To taste, the colors. And for the interpretation of the words and behavior of the central banks, the investors. The reaction of the stock markets was generally bullish to the ‘Super Thursday’ announcements of the central banks, including the one made hours before by the United States Federal Reserve (Fed). Jerome Powell’s speech marked a firm course towards an upcoming monetary easing, after confirming that they expect rate cuts in 2024 (at least three) but, above all, the ‘reverse tapering’ of the adjustment that he is carrying out in his securities portfolio, That is, it will reduce the current rate of -95 billion dollars per month of reduction in its balance that tightens monetary policy.
Although he did not set a date, Powell said it would be “pretty soon.” The Fed’s delayed relief caused stock market increases from early Thursday morning in Asian stock markets and emerging markets that are more exposed to the dollar. The US central bank’s optimistic message regarding economic growth was echoed in Europe from the first hour. The increases were also supported by the Swiss SNB’s rate cut, from 1.75% to 1.5%, which accelerated expectations that other European central banks will follow suit. Norges Bank maintained rates but did not rule out lowering them later as inflationary pressures ease. Finally, the Bank of England also began to lean towards the side of easing rates after emphasizing in its statement that the CPI is making relevant progress towards its objective.
As a whole, the markets saw a macro scene aligned with the theses of preventive monetary relaxation for the summer that avoids the feared recession. One idea seems to indicate that the monetary authorities have reached the point where they have to have very bad CPI data in order not to lower rates, after months of having kept the promise of ‘high rates for time’ that they predicted in 2023 when they left to upload them. “The Bank of England has been careful not to endorse the idea of a short-term rate cut in its latest policy statement. We think it will want to see inflation data for April and May before doing anything, and that is around June as the earliest date for the first rate cut. However, we stick to our call to take the first step in August,” said James Smith and Chris Turner, analysts at ING Research.
Emerging market stocks rose along with their currencies with the awakening of risk. MSCI’s index for developing country stocks rose nearly 2%, its biggest one-day gain since December, with technology and AI-oriented companies leading gains in Asian trading, Bloomberg reports.
“As long as the labor market does not show too many cracks, the Fed can continue to rely on the data and wait. That said, at this point it seems unlikely that the Fed will be willing to risk a recession or a significant spike in unemployment just to meet its demands. inflation targets,” says Bret Kenwell, analyst at broker eToro. “If markets respond upward to the Fed’s current stance, investors should see if money flows back into bonds and small caps,” he adds.
“After more than two years of worse relative performance, small and mid-cap stocks present an attractive level of discount and valuation. The start of the monetary relaxation cycle and the gradual improvement of macroeconomic indicators in Europe could “Give the starting signal to a new phase of better relative performance of this asset class,” point out Stéphanie Bobtcheff, José Berros and Philbert Veissieres, from the French asset management firm La Financière de l’Echiquier (LFDE).
Switzerland, starting point
The movement of the Swiss SNB represents a divergence in the coordinated actions of the rest of the major central banks. “This was a surprise, since the consensus expected that the status quo would be maintained,” according to Charlotte de Montpellier, an economist at ING. In the same way that Japan adopted the first interest rate increase in 17 years in advance, the Swiss rate cut is brought forward to June, the month in which both the Fed and the ECB have chosen to make their move.
“The Swiss National Bank once again demonstrates its independence and is the first of the major central banks to start cutting interest rates. Therefore, it is also starting to cut interest rates again before the ECB, “Just like the ECB did before in June 2022 with its rate hike. This should also further reduce upward pressure on the Swiss franc, especially against the euro,” explains Reto Cueni, chief economist at Vontobel.
Goldilocks Scenario
The Ibex 35 experienced a notable rise of 1.07%, reaching 10,867 points, after remaining mostly above 10,900 points for much of the day, a level that had not been seen since June 2017. The increase was widespread in the Spanish index and other European stock markets, after the Fed and Jerome Powell expressed an optimistic scenario regarding inflation, growth and interest rates, which stimulated investor appetite. Despite some uncertainties, the end of the day was positive. The German Dax rose 0.88%, the French Cac 0.2%, while the Italian Mib and the British Ftse recorded increases of 0.1% and almost 2%, respectively.
“The Fed yesterday supported a little more the “goldilocks” narrative in which the markets are immersed, predicting better growth and the labor market, and pointing to three rate cuts in 2024 (which will be followed by three more, annually, in the next two years)”, explains David Macià, director of investments and market strategy at Creand Asset Management. “Powell was relaxed about the stubbornness of inflation, which is not receding at the speed that was expected, and did not bother to rule out the first cut before June. A combination of investor satisfaction, which boosted fixed income and variable income prices, while the dollar weakened. Perhaps the most illustrative reaction is that of gold, which marks new highs, perhaps due to fear that monetary policy will be more lax ahead of time,” adds Maciá.
