US rates – No land of doves anymore
The US March CPI report triggered a meaningful re-pricing in global interest rates. The report showed acceleration in core components for the third consecutive month, challenging the notion of Fed cuts in 2024. Quarterly annualized core inflation in March was 4.6%, and supercore (which excludes also housing costs) almost 9%, very far from easing levels. Rates markets reacted by erasing cuts priced on the curve: 2y Treasuries widened 25bp to almost touch 5%. The US curve now prices no cut in June, two cuts in 2024 and a terminal rate of 4% to be reached in 2027. As we highlighted in February, markets assumed too much easing too quickly compared to what the data is saying. We thus find the re-pricing healthy in nature. In our view, further strength in data has the potential to take out even further cuts out of the curve. An additional leg would also hurt credit markets, particularly low spread products, which currently trade very tight valuations. We continue to see limited value in overall credit and favour a selective approach focused on higher yield segments.
ECB – Lagarde goes first
The ECB held rates but changed its guidance, pointing to a cut in June conditional on the economic data playing along. Most importantly, Lagarde confirmed the ECB can diverge from the Fed, amid market concerns of delayed cuts post US CPI. The statement acknowledged easing underlying inflation, moderating wage growth, restrictive financial conditions, but also continued elevated domestic pressures. Some members already wanted to cut at this meeting, giving the meeting an overall dovish spin. Following the meeting, markets raised their odds for a June cut from 80 to 90%, and the total amount of cuts for 2024 from 0.75% to 0.85%.
Algebris Investments’ Global Credit Team
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