What shaped as a pivotal week for G10 central banks delivered a broadly dovish surprise that is now set to drive the market narrative for the foreseeable future. Bond yields are lower after the Federal Reserve reaffirmed that it is moving towards an easing cycle; the SNB announced a surprise 25bps rate cut; while the BoE and RBA meetings were seen as communicating a more dovish message. Although the BoJ hiked rates by 10bps and abandoned its unconventional measures of Yield Curve Control and ETF and REIT purchases, Governor Kuroda indicated that accommodative monetary policy would be maintained. With the assessed probability of a soft landing for the US economy increasing, the dollar strengthened and equities rallied to new record highs.
Domestically, the focus was on the shift from the RBA at this week's meeting to a neutral stance on the policy outlook. The Board held rates at 4.35% but the decision statement made an impact by removing the line that "a further increase in interest rates cannot be ruled out" and replaced it with a more balanced position of "the Board is not ruling anything in or out". The shift acknowledges the progress made on inflation but still conveys caution with the Board continuing to assert there remains an imbalance between aggregate demand and supply. My review covers the meeting in further detail here. Also this week, a 116.5k surge in employment in February printed nearly 3 times higher than the expected rise (40k), driving the unemployment rate down from 4.1% to 3.7%. The report confirmed the labour market remains resilient, with the weakness in employment around the turn of the year reflecting seasonal shifts in hiring post the pandemic. For more analysis, please see my review here.
The Federal Reserve remains on track to cut rates later in the year, undeterred by expectations for stronger US economic growth and higher inflation in the near term. The policy-setting FOMC left rates on hold at 5.25-5.5%, with Chair Powell reaffirming at the press conference that rates had likely peaked and that if the economy evolved as expected, it would "likely be appropriate to begin dialing back policy restraint at some point this year". Although the recent data has shown an uptick in inflation, this was judged to be due to seasonal factors and was therefore not expected to derail progress back to the 2% inflation target.
Importantly, it has also not dented the FOMC's outlook on rate cuts, with the Committee retaining the projection for 3 rate cuts in 2024 in the updated Summary of Economic Projections. This is despite the incoming data prompting the FOMC to raise its forecast for the key core PCE deflator to end the year at 2.6% from 2.4% previously. Meanwhile, stronger-than-expected data saw the FOMC lifting its forecast for GDP growth for this year from 1.4% to 2.1%, resulting in a slightly lower unemployment rate of 4% from 4.1% previously. Another key development coming out of the meeting was that Chair Powell communicated that the FOMC would be looking to slow the pace of balance sheet reduction (currently targeted at $95bn/mth) "fairly soon". Chair Powell said the intention was to transition from "abundant" to "ample" reserves and that by taking a more gradual approach, it could guard against undue liquidity strains emerging.
A dovish tinge to the Bank of England's decision to leave Bank Rate unchanged at 5.25% has shifted market pricing for the start of the easing cycle into June from August. The MPC voted 8-1 to hold, with the split notable due to members Haskel and Mann siding with the majority after scrapping their calls to hike rates further. As was the case at the February meeting, member Dhingra was again the sole voter supporting a rate cut. Summarising the tone of the MPC, Governor Bailey said there had been "further encouraging signs" inflation was coming back to target - in February, headline CPI slowed from 4% to 3.4%yr and the core rate eased from 5.1% to 4.5%yr - but it was still too early to be cutting rates. Although the guidance that monetary policy would need to be "restrictive for an extended period" was retained, the minutes noted that rate cuts would still leave policy at a restrictive setting given the current level of Bank Rate. Over in Europe, ECB President Lagarde's opening remarks at the ECB and its Watchers Conference continued to guide towards a June start date for the first cut of the cycle.