Is a Fed rate cut really all that important?
In March, US stocks entered their fifth consecutive month of gains. The S&P 500, in particular, has notched up more than 265 trading days without a correction of more than 2% – that hasn’t happened since 2018.
Initially, risk assets were driven up by expectations of monetary policy loosening by the US Federal Reserve (Fed) as inflation dropped off more sharply towards the end of last year. But the latest economic readings show that investors were overly optimistic about how soon the Fed would start cutting its rates. Just a few weeks ago, the Fed was expected to make the first move at its upcoming March meeting. Now it looks like this won’t happen until July. But the stock market hasn’t stopped heading upwards – and the rally is gaining in strength.
So maybe the timing of the Fed’s tightening isn’t all that important after all. Maybe it’s not even in Jerome Powell’s interest to make monetary policy more accommodative in the current environment.
There are reasons to believe that might be the case. Cutting rates now could push consumer price growth up further, at a time when it’s still stubbornly above the Fed’s target. And rate cuts certainly aren’t needed to support the economy, which is doing perfectly well in the current financial conditions. GDP growth is forecast to come in at 2.1% in 2024 and 1.7% in 2025, and full employment continues to spur wage growth. So Mr Powell may wish to bide his time in the short term.
Anyway, all that is of little importance, as it’s not the prospect of monetary policy normalisation that investors are excited about at the moment – it’s the conviction that the Fed has the resources it needs to deal with the slightest sign of weakness in the US economy. Things are particularly comfortable now, after more than a decade of rock-bottom rates that meant the Fed had very little room for manoeuvre. Cutting rates in the current climate would mean wasting those resources, and investors seem to have priced that in. Their interest rate expectations are now aligned with those of the Fed.
Bonds at the back of the pack in 2024
Long-term yields rose sharply on most bond markets last week. This is because inflation is not easing as much as expected, which has raised doubts about how much the major central banks will be able to loosen their monetary policies this year. This disappointing performance is another sign of how tough the start of the year has been for sovereign bonds with maturities of 10 years and over, with most seeing their prices drop by more than 2%. Swiss government bonds are among the only sovereign bonds to have recorded smaller losses. Only the riskiest segments of the bond market – particularly US high yields and emerging market debt – have turned in positive YTD performances. We still think that the fixed income markets are appealing, first and foremost because of their attractive valuations. Both in nominal and real (i.e. adjusted for inflation) terms, bond yields are much higher than their 10-year average.
This week’s figure : 7%
This is the rise in China’s January-February manufacturing output. It’s the strongest year-on-year growth rate in almost two years and is well above the +5% forecasts. Retail sales were also up, by 5.5% – a sign that the Chinese economy might be stabilising despite ongoing challenges in the property sector.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
