US market close: Don't stop the music

The global shift towards a dovish central bank stance appears to be gaining momentum, with the Swiss National Bank (SNB) taking proactive measures.

Markets

Stocks continued their climb on Thursday, extending the gains from the previous session. However, profit-taking emerged in the afternoon New York session, reversing intraday gains after all three major stock indexes on Wall Street reached record highs. The rally was initially driven by chip stock gains following Micron Technology's optimistic forecast.

Today, there is confidence in the Federal Reserve's commitment to potential rate cuts, instilling optimism among investors. The prevailing belief is that rate reductions are cautiously on the horizon. With this sentiment, markets are experiencing stability, and investors are embracing the idea of a soft economic landing. The current narrative of three anticipated rate cuts is music to the market's ears, so inventors hope the Fed doesn't stop the music.

However, with US yields holding firm and the dollar rallying on the Federal Reserve's upward adjustments to growth and inflation forecasts, there may eventually be some second-guessing of the Fed's rate cut outlook. It's worth noting that nothing is preventing the market from pricing in fewer rate cuts for 2024 than the Fed has indicated, especially if the data warrants.

Unquestionably, with many vital data releases—CPI, NFP, and PCE, to name a few prominent ones—scheduled before the FOMC meeting on June 12th (coinciding with the May CPI data release), there's ample opportunity for an entirely less dovish group rethink. Indeed, three rate cuts are far from a slam dunk.

While investors found reassurance in the Federal Reserve maintaining its outlook for three interest rate cuts this year, the question is whether the data, particularly price pressures, will permit that. Indeed, the main concern is that inflation might take longer to reach the Fed's 2% target. This could happen if services inflation remains stubbornly high and slow to decline or demand for goods rebounds, leading to higher prices. Indeed, as the disinflationary trend in goods likely reaches its end, any further increase in service prices will need to slow significantly to maintain an overall downward trajectory for inflation.

In March, US manufacturing activity expanded at the fastest pace since the summer of 2022, according to the preliminary reading of S&P Global's gauge. The flash headline print 52.5 on the factory index indicated a slight improvement from February's final reading.

On the services side of the world's largest economy, activity continued to expand, although slower. The services gauge recorded a reading of 51.7, marking the weakest level since November.

The moderation in services activity suggests that some households may feel the strain from higher rates. However, the latest release indicated that firms are "increasingly optimistic about the outlook," especially with rate cuts expected shortly. A measure of confidence among service providers in the US reached a 22-month high.

According to S&P Global's chief business economist, Chris Williamson, Q1 2024 might have been the best quarter for the US economy since Q1 of last year. "The survey data point to another quarter of robust GDP growth accompanied by sustained hiring as companies continue to report new order growth," he said.

However, the downside to robust demand is the upside risk to inflation. This was evident earlier this month when S&P Global observed "a steepening rise in costs." When accompanied by "strengthened pricing power," it creates a pressure cooker situation.

Oil Markets

The draft resolution issued by the United States to the United Nations Security Council, calling for an immediate cease-fire between Israel and Hamas, has triggered a bull market squeeze. Despite the macroeconomic optimism fueled by the Federal Reserve's indication of three potential rate cuts, typically seen as bullish for oil sales and the economy, both global oil benchmarks have experienced a decline. This suggests a more favourable geopolitical landscape regarding the cease-fire resolution outweighs the positive outlook on oil markets driven by the Fed, and the oil industry think tank demand upgrades.

Forex Markets

Swiss Franc

The global shift towards a dovish central bank stance appears to be gaining momentum, with the Swiss National Bank (SNB) taking proactive measures.

On Thursday, Switzerland became the first G10 country in the pandemic era to implement rate cuts under the leadership of outgoing Thomas Jordan. This decision is likely aimed at staying ahead of other developed market economies, possibly to prevent unwanted appreciation of the Swiss franc, which has historically been a primary concern for the SNB.

In the past, the franc's strength has been advantageous during inflation.

However, the Swiss franc became too strong by the end of last year. Analysis of the SNB's annual report suggests that the central bank significantly reduced its foreign exchange (FX) sales by nearly half in the fourth quarter.

After the December meeting, Thomas Jordan, who announced this month that he would step down from the bank in 2024, indicated that with inflation stable below 2%, the economy facing subdued growth, and the franc at record levels, the SNB's focus shifted away from supporting the currency through FX sales. Instead, they hinted at the possibility of intervening in the opposite direction.

The rate cut implemented on Thursday suggests that regardless of their stance on FX interventions, the SNB saw merit in using the policy rate to weaken the franc further, adding to the depreciation already observed in 2024. This move provides some leeway before potential rate cuts by the Federal Reserve and the European Central Bank come into play.

British Pound

On Thursday, the Bank of England's decision revealed a significant shift in the Monetary Policy Committee's (MPC) stance, with the hawks conceding defeat. The vote split to maintain the Bank rate at its current level was 8-1, with Dhingra being the lone dissenter in favour of a rate cut at the March meeting.

Given the certainty that there would be no rate cut on Thursday, all attention was focused on the voting split. Notably, Dhingra's call for a reduction at February's MPC meeting marked the first vote for a cut since the pandemic began, contrasting with two votes for a hike. With those two votes now absent, only the dovish dissent remains.

Last month, the BoE softened its forward guidance, acknowledging that current policy settings are "bearing down on inflationary pressures." While the bank is committed to keeping policy restrictive as needed, it's adopting a data-dependent approach to determine the duration of maintaining rates at current levels.

Although Andrew Bailey emphasized that the BoE is not yet ready to cut interest rates, the absence of hawkish dissents during Thursday's meeting suggests that discussions around rate cuts will likely intensify.

Japanese Yen

After the Bank of Japan's decision to terminate negative interest rates on Tuesday, market focus has shifted to whether the bank will enact further rate hikes before year-end.

The yen experienced a significant weakening following the BOJ's announcement, prompting speculation that the central bank may need to take action sooner rather than later; hence, this could create resistance in the 151.50 to 152.00 USD/JPY.