The Fed and the ECB are in no hurry

Overshadowed by Nvidia’s stunning performance, the macroeconomic news consists of a few clarifications in the minutes of the last FOMC meeting and converging statements by several central bankers. Three Governors stressed the importance of gathering more information confirming the restoration of price stability before starting to cut interest rates. All of them put the extent of the upturn seen in January into perspective, but felt that it was premature to celebrate the end of the fight against inflation.

Christopher Waller still believes that it will be appropriate to cut interest rates in 2024, but his speech suggests that we should not expect any easing before 12 June. Lisa Cook, who reviewed the uncertainties surrounding the inflation outlook, is also opposed to any hasty action. In the same vein, Philip Jefferson is anxious not to repeat the mistakes of the past, and places the emphasis on future data. Referring to historical evidence, the Governor did not completely rule out the possibility of an exogenous shock dictating a more rapid easing. Finally, the minutes of the FOMC meeting tell us that only a couple of FOMC members expressed concern about the risks associated with keeping an overly restrive stance for too long.

The current economic situation is not very salient, but it does not call into question the solidity of the US economy. The erosion in the PMIs published by S&P Global (from 52 in January to 51.4 in February for the composite gauge) is not significant. The persistent decline in the Conference Board’s leading indicator, down 0.4% in January, is hardly worthy of consideration, given the erroneous signals that this index has been sending out since 2022. The upturn in existing home sales and the reduced level of jobless claims (201,000 according to the latest weekly reading) validate the Fed’s wait-and-see attitude.

While stock market euphoria takes centre stage, Treasury yields were more or less stable at the end of last week. The yield on the 10-year T-Note peaked at 4.35% before retreating to around 4.25% on the back of the appeasing rhetoric from central bankers. The decline in credit risk spreads continued, leading to an outperformance of corporate bonds, particularly those in the high yield segment.

In Europe, euro-denominated bonds also posted stable yields. Surveys show a slight improvement in confidence and the business climate, which could support the ECB in its wait-and-see stance. Isabel Schnabel’s speech, in which she spoke of the difficulties of completing the “last mile” of disinflation, suggests that the central bank is in no hurry to act despite the stagnation in activity.

In the United Kingdom, Governor Bailey’s statements led to a sharp fall in short and medium-term sterling yields. The head of the Bank of England did not attempt to correct expectations of interest rate cuts and reiterated that easing was possible before inflation returned to target. Swiss franc yields also fell in
anticipation of easing, which could take place as early as 21 March.