Deferred Confidence
- 05 February 2024 (10 min read)
- Powell’s Q&A and the payrolls put paid to expectations of quick cuts by the Fed
- Euro area January inflation – with concerning developments in services – may have done the same for the ECB
In December Jay Powell had fuelled the already aggressive market pricing for quick rate cuts. Last week he chose to take the opposite posture and did so effectively. Beyond the explicit reference to March not being the FOMC’s base case for the first cut, Powell’s key point was the need to get further confirmation of the ongoing disinflation process to get the level of confidence needed to embark on cuts. While the FOMC chairman made it clear the Fed is not seeking a proper downturn of the labour market, seeing more normalisation there was on his shopping list. From this point of view, the strong payroll last Friday came as a strong warning signal.
Optimists will argue that if the reason beyond the resilience of the US economy is a positive supply-side shock pushing both employment and productivity higher, then one could be relaxed about the inflation risks. Still, the same configuration is also consistent with a higher equilibrium interest rate, while even the strong recent productivity gains could not fully offset the current wage momentum. We find similarities with the discussions at the Fed in the late 1990s when the New Economy narrative – at the time based on the impact of the new information technologies – convinced Alan Greenspan to “go easy” on monetary tightening. These decisions probably contributed to the build-up of imbalances ahead of the Great Financial Crisis of 2008. The risks are different today, of course, but this memory should be another reason for the Fed to be cautious.
Meanwhile, the Euro area does not have the luxury of discussing the possibility of a positive supply-side shock given the mediocrity of its latest GDP prints. We wrote last week that for the ECB to cut in April, a “perfect data flow” would be needed. The inflation print for January, with potentially concerning news for services prices, certainly does not qualify. All this leaves us comfortable with our baseline of the first cut coming in June on both sides of the Atlantic.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.