Nerthuz
When I was a child, spring was full of excitement. We all knew warmer weather and summer vacation were right around the corner, but we didn’t know exactly when they would arrive (based on how many snow days we had). (The last day of school may vary by a few days).
However, the expectations we all shared were universally positive. This spring, I think markets are going through a similar period of anticipation, waiting for the various central banks to start cutting interest rates.
We expect it to happen soon, even if the exact timing is less certain, and the wait has been generally positive, with major stock indices around the world hitting record highs in the past few weeks.
So, where do we stand as May comes to a close? Here’s what I expect to see during this Central bank meetings in June
Bank of Canada: June 5
Last week, we got a reading on Canadian inflation that showed significant progress, with the CPI rising 0.5% month-on-month and 2.7% year-over-year in April.1 This was in line with expectations and was the slowest pace in three years.
More importantly, the core CPI, which excludes food and energy prices, rose 0.1% month-on-month for the fourth month in a row, indicating that inflation is well under control.1
The Bank of Canada is focusing on core inflation, as explained in its monetary policy decision announcement in April: “The Governing Council is particularly monitoring the development of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behavior.2
This is the last CPI reading before the Bank of Canada meeting in June – and I think it has significantly increased the odds of a June rate cut. On the other hand, the Bank of Canada may be reluctant to act so far given the possibility that the Fed will raise interest rates, as indicated in the Federal Open Market Committee minutes and from some US Fed spokesmen.
This would pose a problem for the Canadian currency, causing the value of the US dollar to fall. I give a 50/50 chance of a cut at this Bank of Canada meeting.
European Central Bank: June 6
It seems very likely that the ECB will cut interest rates at its June meeting, in my view. Progress on inflation has been significant. The Eurozone inflation report for April showed headline CPI at 2.4% and core CPI at 2.2% year-on-year. The CPI for services remains hot but has slowed significantly, falling to 3.7% year-on-year.3
Also encouraging is the lower April consumer inflation forecast, which was just released. The inflation rate next year is expected to reach 2.9%, the lowest level since September 2021.
Expectations for the next three years moved from 2.5% to 2.4%.4 Now, we have seen a re-acceleration in hourly labor costs, but I think it is unlikely to prevent the ECB from cutting interest rates in June.
US Federal Reserve: June 12
It seems certain that the Fed will stand still at this meeting. On the bright side, April CPI data showed progress in fighting inflation resuming after some pause in the first quarter.
In addition, the final reading of the University of Michigan consumer inflation forecast for May was lower than expected, indicating that inflation expectations are well established. However, this is clearly not enough to satisfy the Fed.
A number of Fed spokesmen have said in the past few weeks that they need more data to be confident about starting to cut interest rates. I believe Fed Governor Chris Waller summed up the views of the majority of Federal Open Market Committee (FOMC) participants in his comments last week:
“Absent significant labor market weakness, I need to see several more months of good inflation data before I feel comfortable supporting an easing of the monetary policy stance.”5
This follows the release of minutes from the May FOMC meeting which were more hawkish than expected, with some participants indicating a willingness to raise interest rates if necessary.
The Fed’s preferred measure of inflation – the Personal Consumption Expenditures Price Index – is scheduled to be released at the end of this week. It is clear that it will be closely watched and has the potential to move the markets. But this alone will not be enough to move the Fed. However, I still believe that a rate cut in the third quarter is still very likely.
It is worth noting that Asian central banks are likely to wait until the Fed starts cutting interest rates due to the need to protect their local currencies in the face of the strong US dollar.
Bank of Japan: June 17
The Bank of Japan appears to be achieving its goal of reaching a sustainable 2% inflation rate after decades of staying below that target. Japan’s inflation rate for April was 2.5% year-on-year, and the core CPI, which excludes fresh food but includes fuel costs, rose 2.2% year-on-year; This marks the second month of moderation in inflation but is still above the central bank’s target.6 Moreover, consumer inflation expectations have increased recently, making it easier for the Bank of Japan to raise interest rates again.
The Bank of Japan appears to have another goal as well – which is to help strengthen the Japanese yen in the face of downward pressures. Bank of Japan Governor Kazuo Ueda expressed his confidence in the Japanese economy:
“I still believe the Japanese economy will rebound, even with the data released after the Bank of Japan’s policy meeting in April.”7
Not surprisingly, the Bank of Japan has appeared more hawkish in recent weeks. Although interest rates are not expected to rise in June, the likelihood of more than one rate hike before the end of 2024 has increased. This has affected the Japanese Government Bond (JGB) market as the 10-year Japanese Government Bond yield exceeded 1% for the past year. For the first time in 11 years.8
Reserve Bank of Australia: June 18
Inflation has been more stubborn in Australia, so much so that there are fears the Reserve Bank of Australia (RBA) may raise interest rates this year. I don’t think that will happen, although I expect the RBA to be one of the latecomers when it comes to cutting interest rates.
Bank of England: June 20
The UK’s April inflation report showed significant progress in inflation – but lower than expected. Particularly disappointing has been the very modest progress made on services inflation. In my view, a cut at the June meeting is clearly off the table, although some progress in slowing services inflation should be enough for the Bank of England to cut in August.
Global central banks are largely headed in the same direction
Because of these expected near-term policy differences, aggressive carry trading has emerged, where investors borrow money in currencies with low interest rates and use it to invest in currencies whose interest rates are expected to remain higher for a longer period.
I expect this to continue in the short term, as the rollout of interest rate cuts will be staggered between early movers and late movers. However, I expect all of these central banks to start cutting interest rates in 2024, just as all school children eventually get summer vacation.
I expect most, if not all, of these central banks to be on a path of gentle easing (or gentle tightening, in the case of the Bank of Japan) which will likely lead to a supportive environment for risk assets.
Footnotes
1 Source: Statistics Canada
2 Source: Bank of Canada press release, April 10, 2024
3 Source: Eurostat
4 Source: European Central Bank, May 28, 2024
5 Source: Reuters, “Fed officials urge patience on timing of initial rate cut,” May 21, 2024.
6 Source: Japanese Ministry of Internal Affairs and Communications
7 Source: Bank of Japan
8 Source: Bloomberg, as of May 24, 2024
important information
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Photo: Walter Bebeko/Getty
All investments involve risks, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in the index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
In general, stock values fluctuate, sometimes widely, in response to company-specific activities as well as general market, economic and political conditions.
Risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign tax issues.
Deflation, a slowdown in the rate of price inflation, describes situations in which the inflation rate has fallen marginally in the short term.
The Consumer Price Index (CPI) measures the change in consumer prices.
Core inflation excludes food and energy prices, while headline inflation includes them.
Personal consumption expenditures (PCE), or PCE index, measures price changes in consumer goods and services. Expenditures included in the index are actual expenditures of US households.
The Federal Open Market Committee (FOMC) is a 12-member committee of the Federal Reserve that meets regularly to set monetary policy, including the interest rates charged to banks.
The Consumer Survey is a monthly telephone survey conducted by the University of Michigan that provides indicators of consumer sentiment and inflation expectations.
The opinions indicated above are those of the author as of May 28, 2024. These comments should not be interpreted as recommendations, but rather as clarification of broader themes. Forward-looking statements are not guarantees of future results. It involves risks, uncertainties and assumptions; There can be no assurance that actual results will not differ materially from expectations.
Central banks meet in June, but when will interest rate cuts start? By Invesco
