Stocks surged to fresh highs as the Federal Reserve sounded a dovish note and indicated it’s still looking to cut three times this year. Europe’s Stoxx 600 hit a new record high this morning as shares in London, Frankfurt and Paris all rose sharply in the wake of the FOMC’s decision, which saw rates left unchanged for now but the market under the impression that the Fed is not about to delay on easing.
The FTSE 100 rallied through the 7,800 level to hit its best since early May 2023 in early trading this morning after the Dow Jones, S&P 500 and Nasdaq Composite all jumped to record closing highs. Tokyo followed suit as the Nikkei also broke a new all-time high.
The positive mood helped risk and sent yields down, gold up, and the dollar down. Treasury yields slipped back to lift gold to a new high. Bitcoin got in on the action to rally sharply off a two-week low. Meanwhile the yen made a break higher on ‘sources’ suggesting that the BoJ could hike again in the summer...classic soft intervention to stop the run on the yen.
So what do we make of it all? Three cuts in 2024 with core PCE seen at 2.6 per cent is like sending up the white flag – they’re now tacitly accepting that they won’t or can’t get back to 2 per cent, as anticipated in these pages. The core PCE projection was revised up since December but still sticking to three cuts. Jobs are more important than prices = it’s an election year. Indeed, chair Jerome Powell said that “strong job growth is not a reason for us to be concerned about inflation”. Powell's basic stance on the recent high inflation: "We don't really know if this is a bump on the road or something more. We'll to have to find out."
The projections are all way too neat for my liking – 2.0 per cent for both headline and core PCE inflation in 2026…this was tacit, not yet explicit, acceptance of a willingness to tolerate higher inflation to juice the jobs market. Higher for long is for inflation, and immigration (see jobs market data below).
Now over to the Bank of England, which will leave rates unchanged – the question is to what extent that 6.1 per cent services inflation reading is a worry – or do they likewise throw in the towel and admit that there is no point in trying to get inflation down sustainably to 2 per cent?
Sterling trades a tad lower ahead of the Bank of England decision – no cut likely - after rising sharply yesterday on the softer USD yesterday.
Cue the cuts: The Swiss National Bank cut rates by 25bps this morning, sending the Swiss franc lower against peers, the euro jumping to its best since July 2023 against the franc. Inflation fell to 1.3 per cent in Jan and 1.2 per cent in Feb, plus the SNB was uncomfortable with CHF strength. If you are about to hit the slopes, this could be a bonus!
But it’s interesting now because we are entering a multi-speed exit from the tightening phase of the cycle and central banks are starting to need to think for themselves again and take things in the direction that best suits their economy. The SNB is in a rush to cut; the Fed seems to be prepared to sequence it neatly despite inflation running at 4 per cent; the BoE will see inflation down to 2 per cent this quarter but is not seen cutting until later this year. It’s getting interesting again and FX vol may be returning.
The Trader is written by Neil Wilson, chief market analyst at Finalto
