US inflation March figure, again higher than expected, put an end to our scenario of a simultaneous first rate cut by the Fed, the ECB, and the BoE in June. We now expect only two rate cuts by the Fed this year, the first in July and the second one in December. The possibility is even rising that the Fed will not cut rates at all this year. On the ECB’s side, we maintain our expectation that the first cut will occur in June, but we have ruled out our back-to-back cuts forecast (i.e. June, July and September), favouring a more gradual easing of one cut per quarter (in June, September and December). The ECB would end up cutting rates before the Fed.
In the United States, economic policy uncertainty, based on media coverage, resumed rising modestly in March, following a marked decline in February. This increase can be attributed, in part, to the February inflation figure (3.2% year-on-year according to the BLS consumer price index). By exceeding consensus expectations (3.1%), this negative surprise further pushes back the prospect of Fed policy easing.
GDP growth, inflation, exchange and interest rates.
Despite the rebound in the United States, inflation continues overall to slow in the G7 countries and in the euro area as a whole. In Japan, keeping consumer prices above 2% will remain complicated in the short term, due to the loss of momentum observed this winter: inflation rebounded in February due to base effects, but the 3m/3M annualised rate fell back to 1.3%. The decline in the 3m/3m annualised rate is more marked in services, down to only 0.4%. The wage increase granted following the annual wage negotiations (Shunto): 5.3% in total, including 3.7% in base salary, will nevertheless support the BoJ in its (very gradual) attempt to normalise monetary policy
An analysis of the latest PMI indicators, by Tarik Rharrab.
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Tensions on global maritime freight have eased in recent weeks but remain significant and the outlook uncertain due to the disruptions in the Red Sea. The global supply-chain tension index – from the Federal Reserve Bank of New York – rose above its long-term average in February for the first time since January 2023. But the Freightos and Baltic indices both fell nearly 15% in the first three weeks of March.
GDP growth, inflation, exchange and interest rates
According to the latest economic data, the divergences in growth between the US, Europe and Japan are expected to remain at the beginning of 2024. In Europe, the economic situation in Q1 was once again disrupted by exceptional factors, this time linked to the Red Sea crisis, which particularly affected automotive production in January and, by extension, industrial production.
Recent communication by the Federal Reserve and the ECB has made it clear that the first cut in official interest rates is coming. Both central banks are saying the same -it depends on the data- but the ECB communication is more opaque than that of the Federal Reserve, which provides interest rate projections of the FOMC members (dot plot). In assessing how fast and how much the ECB might cut policy rates in this cycle, several approaches can be adopted. Based on the credibility of the ECB and plausible estimates of the neutral rate, it makes sense to use an assumption of a range between 2.00% and 2.50% for the ECB deposit rate as the end point of the easing cycle.
In the US, the latest Survey of Professional Forecasters (SPF) of the Federal Reserve Bank of Philadelphia paints a rather upbeat picture of the economic outlook. A similar survey of the ECB points towards a gradual pickup in growth this year. In both cases, the level of disagreement is low. This provides reasons to be hopeful about the economic outlook. However, the alternative scenarios are predominantly negative for growth and inflation, and some have totally different implications for the evolution of bond yields. This would mean that as time goes by and the likelihood of the different alternative scenarios evolves, bond yield volatility could be high.
In the United States, economic policy uncertainty, based on media coverage, fell significantly in February, following a rebound in January. The index fell from 124 to 97, the lowest level since July 2023, when the policy rates were last raised. With US growth and the labour market continuing to hold up well, the economic outlook appears to be brighter and less uncertain. This gives greater credit to the scenario of a soft landing for the economy, and greater comfort for the Fed’s cautious stance and to take its time before cutting rates.
Consumer price disinflation stalled at the beginning of the year in Europe and the United States. With the tailwinds of energy price deflation fading, core inflation, which is still high, now accounts for almost all of the price increases in the United States. This is less true in the euro area and the United Kingdom, where food inflation still contributed almost a third to headline inflation in January. The decline in inflation in 2023 has led, in all areas, to a downward shift in household inflation expectations in the short-term (1 year) towards long-term expectations (5 years). Wage growth continues to outpace inflation and fuel a recovery in purchasing power, which appears to be stronger in the United States and the euro area than in the United Kingdom.
In February, the S&P Global Composite PMI improved for the fourth consecutive month (+0.3 points), to 52.1, its highest level since June 2023. This is a fairly clearly encouraging signal for Q1 global growth, especially as this improvement is being driven both by the manufacturing and services sectors. In February, the global PMI index in these two sectors reached its highest level since August 2022 and July 2023, at 50.3 and 52.4 respectively.
GDP growth, inflation, interest and exchange rates.
The economic situation in January and February highlights the uncertainties surrounding 2024 with, on the positive side, improvements in the business climate in several countries and resilient labour markets (Europe) or labour markets remaining dynamic (US). Combined with a disinflation trajectory not yet spreading to all sectors (services in particular), all these factors are tending to defer expectations of rate cuts.
Global maritime freight stabilised in February after the previous month’s sharp rise following the escalation of tensions in the Red Sea. The Freightos index is currently stable, with a decline even observed on routes between China and Europe which had been most directly affected by the conflict in the Middle East and by the rise in transport costs. The New York Federal Reserve’s global supply chain pressure index was unchanged in January but is expected to rise again in February, reflecting longer delivery times in the PMIs.
After a short respite in December, uncertainty about US economic policy, based on media coverage, rose again in January. This resurgence in uncertainty was likely caused by the latest US inflation figures, which proved more persistent than expected: it remained above 3% in January (3.1% year-on-year, according to the BLS Consumer Price Index) and turned out to be higher than consensus expectations (2.9%). During its mid-December meeting, the Federal Open Market Committee (FOMC) made it clear that it would not be appropriate to cut rates in the absence of certainty as to whether inflation was on a sustainable downward path towards its 2% target.
The global composite PMI rose for the third consecutive month in January (up to 51.8 from 51 in December), reaching its highest level since June 2023. All sectors have contributed to this improvement in global activity. In January, the global manufacturing and services PMIs hit their highest levels since August 2022 and July 2023, respectively.
