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Weekly Market Preview
Friday, Feb 23, 2024
The US monetary policymakers have consistently expressed optimism about further declines in inflation levels, even in the face of the modest dip observed in January. The prevailing sentiment among Fed members leans towards the necessity of adopting a wait-and-see approach regarding interest rate reductions. This underscores the importance of having more evidence available to ensure sustainable declines in inflation levels before initiating any rate cuts, as premature or hasty reductions may risk negating the progress achieved in curbing inflation. This stance prompted investors to adjust their portfolios, resulting in the selling of bonds and a subsequent rise in bond yields. Both ten-year and two-year bond yields recorded their highest levels since the beginning of the current year.
Statements from European monetary policymakers echoed their American counterparts, ruling out an early reduction in interest rates. Factors contributing to this decision include elevated wage levels and the European labor market resilience. Therefore, it’s more likely for the ECB to start cutting rates in June rather than April.
Looking ahead, the markets are anticipating several key economic data releases this week. This includes the RBNZ interest rate decision, projected to keep rates steady at 5.5%. Despite a significant decline in New Zealand’s inflation levels in Q4-23, reaching 4.7%, levels remain considerably higher than the 2% target. Consequently, any reduction in interest rates during the first half of the year seems improbable, with potential adjustments more likely in Q4 of 2024.
Investors will also gain insights into the US inflation levels performance with the release of data on the US PCE for January, the Federal Reserve’s preferred indicator for measuring inflation. Bloomberg’s expectations suggest a possible decline in the YoY headline index data from 2.6% in December to 2.4% in January while the YoY core index might drop from 2.9% to 2.8%. Hence, any higher-than-expected data may lead Fed members to further postpone the initiation of interest rate reductions. This, in turn, could support the prices of the US dollar against other major currencies while potentially impacting the prices of indices and commodities negatively.
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