Fed – More dovish reaction function
The Federal Reserve held rates as expected, upgraded their projections to reflect higher growth and inflation, and fewer rate cuts. Growth in 2024 was revised from 1.4% to 2.1%, while core PCE was lifted from 2.4% to 2.6%. The Dot-Plot kept 3 cuts in 2024, but erased 1 cut each for 2025 and 2026. The estimate of long-run neutral rates rose marginally from 2.5 to 2.6%, after having been unchanged since 2019. Keeping 3 cuts in 2024 despite higher growth and inflation was taken dovishly by the market, with 2Y Treasury yields falling 7bp after the release. Powell’s press conference emphasized the Fed’s tactic of hoping for lower inflation going forward, to stay on track for dialling back restrictive rates. If this works that’s great, but if not the Fed is damaging their credibility and risks steeper rates curves and a weaker USD.
Global central banks – Swiss cuts vs Japanese hikes
The Bank of Japan raised rates, thereby concluding this hiking cycle by being the last central bank to hike. The BoJ exited negative rates in place since 2016 and raised rates for the first time since 2007. Nonetheless, the hike was delivered in a dovish way, with Ueda emphasizing accommodative policy to stay, resulting in USDJPY rising back above 150 quickly. The Swiss National Bank kicked off the DM cutting cycle and surprised markets by lowering rates by 25bp to 1.5%. Swiss inflation is projected to be between 1.4-1.1% between 2024 and 2026, and thereby well within the inflation target range of 0-2%. Given their quarterly pace, the SNB chose to front-run the ECB ahead of their likely June cut. The Bank of England made mini steps towards easing policy, voting 8-1 for keeping rates unchanged. Most notably, hawkish MPC member Catherine Mann no longer voted for hiking rates, signalling that the core of the committee is likely also shifting into a more dovish direction.
EM central banks – Dovish LatAm and more orthodox Turkey
In Latin America, monetary easing continues. In Brazil, BCB cut 50bp for the sixth consecutive time, bringing policy rates to 10.75%. Guidance was less committed to further cuts, as the central bank tries to limit potential impact of any volatility on fiscal. We think cuts will continue into summer and see terminal rate below 9%, vs 9.8% priced. In Mexico, Banxico was the last Latin American central bank to start an easing cycle. The central bank cut rates 25bp to 11%. Inflation forecast remains subdued, at 3.6% by end of 2024. The tone suggests a constant but gradual cutting cycle ahead, which should be supportive of both rates and the currency given high initial real rates. In Turkey, the CBT hiked rates 500bp to 50% to send a strong signal in terms of inflation fight. We see the country as vulnerable but recognize the recent efforts at taking the right step recently. We believe disinflation will start to materialize in the second quarter.
Algebris Investments’ Global Credit Team
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