released its World Economic Outlook, in which it upgraded its global growth forecast slightly, saying the economy had proven “surprisingly resilient.”
It now sees global growth at 3.2% in 2024, however it noted that downside risks remain, including regarding inflation and the increasingly uncertain path forward for interest rates.
Federal Reserve Chair Jerome Powell said Tuesday that the U.S. economy has not seen inflation come back to target, adding to the unlikelihood that it will cut rates in the near-term.
“We do see risks in terms of inflation persistence. Some of that has realized already, but of course we could see further surprises,” Adrian said.
“We’ve [cited] risks as broadly balanced around the globe. But in some countries, there’s a little bit more upside and others a little bit more downside. So certainly, interest rate risk is a key factor we’re looking at,” he added. More

Inflation in the U.K. eased to 3.2% in March, the Office for National Statistics said on Wednesday, slightly higher than the 3.1% forecast from economists polled by Reuters.
The core figure, excluding energy, food, alcohol and tobacco, came in at 4.2%, compared with a projection of 4.1%.

Workers deliver drinks to a pub in the City of London, UK, on Tuesday, April 16, 2024. 
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Inflation in the U.K. eased to 3.2% from 3.4% in March, the Office for National Statistics said on Wednesday, but a set of higher-than-expected figures spurred investors to push back bets on the timing of the first Bank of England rate cut.
Economists polled by Reuters had expected a reading of 3.1%.

Food prices provided the biggest downward drag on the headline rate, the ONS said, while motor fuels pushed it higher.
The core figure, excluding energy, food, alcohol and tobacco, came in at 4.2%, compared with a projection of 4.1%. Services inflation, a key watcher for U.K. monetary policymakers, declined from 6.1% to 6% — again above the expectations of both economists and the BOE.
This week, investors have been monitoring signs of a cooling U.K. labor market, with unemployment unexpectedly rising to 4.2% in the period between December and February. Wage growth excluding bonuses meanwhile dipped from 6.1% in January to 6% in February.
BOE Governor Andrew Bailey on Tuesday said he saw “strong evidence” that higher interest rates were working to tame the rate of price rises, which has cooled from a peak of 11.1% in October 2022. The central bank’s own forecast is for inflation to “briefly drop” to its 2% target in the spring before increasing slightly.

But a higher-than-expected March core print firmly above 4% is likely to increase speculation that inflation is proving stickier than recent forecasts have suggested, and the timing of the first interest rate cuts may be moving further down the line.

Market pricing shifted on Wednesday, with a majority of investors now seeing a first cut of 25 basis points in September or November from the current rate of 5.25%, with only around a 25% likelihood of a June trim.
Uncertainty has also been raised over the path of central banks around the world given signs of continued inflationary pressures in the U.S., with analysts questioning who will move ahead of the Federal Reserve.

‘The U.S. direction’

Camille de Courcel, head of European rates strategy at BNP Paribas, on Wednesday told CNBC’s “Squawk Box Europe” that the latest data showed that the U.K. was “going in the U.S. direction” and provided a risk to her prior call for a June rate cut from the BOE.
While labor data surprised to the downside, the ONS has cautioned its month-on-month figures may be skewed by methodological issues. That means the BOE’s Monetary Policy Committee will be far more focused on upside surprises on wage growth and services, de Courcel said.
Some expect a sharp fall in inflation in next month’s reading due to the year-on-year impact of utility prices.
Ruth Gregory, deputy chief U.K. economist at Capital Economics, expects the print to fall below the 2% target in April and said in a Wednesday note that the BOE may still opt for a June cut, if inflation continues to decline in the coming months. But risks of U.S.-style stickiness or inflation fueled by geopolitical tensions in the Middle East are high, she added.
The British pound moved higher against both the U.S. dollar and euro following the announcement, trading up 0.3% against the greenback at $1.246 and 0.2% stronger against the euro at 1.172.
U.K. Finance Minister Jeremy Hunt, who is gearing up for a national election this year, said on social media platform X that the inflation data was “welcome news.” More

The International Monetary Fund on Tuesday raised its global growth forecast slightly, saying the economy had proved “surprisingly resilient.”
The IMF now expects global growth of 3.2% in 2024, up by a modest 0.1 percentage point from its earlier January forecast.
The IMF’s chief economist, Pierre-Olivier Gourinchas, said the findings suggest the global economy is heading for a soft landing, though several downside risks remain.

Crowds walk below neon signs on Nanjing Road. The street is the main shopping district of the city and one of the world’s busiest shopping districts.
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The International Monetary Fund on Tuesday slightly raised its global growth forecast, saying the economy had proven “surprisingly resilient” despite inflationary pressures and monetary policy shifts.
The IMF now expects global growth of 3.2% in 2024, up by a modest 0.1 percentage point from its earlier January forecast, and in line with the growth projection for 2023. Growth is then expected to expand at the same pace of 3.2% in 2025.

The IMF’s chief economist, Pierre-Olivier Gourinchas, said the findings suggest the global economy is heading for a “soft landing,” following a string of economic crises, and that the risks to the outlook were now broadly balanced.
“Despite gloomy predictions, the global economy remains remarkably resilient, with steady growth and inflation slowing almost as quickly as it rose,” he said in a blog post.
Growth is set to be led by advanced economies, with the U.S. already exceeding its pre-Covid-19 pandemic trend and with the euro zone showing strong signs of recovery. But dimmer prospects in China and other large emerging market economies could weigh on global trade partners, the report said.

China among key downside risks

China, whose economy remains weakened by a downturn in its property market, was cited among a series of potential downside risks facing the global economy. Also included were price spikes prompted by geopolitical concerns, trade tensions, a divergence in disinflation paths among major economies and prolonged high interest rates.
To the upside, looser fiscal policy, falling inflation and advancements in artificial intelligence were cited as potential growth drivers.

Central banks are now being closely watched for a signal on the future path of inflation, with opinion diverging on either side of the Atlantic as to when the Federal Reserve and the European Central Bank will cut rates. Some analysts have recently forecast a possible Fed rate hike as stubborn inflation and rising Middle East tensions weigh on economic sentiment.
The IMF said it sees global headline inflation falling from an annual average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies.
“As the global economy approaches a soft landing, the near-term priority for central banks is to ensure that inflation touches down smoothly, by neither easing policies prematurely nor delaying too long and causing target undershoots,” Gourinchas said.
“At the same time, as central banks take a less restrictive stance, a renewed focus on implementing medium-term fiscal consolidation to rebuild room for budgetary maneuver and priority investments, and to ensure debt sustainability, is in order,” he added.
Despite the rosier outlook of Tuesday, global growth remains low by historic standards, owing in part to weak productivity growth and increasing geopolitical fragmentation. The IMF’s five-year forecast sees global growth at 3.1%, its lowest level in decades. More

The U.S. economy could be headed for stormy waters in 2025 if the Federal Reserve does not take action soon on interest rates, State Street’s head of investment strategy in EMEA said Tuesday.
Altaf Kassam told CNBC that classic monetary policy mechanisms had “broken,” meaning that any changes made by the Fed will now take longer to trickle down into the real economy.
“The problem is, if rates stay at this level until say 2025, when a big wall of financing is due, then I think we will start to see more things break,” Kassam said.

Federal Reserve Bank Chair Jerome Powell speaks during a news conference at the bank’s William McChesney Martin building on March 20, 2024 in Washington, DC. 
Chip Somodevilla | Getty Images

The U.S. economy could be headed for stormy waters in 2025 if the Federal Reserve does not take action soon on interest rates, State Street’s head of investment strategy in EMEA said Tuesday.
Altaf Kassam told CNBC that classic monetary policy mechanisms had “broken,” meaning that any changes made by the Fed will now take longer to trickle down into the real economy — potentially delaying any major shocks.

“The traditional transmission policy mechanism has broken, or doesn’t work as well,” Kassam told “Squawk Box Europe.”
The research chief attributed that shift to two things. Firstly, U.S. consumers, whose largest liability is typically their mortgage, which were mostly secured on a longer-term, fixed rate basis during the Covid-19 low-interest rate era. Similarly, U.S. companies largely refinanced their debts at lower rates at the same time.
As such, the impact of, for example, sustained higher interest rates may not be felt until further down the line when they come to refinance.
“The problem is, if rates stay at this level until say 2025, when a big wall of refinancing is due, then I think we will start to see more things break,” Kassam said.
“For now, consumers and corporates aren’t feeling the pinch of higher interest rates,” he added.

Expectations of a near-term Fed rate cuts have faded lately amid persistent inflation data and hawkish commentary from policymakers.
San Francisco Fed President Mary Daly said Monday there was “no urgency” to cut U.S. interest rates, with the economy and labor market continuing to show signs of strength, and inflation still above the Fed’s target of 2%.
Until as recently as last month, markets had been anticipating up to three rate cuts this year, with the first in June. However, a string of banks have since pushed back their timelines, with Bank of America and Deutsche Bank both saying last week that they now expect just one rate cut in December.
That marks a deviation from the European Central Bank, which is still broadly expected to lower rates in June after holding steady at its meeting last week. However, Morgan Stanley on Monday trimmed its 2024 rate cut expectations for the ECB from 100 basis points to 75 basis points, which it said was due to “the change in the forecast of the Fed cutting cycle.”
Kassam said Tuesday that State Street’s expectations of a June Fed rate cut had not changed. More

Rising inflation in March didn’t deter consumers, who continued shopping at a more rapid pace than anticipated, the Commerce Department reported Monday.
Retail sales increased 0.7% for the month, considerably faster than the Dow Jones consensus forecast for a 0.3% rise, according to Census Bureau data that is adjusted for seasonality but not for inflation.

The consumer price index increased 0.4% in March, the Labor Department reported last week in data that also was higher than the Wall Street outlook. That means consumers more than kept up with the pace of inflation, which ran at a 3.5% annual rate for the month, below the 4% retail sales increase.
Excluding auto-related receipts, retail sales jumped 1.1%, also well ahead of the estimate for a 0.5% advance.
A rise in gas prices helped push the headline retail sales number higher, with sales up 2.1% on the month at service stations. However, the biggest growth area for the month was online sales, up 2.7%, while miscellaneous retailers saw an increase of 2.1%.
Multiple categories did report declines in sales for the month: Sporting goods, hobbies, musical instruments and books posted a 1.8% decrease, while clothing stores were off 1.6%, and electronics and appliances saw a 1.2% drop.
Stock market futures added to gains following the report, while Treasury yields also pushed sharply higher. The upbeat outlook for the Wall Street open came despite an escalation over the weekend in Middle East tensions as Iran launched aerial strikes at Israel.

Resilient consumer spending has helped keep the economy afloat despite higher interest rates and concerns over stubborn inflation. Consumer spending accounts for nearly 70% of U.S. economic output so it is critical to continued growth in gross domestic product.
Monday’s data comes with market concerns elevated over the path of monetary policy. Federal Reserve officials have expressed caution about cutting interest rates while inflation pressures continue, and investors have been forced to reduce their expectation for easing in policy this year.
Stronger consumer spending could cause the Fed to hold off longer on cuts, said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
“Alongside the recent resurgence in employment growth, the continued resilience of consumption is another reason to suspect the Fed will wait longer before starting to cut interest rates, which now we think won’t happen until September,” Hunter said in a note after the retail sales release.
Market pricing, which has been highly volatile over the past several weeks, also is pointing to the first cut coming in September, according to the CME Group’s FedWatch gauge of futures prices.
In other economic news Monday, the Empire State Manufacturing index, which gauges activity in the New York region, increased in April from a month ago but remained in contraction territory. The index hit -14.3, better than the -20.9 reading for March but below the Dow Jones estimate for -10.
The index measures the percentage of firms reporting expansion against contraction, so anything below zero represents contraction. Shipments and delivery time readings saw a decline, while prices paid increased.

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