Executive briefing: US inflation data reduces rate cut optimism

The past month has been characterized by growing inflation worries and waves of geopolitical uncertainty. The latest March CPI data from the US exceeded markets’ expectations, as underlying price pressures have seemingly picked up speed in early 2024. As a response, markets continued to pull back rate cut expectations not just in the US, but across most developed economies. ECB is priced to cut rates 2-3 times this year (down from 5-6 at the beginning of the year) while the Fed is only priced cut 1-2 times.

The central bank repricing has weighed on risk sentiment across asset classes. Fixed income markets were naturally under pressure, but also the strong rally previously seen in equity markets took a breather. Broad USD has remained on a strong footing as financial conditions have retightened and cyclical scandi currencies weakened. Rising global yields have also weighed on JPY despite the Bank of Japan exiting its negative interest rate policy in March and signalling potential for further hikes with its updated inflation forecasts in April.

While central banks are mostly concerned with signs of still elevated domestic inflation, broadly rising commodity prices have certainly not eased the situation. The uptick seems to have reflected both gradual recovery in the global manufacturing cycle as well as geopolitical uncertainty after Iran struck Israel with a barrage of missile and drone strikes in mid-April. That said, oil prices turned lower again towards the end of the month, and the spiral of escalating tensions in the Middle East appears to have been halted for now. We discuss the outlook in our latest Geopolitical Radar, May 1. In addition, the latest leading manufacturing data surprised to downside, suggesting that growth outlook still remains muted.

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