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Markets are primed for clues on the timing of global interest rate cuts this week, with crucial release dates coming from the US, Europe and Britain.
Wednesday’s US inflation data will be key in determining the path for the Federal Reserve’s monetary policy, while markets will also appreciate the European Central Bank’s comments at Thursday’s policy meeting and UK GDP data due on Friday will monitor closely.
This is Money explores how this week could determine the course of global interest rate cuts – and which central bank will be the first to take the plunge.
Federal Reserve Bank Chairman Jerome Powell has pushed back against overly optimistic expectations about interest rate cuts
US interest rate cut expectations are being postponed further and further
Investors have already been forced to revise the outlook for US interest rates several times over the past year, with markets now pricing in fewer than three cuts by year-end, compared with as many as seven cuts in early 2024.
The US economy has held up much better than pessimistic forecasters predicted, thanks to a surprisingly positive consumer outlook, and stronger-than-expected US job data has again delayed the expected timing of the first cut last week.
Richard Hunter, head of markets at Interactive Investor, said: ‘Expectations for the first expected rate cut are now shifting from June to July, with the outlier being the consensus that on current form there may be no need for cuts at all this year.
“However, markets moved higher on other measures in the (jobs) report, particularly wage growth, which rose 0.3 percent this month but fell slightly year-over-year to 4.1 percent.
“This led to the conclusion that wage inflation could normalize, which has been a point of contention for the Fed.”
Wednesday’s analysis is expected to show that core inflation has slowed from 3.8 to 3.7 percent, and any positive surprise would likely push forecasts for rate cuts further down.
While the CPI reading will be crucial, further clues will be revealed later this month as the US first quarter earnings season kicks off.
Markets will closely monitor companies’ guidance on costs and consumer demand.
The Governor of the Bank of England has been particularly vocal about the consequences of wage inflation
Britain facing higher than expected interest rates for longer?
After falling into a shallow recession in the second half of last year, the UK economy has shown more positive signs of life recently, and the recovery in GDP growth in January is expected to be followed by a gain of 0 .1 percent for February – indicating a positive first quarter overall.
Morgane Delledonne, head of investment strategy in Europe at Global
She added: ‘And if GDP comes in stronger than expected, this could slow the easing cycle and leave the UK with a higher final rate than previously thought.’
Markets are currently pricing in 75 basis points of the BoE’s easing this year, which would take the base rate to 4.5 percent from its current level of 5.25 percent.
Markets are currently divided on the timing of the first rate cut and it appears that a break will occur between June and August.
However, key to the BoE’s decision will be service sector inflation and wage growth, figures for which will be released later this month.
Christine Lagarde, president of the European Central Bank, has raised market expectations for a rate cut in June
Europe that will be the first to take the plunge?
The eurozone also paints a rosier economic picture, despite a downturn in the strong German economy, led by its dominant industrial sector.
Meanwhile, the ECB recently revised downwards inflation expectations after the headline rate fell to 2.4 percent in March from 2.6 percent in February.
The bank now expects inflation to total 2.3 percent in 2024, compared to 2.6 percent and 2 percent in 2025.
This has pushed down expectations for the ECB’s first rate cut, but markets are still pricing in a total cut of 90 basis points for 2024.
Delledonne said: Markets estimate a near 80 percent chance of a first rate cut in June.
‘Christine Lagarde said at the previous meeting that the ECB was waiting for more information in June.
‘In an ideal scenario, the ECB would have waited for the Fed to act first, especially given the possible consequences for the euro.
“But (it could) first act to stimulate economic activity in the region.”
“I will be watching on Thursday to see how the rise in energy prices will impact the ECB’s inflation forecasts, and how they may be more dovish or more hawkish in response.”
However, Franck Dixmier, Allianz Global Investors’ global chief investment officer for fixed income, warned: ‘The timing and magnitude of future rate cuts remain open.
‘We expect a measured speech, confirming the very high likelihood of a first cut in June and presenting it as a first step towards policy normalization.
‘But the ECB will probably maintain that future interest rate cuts are not a given and will depend on the expected course of inflation.’
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