All's Well That Ends Well?

No, we’re not referring to Shakespeare’s play…

It has been quite the week for the markets from a macro perspective, with data coming out from several entities worldwide.

All of the Federal Reserve, BoJ, BoE and Swiss National Bank (SNB) released data this week, which left the markets affected.

While most of the interest rates decisions were already expected from the public, some moves did, in fact, surprise the markets.

With no further ado, let’s get started!

A 23-Year High

The Federal Open Market Committee took place earlier this week, on March 19th extending to the 20th.

In a move that comes with no surprise, the FOMC made the decision not to cut interest rates in March’s meeting. Fed’s benchmark rate remains steady at 5.25-5.50% - a range maintained since July 2023.

The FOMC meetings have always been highly anticipated by investors, but even more so in recent years, after the Fed started raising interest rates in its fight against inflation.

From March 2022 to July 2023, the Fed raised rates 11 times – and ever since the Fed’s last rate hike (which dates back to July 2023), it has maintained rates at a fixed rate.

Following the Fed’s “dot plot” survey shared in December 2023, investors have been eager to see rate cuts, betting that there would be up to 6 cuts, starting in March.

However, little did they know that Fed Chair Powell has been consistently saying that they need to see inflation moving “substantially” to the 2% target before even considering any potential rate cuts.

As for inflation, it became clear that it still running a little hot, and tamping it down won’t be as easy as everyone thought it would be.

From a data point of view, both the CPI and PPI readings for February ticked higher and were way above economists’ forecasts – which is considered to be a problem.

“Nonetheless, we are looking for data that confirm the low readings that we had last year,” Powell continued. “And give us a higher degree of confidence that what we saw was really inflation moving sustainably down to 2%.”

Now comes the interesting (yet questionable) part: there were no changes to the dot plot for this quarter.

• The Fed is still planning on cutting key interest rates three times this year.

• However, they now anticipate three additional rate cuts in 2025 instead of four.

 

Source: Federal Reserve

Moreover, the Fed raised its GDP projections for 2024, even after inflation has backed up a little.

The central bank now expects GDP growth of 2.1%, up from previous projections of 1.4% in December.

Markets React

Fed’s decision never leaves the markets unaffected.

• Stocks rose Wednesday

• S&P 500 gained 0.7% and topped the 5,200 level – a new ATH

• Nasdaq gained 0.9%

• Dow Jones Industrial Average added 0.7%

Japan’s First Rate Hike in 17 Years

While most central banks in the world have been raising interest rates, or refusing to bring them down, Japan’s central bank – BoJ – raised its negative interest rate.

Bank of Japan raised the rate from -0.1 to 0.1%, with its Governor saying that there would be no rapid hikes in interest rates.

Why is that? Ueda still believes that Japan’s economic situation is fragile.

Japan has been facing deflationary situation where consumption fell, and investments somewhat stopped.

This move marks Japan’s first interest rate hike in 17 years, and makes it the last central bank to exit negative rates – an end of an era.

Related Article: BoJ to End Negative Rate Policy?

"We reverted to a normal monetary policy targeting short-term interest rates, as with other central banks," BOJ Governor Kazuo Ueda said at a press conference after the decision.

In a widely expected decision, the BoJ ditched a policy put in place since 2016. The elimination of negative interest rates signals the bank’s confidence that Japan has emerged from the grip of deflation.

Ueda said the move was justified by steadily rising wages and prices in the country. The central bank “judged that sustainable and stable achievement of our 2% inflation goal has come into sight”, he stated.

Market reaction was restrained as BoJ officials had telegraphed their intentions.

• The Nikkei Stock Average closed up 0.7%

• Japanese Yen slid more than 0.5% against the dollar

• Similarly, the euro jumped 0.44% against the yen

• Sterling rose 0.32% to 190.52 yen

However, the BoJ’s economic assessment pointed to some warning signs. With China’s economy still struggling, Japan’s economy “is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies.”

Recommended Read: China’s Economic Fate: Turmoil or Resilience?

The amount of government bonds purchased by the central bank will also be reduced, while also discontinuing purchases of exchange-traded funds.

BoE – Taking It Slow

The Bank of England has opted once again to hold the base rate at 5.25%, a move that did not shock the markets at all.

This decision marks its fifth pause in a row, after the Monetary Policy Committee voted to hold the base rate first in September, then in November, December, and February.

Now prior to that, there had been 14 consecutive base rate hikes since December 2021.

BoE policymakers have signalled at least 3 interest rates cuts this year after seeing “encouraging signs” of falling inflation.

Markets now expect three cuts of 0.25 percentage points this year, pricing in the first to take place in June.

Inflation in the country has decreased sharply in recent months, with consumer prices index falling to 3.4% in February.

Moreover, it was the first time since September 2021 that not a single member on the MPC voted for a rate rise.

BoE governor Baily has clearly stated: “We’re not yet at the point where we can cut interest rates, bit things are moving in the right direction.”

• Pound fell against the dollar

• Sterling was down 0.6% against USD at $1.27 and down 0.2% against EUR at €1.16 after the announcement

• FTSE was up around 2%

SNB Setting the Tone

The Swiss National Bank became the first major central bank to cut interest rates after a sustained period of hikes designed to combat soaring inflation.

The SNB cut its rate by a 25 basis points to 1.5% following a Swiss tightening policy begun in June 2022.

In Switzerland, SNB chief Jordan said the decision to cut now was not to move before other central banks, but because it was “the right time for the country”.

The central bank’s decision, its first rate cut in 9 years, kicked off a busy day for central banks in Europe.

The move wrong-footed the markets, sending the Swiss franc to an eight-month low against the euro and Swiss government bonds yields tumbling.

The SNB said it was taking into account the reduced inflationary pressure as well as the appreciation of the Swiss franc over the past year. This cut is meant to support economic activity in the country.

To say that this week was a busy one for the markets would be an understatement. Investors and traders combined will be keeping a close eye on the markets moving forward, with the summer season looking promising for potential rate cuts.