Reflecting on the past week in global Fixed Income and economic news, Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited has shared her thoughts on what’s been happening and what stands out commenting:
“Following the stronger than expected US data we have seen so far this year, markets have repriced central bank rate expectations and are now pricing the first full rate cut from the ECB and the Fed around June 2024. Markets are also pricing an almost identical amount of cumulative cuts by the end of 2025 (basis points). Yet the distribution of these rate cuts will be slightly different with the ECB expected to cut more than the Fed this year; with the Fed catching up in 2025.Â
“A few things stand out to us at this juncture. We have started to see growing divergence between market pricing of other central banks, the Fed and the ECB are still remarkably close together. US data is looking broadly strong and surprising to the upside, whereas the eurozone is in a structurally weaker position given the stagnant growth outlook.
“The ECB is signalling that they want to see more evidence of loosening in labour markets and Q1 wage setting agreements before cutting rates. While there may be some short term support for growth given an improving real wage outlook and some optimism in survey indicators, a tighter for longer ECB policy is more likely to prove a drag on growth and result in looser monetary policy in the future. The Fed on the other hand has displayed some desire to cut rates to avoid running real policy rates at levels that are restrictive given inflation is moving towards target. However the persistently strong US data this year raises uncertainty around what the appropriate level of rate cutting will be.”
