March 20th Fundamental Facts

March 22nd Fundamental Facts

March 22nd Fundamental Facts

[Facts Highlighted]
1. Japan’s price trend gauge slows sharply, highlighting the uncertainty of rate hikes.
2. Summers says the Fed has “itchy fingers” to start to cut interest rates.
3. U.S. home sales growth in February reaches the highest level in a year.
4. U.S. manufacturing and service sector outputs continue to expand in March.
5. Dollar Strikes Back as Investors Reevaluate Global Central Bank Paths
6. The BOE maintained rates unchanged, with the Committee members turning dovish.
7. The Swiss National Bank unexpectedly cut interest rates.
8. The ECB will get encouragement from the services PMI.
9. Oil Traders Expect Stocks to Fall Significantly After OPEC Extends Cuts
10. Wall Street rallies, gold marches to new record
11. PBOC Signals Liquidity Boost For Banks But Cautions On Rate Cuts

[Facts in detail]

Japan’s Inflation and Interest Rate Uncertainty

Japan’s core inflation, excluding fresh food but including energy, increased by 2.8% YoY in February. However, the overall price trend index, which the Bank of Japan (BOJ) uses to monitor price trends, slowed down significantly. This indicates that the conditions for the BOJ to further tighten monetary policy are not yet met, leading to increased uncertainty about the timing of the next interest rate hike.

Summers’ Views on the Fed’s Rate Cuts

Lawrence Summers, the former U.S. Treasury Secretary, expressed his confusion about the Federal Reserve’s eagerness to cut interest rates in the coming months despite high inflation in a strong economy. He believes that the Fed’s forecast for a neutral policy rate is too low, suggesting that policymakers perceive the current environment as more restrictive than it actually is.

U.S. Home Sales Growth

According to the National Association of Realtors, home sales in the U.S. increased at an annualized monthly rate of 9.5% to 4.38 million units in February, the fastest pace in a year. The median home sale price also increased by 5.7% YoY to $384,500, the highest level in February since 1999.

U.S. Manufacturing and Services Output Expansion

The preliminary US Markit Manufacturing PMI for March was 52.5, the highest since May 2022, due to improved domestic and overseas demand. However, the growth of the Services PMI slowed to 51.7, partly due to ongoing cost of living pressures.

Dollar Strikes Back as Investors Reevaluate Global Central Bank Paths

The Dollar made a significant recovery overnight, showing resilience amidst a surge in risk-on sentiment that pushed the three major US stock indexes to all-time highs. The greenback continued to make gains in the Asian session, surpassing pre-FOMC highs against European majors.
The change in sentiment occurred following SNB’s unexpected rate cut yesterday and a dovish voting pattern from the BoE. These events could have led investors to understand that there are realistic risks that the Fed could start reducing interest rates later than other major counterparts like the ECB.
At present, the Dollar is the strongest currency of the week, outperforming the Canadian Dollar and Euro. On the other end, the Swiss Franc is the weakest performer of the week, with the Japanese Yen not doing much better. The New Zealand Dollar and British Pound are also under pressure, while the Australian Dollar maintains a neutral position within the currency mix.

March 20th Fundamental Facts

BOE’s Interest Rate Decision

On March 21st, the Bank of England (BOE) decided to keep the benchmark interest rate unchanged at 5.25%. Governor Andrew Bailey stated that they need to ensure that inflation falls back to the 2% target and stays there.
The Bank of England (BOE) is leaning towards reducing interest rates, a change influenced by Catherine Mann and Jonathan Haskel, two influential members who previously supported rate increases. This shift is part of a larger trend suggesting that the BOE may ease its policy later this year, as evidenced by the lack of backing for rate hikes in a recent Monetary Policy Committee decision.
Mann and Haskel’s agreement with the majority to keep rates at 5.25%, along with the recognition that policy could stay tight even with rate reductions, indicates a significant move towards monetary easing. Despite Governor Andrew Bailey’s caution due to the need for more progress in tackling inflation, the market has reacted with heightened expectations of rate cuts, especially a potential cut in June.
This change in sentiment comes after the Federal Reserve hinted at future rate cuts in the US, leading to a reevaluation of expectations in global markets. Even though the BOE decided to maintain steady rates in March, the dovish shift in the voting pattern implies a growing trend towards lower rates. This shift away from a hawkish position is the bank’s reaction to recent drops in inflation, with the Consumer Prices Index expected to fall below the 2% goal.
Swati Dhingra’s persistent support for rate cuts highlights a wider narrative change within the BOE, which is modifying its position in light of economic uncertainties. Concerns about fundamental price pressures, including wages, continue, with policymakers hesitant to prematurely cut rates.
The potential decrease in interest rates could ease financial burdens on households, providing a positive environment for the Conservative government before a predicted general election. This political scenario is intertwined with economic factors as the government tackles issues caused by the cost of living crisis and mortgage rate increases.
Bailey’s focus on the need for certainty in the path of inflation emphasizes the BOE’s careful approach. However, investors have already modified their expectations in anticipation of rate cuts, especially following indications from central banks worldwide.
From a technical standpoint, the BOE’s move towards monetary easing could affect various market sectors. Lower interest rates usually encourage borrowing and spending, potentially benefiting industries that cater to consumers. However, sectors that are sensitive to interest rate changes, such as financial services, might see changes in profitability. Furthermore, currency markets could experience volatility as investors reevaluate the pound’s outlook amidst changing monetary policies.
The BOE’s inclination towards interest rate cuts mirrors a wider trend of monetary easing in response to changing economic conditions. While uncertainties persist, especially concerning inflation and economic growth, the possibility of lower rates indicates potential effects on various market sectors. Investors will closely watch developments as central banks strive to strike a balance between supporting economic recovery and controlling inflationary pressures.

Swiss National Bank’s Unexpected Rate Cut

To counteract the strengthening of the Swiss franc, the Swiss central bank unexpectedly cut its policy rate to 1.5% from 1.75%. This is the first time in nine years that the bank has cut interest rates.
On March 21, the Swiss National Bank (SNB) released its most recent monetary policy assessment. It announced a reduction of the SNB policy rate by 25 basis points to 1.5%, effective from March 22. This decision was facilitated by the successful management of inflation over the past two years. In recent months, the inflation rate has fallen below 2%, which is considered a stable price range. The new forecast suggests that the inflation rate may stay within this range in the coming years. The decision to lower interest rates took into account the decreased inflationary pressures and the real strengthening of the Swiss franc over the past year, which negatively impacted the Swiss economy. Additionally, the rate cut is expected to support economic activity and maintain a moderate monetary environment.
Since the start of the year, inflation has continued to decrease, primarily due to the ongoing reduction in commodity inflation. The main factor driving inflation now is the increase in domestic service prices. Forecasts predict inflation rates of 1.4% in 2024, 1.2% in 2025, and 1.1% in 2026.
In the fourth quarter of the previous year, Swiss GDP experienced moderate growth. The service sector saw expansion, while manufacturing growth was slow or even stagnant. The unemployment rate continued to rise, and production utilization remained at normal levels.
In the upcoming quarters, growth is expected to remain moderate, with weak domestic demand and the real appreciation of the Swiss franc negatively affecting the economy. The Swiss GDP is projected to be around 1% this year, with a gradual increase in the unemployment rate and a further decline in production utilization. However, the economic outlook is still fraught with considerable uncertainty, with the primary risk being weak foreign economic activities.
The SNB will maintain its focus on inflation developments and will make necessary adjustments to monetary policy.

ECB and the Services PMI

The Eurozone manufacturing PMI for March was 45.7 and the services PMI was 51.1, the slowest growth in four months. This could encourage the European Central Bank (ECB) to be cautious about cutting interest rates.

March 20th Fundamental Facts

OPEC Extends Cuts

Global petroleum stocks are just marginally below the long-term seasonal norm, but futures prices have already shifted into a sharp backwardation as traders predict further depletion throughout 2024. The OECD’s commercial inventories of crude oil and refined products are estimated to have been around 75 million barrels, or 3% below the previous ten-year seasonal average at the end of February.
The U.S. Energy Information Administration’s “Short-Term Energy Outlook” indicates that the deficit has remained relatively stable since March 2023, despite significant fluctuations in spot prices and calendar spreads. Additional production cuts by Saudi Arabia and its OPEC+ allies have been counterbalanced by faster-than-expected growth in non-OPEC production, primarily from the United States, Canada, Brazil, and Guyana.
Despite the ongoing slowdown in manufacturing and freight activity across North America, Europe, and China, petroleum consumption has consistently increased in line with its long-term trend. Front-month futures prices for the benchmark Brent contract have averaged around $84 per barrel so far in March, almost exactly in line with the long-term average since the start of the century, once inflation is taken into account.
Nearly all the price increases have been concentrated in the contracts nearest to delivery, with little or no change in prices for deliveries in 2025 and beyond. The relative increase in nearby futures prices has pushed the market structure into an increasingly steep backwardation. Front-month prices have traded at an average premium of almost $4 over contracts for delivery six months later so far in March.
Such a steep backwardation would normally be associated with inventories that are already low and rapidly depleting. However, in this case, traders seem to be anticipating a much larger depletion of inventories over the rest of the year rather than any current tightness in the market. Traders are reacting to signals that Saudi Arabia and its OPEC+ allies will extend their cuts through the middle of the year and beyond, even if consumption remains robust and inventories draw down significantly.
Saudi Arabia and its closest allies have accepted a smaller share of global production to support prices at a higher level and this calculation is expected to be maintained for the indefinite future. Production cuts will only be reversed “subject to market conditions”, OPEC announced on March 3, in other words when consumption is strong enough that output can be increased without lowering prices.
Saudi Arabia’s willingness to extend its voluntary production restraint has removed much of the downside risk from oil prices despite uncertainty about the outlook for the global economy and interest rates. By March 12, hedge funds and other money managers have boosted their net position in futures and options linked to Brent and U.S. crude to the equivalent of 379 million barrels.
Portfolio investors remain cautious about prices increasing further, at least until there are clearer signs of a recovery in industrial activity, but are no longer so fearful of them declining again. One way or another, however, the current contradiction between average spot prices and a strong backwardation will have to be resolved. If global inventories deplete as much as the strong backwardation implies, spot prices are likely to rise over the course of the year and very likely to exceed $90. But if the market remains comfortably supplied, as the current level of spot prices implies, the backwardation will gradually ease.

Wall Street rallies, gold marches to new record

On Wall Street, all three primary indices ended positively, with the tech-centric Nasdaq seeing the most gains, and the S&P 500 and the Dow Jones reaching new record highs. Typically, high-growth tech companies are valued by discounting future free cash flows, and the Fed’s decision to continue factoring in three rate cuts by December might have allowed current values to stay high.
The market’s behavior indicates that there might be more growth opportunities related to AI to be factored in, and the Fed’s decision might enable equity traders to continue venturing into new areas.
Gold also gained from the Fed’s decision to leave its rate forecasts for 2024 unchanged, reaching a new record high of around $2,222. The next potential resistance level to consider might be the 161.8% Fibonacci extension level of the slide from May to October 2023, at around $2,244.

PBOC Signals Liquidity Boost For Banks But Cautions On Rate Cuts

China’s central bank hinted at a possible increase in liquidity for banks, but remained wary about reducing interest rates, following a positive start to 2024 for the world’s second-largest economy. The People’s Bank of China’s Deputy Governor, Xuan Changneng, stated in a briefing that there is still scope to decrease the reserve requirement ratio for banks, a crucial tool for adjusting liquidity. He also mentioned that as deposit rates continue to fall and other major global economies lean towards easing, the country’s interest rate policy could become more “independent”. This was a reference to the current constraints posed by banks’ slim profit margins and the Federal Reserve’s high rates.
Xuan emphasized that China has ample monetary policy space and a rich policy toolbox, and that the financial support to the economy remains robust. These comments indicate that the PBOC is not in a hurry to reduce rates at the moment, as it is likely to lower the RRR this year and monetary policy continues to be relaxed. Official data showed better-than-expected growth in the export, industrial, and investment sectors in the first two months of the year, allowing policymakers to pause easing measures and evaluate growth momentum.
Zhang Zhiwei, the chief economist for Pinpoint Asset Management Ltd., suggested that a rate cut might be postponed due to concerns such as increased pressure on the already weak yuan and China’s flattening yield curve, which indicates growing trader pessimism about the country’s long-term growth prospects.
Raymond Yeung, the chief economist for Greater China at Australia & New Zealand Banking Group Ltd., anticipates that banks will reduce their deposit rates in April. This would alleviate the strain from their shrinking profit margins and create room for lending rates to decrease. He also predicts a cut to the RRR in the second half of the year.
Xuan’s comments follow remarks made a few weeks earlier by PBOC Governor Pan Gongsheng, who emphasized that there was still scope for the central bank to reduce the RRR, thereby enabling lenders to maintain smaller reserves and promote lending. Neither provided any indication of when another reduction might occur. In January, Pan announced a larger-than-expected 50 basis point reduction in the RRR during a live press briefing.
Earlier on Thursday, Chinese state media reported that policymakers were in an “observation period” after the economy demonstrated strength in the first two months of the year. Investors have been closely examining statements by Chinese policymakers for any hints of potential stimulus measures this year. Beijing is aiming for a growth rate of around 5%, a target that some analysts believe may necessitate additional support.
Xuan indicated that the PBOC is currently satisfied with the growth of credit and money supply and will maintain sufficient liquidity, even though loan expansion was at its slowest recorded rate in February. He clarified that a credit growth of at least 8% aligns with the nominal economic growth target of about 8%.

Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN etc

Prepared to you by “Akif Matin


Add a Comment

You must be logged in to post a comment