Hold Raise and Cut

As central bank meetings roll out around the Globe for March, we are starting to see some interesting surprises.

As everyone and their brother expected yesterday, the US Federal Reserve held their benchmark rate. Interestingly enough, only 90 days ago, markets saw the Fed cutting 8 times in 2024, and now that number is down to 2 times – even though the Fed continues to say it will cut 3 times in 2024. Vanguard had a note out to day that says they think the US economy will be strong enough throughout 2024 that the Fed won’t even cut at all.

Japan’s central Banks – the BOJ came out earlier this week and rasied rates for the 1st time in 17 years. This will perhaps play a little havoc with the Yen exchange rate and could start to impact some carry trade investments. 25 bps isn’t huge, but as with a lot of things financial, it isn’t what it is, it is what it represents. Japan, who has had a deflation problem for 20+ years, is perhaps starting to turn the corner and see some inflation. I am not sure if anyone in money management under the age of 50 knows how to run portfolios with Japan having inflation.

England’s Central Bank – the BOE held rates overnight at 5.25%, although is looked a little dovish after inflation slid lower across the UK for February. Surprisingly, the inflation rate in the UK came in a lot lower than consensus for Feb, upping bets the BOE will lower rates within the next 90 days.

Neutral no more. Switzerland’s Central bank ( SNB ) was the first to the line of advanced economy’s to start cutting rates. The Swiss National Bank last night cut 25 bps off of their target rate. Switzerland is the first central bank of what we would call ” rich ” economies to cut rates since the global hiking cycle began back in early 2022. It was a surprise move, and proves just how unpredictable central banks can be sometimes. It is important to note that the reason the SNB cut rates was that Swiss inflation has been under 2% for over 4 months now, and they see it still declining in the coming months. Much like I have discussed, the BOC will probably want to see inflation at or at least near the 2% rate for a while before it cuts rates.

Around the world we have some holding the line, some cutting rates to get ahead, while others are hiking. Currency markets will love all of this and currency hedges have to me made, adjusted, and shifted around to try and re balance. It just proves that no matter what we all “know” things can change quickly, central banks are about as predictable as a squirrel in traffic, and a person needs to be quick to change course when the central banks change course.

Different economies are seeing different inflation numbers, so the inflation problem is no longer a global problem like we have been told, but rather it is regional. The US is still seeing higher inflation, Switzerland is seeing much lower inflation, and most economies are seeing inflation start to taper off and come down bit by bit. However, as we all know, one month or two months of weird data can throw things off quite quickly. I would also rather deal with inflation than deflation or stagflation. Inflation seems to be the cleanest dirty shirt, so lets hope we still see some healthy inflation for the months to come.