STELLAR• 8 April, 2024

Financial Markets Overview - March, 2024

Leading central banks in the West are gearing up to reduce policy rates in the coming summer, with both the Federal Reserve and the European Central Bank anticipated to enact three rate cuts throughout the year. The Swiss National Bank has already taken the lead among the Group of Ten (excluding Japan), lowering its policy rate by 25 basis points to 1.5%, as inflation rates stay within the comfortable 0% to 2% range aimed at maintaining price stability. Nonetheless, these institutions must remain vigilant for any potential hurdles. A notable increase in the ‘prices paid’ metric from the recent US ISM Manufacturing survey may signal inflationary pressures, though further data is necessary to determine if this is an isolated incident or indicative of enduring inflation risks.

A decline in inflation is essential for the reduction of policy rates. Although the inflation of goods has been on a downward trajectory, service inflation, particularly influenced by stubborn rent prices, continues to be high. In the U.S., yields on 10-year government bonds have been rising, whereas in the UK, Germany, and Italy, they have fluctuated within a volatile range. Persistent inflation could make G10 central banks wary of signaling forthcoming policy rate reductions.

Several central banks in Latin America, including Brazil and Chile, have already lowered policy rates, noting that these regions initiated rate hikes ahead of the G7. In contrast, Japan is moving differently, with the Bank of Japan elevating its policy rate by 10 basis points to a ceiling of 0.1%, ending its negative interest rate policy, yield curve control, and ETF purchasing activities to normalize monetary policy after years of extremely lax conditions. This has kickstarted a significant wage-inflation cycle. Curiously, the shift in Japan’s monetary stance has yet to be mirrored in currency markets, with the USD/JPY exchange rate reaching a 34-year peak just below 152.

Global stock markets have reached new peaks, buoyed by a more optimistic growth forecast and the prospect of policy relaxation. A brief phase of market consolidation or a minor correction might occur, which would be considered a normal and healthy adjustment, providing a reset opportunity. Our outlook on equities remains positive, viewing any such phase as a chance to engage.

In the bond markets, the yield spread between German Bunds and other Eurozone countries has narrowed as anticipated, largely due to Germany's relatively weaker economic performance and increasing likelihood of ECB policy easing. While the potential for further narrowing exists, the most significant adjustments have likely already occurred. Despite ongoing concerns about public finances in the Eurozone, there are also optimistic possibilities, such as more extensive fiscal integration within Europe, potentially for joint defense spending.