Investment Institute

Market Views

Fog on the Window

18 March 2024 (10 min read)

Written by

Gilles Moëc

AXA Group Chief Economist and Head of AXA IM Research

KEY POINTS

We explore the risk the Fed cannot cut at all this year. We are not convinced.

We look at the potential ramifications for the ECB of the Fed postponing its first cut beyond June.

The outcome of the wage negotiations opens the door wide to the BOJ normalisation.

The market has moved markedly from its exuberant expectations of massive cuts by the Fed to price barely three cuts in 2024. The mood music is that there is now a distinct risk the US central bank will be unable to cut at all this year because of a window for easing closing well ahead of the presidential elections. We agree that some key details in the latest prints of the consumer price index are concerning but we also think there are enough signals elsewhere for Jay Powell to continue to guide towards a gradual removal of some of the current restrictive stance. The revised data for January and the February print for wages have been reassuring, with a pace consistent with a return to 2% inflation given the US strong productivity performance. We also highlight a very recent paper by the Brookings suggesting that the much higher than expected net immigration in the US could explain why the US economy could continue to create many jobs without triggering further tension on wage. On the political constraints, we think it would be reputationally very dangerous for the Fed to allow the looming elections to influence its reaction function and choose inaction if the data warranted a monetary easing, and there is no obvious historical pattern to substantiate a strong influence of the pre-electoral context on Fed decisions.

We explore the consequences for the ECB of the risk the Fed would not cut in June. The only strong argument in favour of taking on board the Fed’s attitude would be the potential impact on European inflation transiting through another depreciation in the exchange rate. Yet, we think that the current euro exchange rate level already takes on board a baseline in which the ECB cuts more than the Fed this year, and in any case the ECB’s key focus now is domestic inflation, not the role of external forces.

There is quite some trepidation on the possibility the Bank of Japan could end its negative rate policy this week already. The results of the wage negotiations certainly fuel the BOJ’s resolve to start normalising, but we still think moving in April presents some advantages. What really matters anyway is not whether the BOJ moves in March or April, but how it will handle the end of Yield Curve Control.

Read the article

Download Macrocast #218 (514.81 KB)

Disclaimer

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.