Global equities enjoyed their most robust performance of 2024, driven by a clear trend: the dovish shift among central banks in developed economies is taking shape.Indeed, US equity markets surged this week in ebullient fashion as a blend of robust economic indicators and the absence of any significant hawkish revelations from the Federal Reserve provided the latest boost juice; the S&P 500 climbed by 2.3%, buoyed by gains in banks and telecom services, while the debut of another high-profile IPO (Reddit) saw strong initial performance.Global central banks made headlines this week, with Japan discontinuing its negative interest rate policy and several others, such as Switzerland and Mexico, implementing rate cuts. However, all eyes were on the Federal Reserve, which maintained interest rates at the expected level. Although the press statement saw minimal changes, there was subtle nuance in the dot-plot projection, indicating slightly less aggressive easing. While the median FOMC member still anticipates 75 basis points of easing this year, the forecast for 2025 shifted to 75 from the previous 100 basis points, accompanied by a slightly higher longer-run neutral rate. Moreover, the Fed upgraded its growth projections significantly, resonating positively with equity investors. As we suggested this week, what not to like about the Fed cutting interest rates into an already sturdy economy?Although the Bank of Japan (BoJ) was the outlier and surprised some by raising rates for the first time in years, the significance of this move may be limited, given Japan’s unique economic circumstances. Moreover, it’s important to note that BoJ policy remains accommodative and is not signalling a shift towards restriction.With the Swiss National Bank (SNB) cutting rates and a notable shift in the Bank of England’s (BoE) voting dynamics towards a more dovish stance, coupled with the Federal Reserve maintaining its median dot for 2024, the message from central banks is unmistakable.The Federal Reserve is itching to cut rates, while the European Central Bank (ECB) and the Bank of England (BoE) need to follow suit. The Swiss National Bank (SNB) has already implemented rate cuts, and the People’s Bank of China (PBoC) is also moving in the same direction.The “writing on the wall” message suggests that policy restrictions will be relaxed in the coming months. The critical question is whether this expectation is reflected in current market prices.For equity investors, the key isn’t necessarily hard evidence of an imminent rate cut but rather an assurance that the next phase of the economic cycle will likely involve lower policy rates rather than higher or unchanged ones. And again, on that front, the evidence is undeniable.
Central Banks Are Beyond The Start LineIt was a week marked by significant central bank actions, with a mix of tightening, easing, and unchanged policies across various countries. Indeed, it was a week of firsts, or soon-to-be firsts and among the notable moves:Even though the media had leaked out most of the moves, the BoJ made it official at its March meeting and made several significant changes, officially ending its negative interest rate policy (NIRP) by raising its policy rate from -0.1% to a range of 0% to 0.1%. Additionally, it ceased yield curve control (YCC), halted purchases of ETFs and J-REITs, and removed both the easing bias and the commitment to the monetary base. However, it maintained accommodative financial conditions for the time being and pledged to continue buying Japanese government bonds (JGBs), with the possibility of increasing purchases in case of a rapid rise in bond yields. Governor Ueda also indicated plans to reduce JGB purchases in the future. While not a purely hawkish shift, these changes signal a potential shift in the BoJ’s stance, particularly with inflation reaching a four-month high.Meanwhile, the Bank of England (BoE) appears poised to act on interest rates, potentially before the Federal Reserve. In its recent meeting, the Monetary Policy Committee (MPC) voted 8-to-1 to maintain the status quo, with the two hawkish members relinquishing their stance on tightening policy. The central question is what catalyst will prompt action or how much evidence is needed to confirm a sustained path to 2% inflation.Governor Bailey’s remarks suggest readiness for action. Not only did he deem the market’s expectation of two to three rate cuts this year as “reasonable,” but he also stated that rate cuts are “in play” for future meetings. His assertive message, emphasizing encouraging economic indicators, implies a proactive stance. Both the May and June meetings are now considered live events. While June offers sufficient time and data for decision-makers to assess, a positive CPI report, backed by Agents’ surveys, could sway a majority towards supporting a rate cut sooner. While our forecast aligns with a June rate cut, we remain data-dependent.Clearly, some central bankers are not inclined to wait for the Federal Reserve to ease monetary policy. The Swiss National Bank (SNB) surprised markets by cutting rates by 25 basis points to 1.50% this week, becoming the first central bank in the G10 to take such action. This move, under the leadership of Governor Jordan, who recently announced his resignation effective September, might be interpreted as a bold exit strategy. Governor Jordan emphasized the effectiveness of the measures taken against inflation, which has been stabilized below the 2% threshold for “some months now,” as the rationale behind the rate cut.The European Central Bank (ECB) remained relatively subdued in the headlines this week, with President Lagarde taking a cautious stance on the extent of easing measures for the year (BMO’s forecast: 75 basis points). Emphasizing the importance of data over timelines, she reiterated the ECB’s reluctance to commit to a specific path for rate cuts following the initial move. This sentiment was echoed by the Bundesbank’s Nagel, who suggested a higher likelihood of a cut “before the summer break,” but cautioned against expecting automatic follow-up actions thereafter. Adding a different perspective, Austria’s Holzmann warned investors to consider the possibility of no ECB cut, although his view appears to be an outlier.Bottom Line: Central banks are swiftly moving toward the starting line, with some already positioned for policy shifts.CHARTS OF THE WEEKI know we are all thinking this.  More By This Author:Don’t Stop The Music
Just What Dr Markets Ordered: An Uneventful FOMC
US Stocks Rally Into Higher Yield Headwinds