• The Fed left policy unchanged, as widely expected; updated macro forecasts seemed inconsistent; Powell’s press conference delivered the usual dovish surprise; financial conditions remain loose; March survey readings continue to roll out; Mexico is expected to cut rates 25 bp to 11.0%; Brazil cut rates 50 bp to 10.75%, as expected
  
• The BOE meeting ends shortly; U.K. and eurozone reported mixed preliminary March PMIs; Switzerland delivered a dovish surprise; Norway kept rates steady at 4.50%, as expected; Turkey delivered a hawkish surprise
  
• The BOJ is trying to manage market expectations; the weak yen is a growing concern; Australia reported strong February jobs data; New Zealand reported soft Q4 GDP data; Taiwan delivered a hawkish surprise

The dollar is getting some traction after yesterday’s post- FOMC selloff. DXY is trading higher near 103.468. The Swiss franc is the worst performing major today after the SNB became the first major central bank to cut rates (see below). The euro is trading flat near $1.0920 while sterling is trading lower near $1.2765 ahead of the BOE decision (see below). USD/JPY is trading lower near 151.10 as officials express concern about the weak yen (see below). Despite this setback from the Fed, the dollar recovery should continue. The U.S. data continue to come in mostly firmer and it’s clear from the Dot Plots (see below) that most Fed officials remain very cautious about easing too much or too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain further.

AMERICAS

The Fed left policy unchanged, as widely expected. It noted that “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.” It stressed that “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” The statement was rightfully cautious. So far, so good.

Updated macro forecasts seemed inconsistent. The 2024 growth forecast was raised to 2.1% vs. 1.4% in December, while the 2024 core PCE forecast was raised to 2.6% vs. 2.4% in December. Under this scenario, it’s hard to justify the 2024 median Dot remaining steady at 4.625% and implying three cuts. However, we noted that 9 saw two cuts or less, 9 saw three cuts, and 1 uber-dove saw four cuts. As such, the hawkish shift in the 2024 median was barely avoided. Looking ahead, the 2025 median rose from 3.625% to 3.875% and the 2026 median rose from 2.875% to 3.125%. More importantly, the median long-term Dot rose from 2.5% to 2.6%. While this is a small move, the direction is important and suggests that more Fed policymakers are coming around to the view that r* has risen.

Chair Powell’s press conference delivered the usual dovish surprise. He said it was appropriate to begin easing “at some point this year.” Powell said no decisions were made on slowing the balance sheet runoff but added that it would be appropriate to slow the pace “fairly soon.” That was slightly dovish. However, the real dovish slip came when Powell seemed to downplay the recent pickup in inflation as he noted that there could be seasonal effects on the data. That is, Powell seemed to imply that he doesn't really believe the high prints from January and February.

The FX market clearly saw a dovish tilt to the Fed messaging. Odds of a June cut have risen to 80% vs. 65% ahead of the FOMC decision. However, we saw a fairly hawkish underlying message. The 2024 was one dove away from a hawkish shift, even as we got hawkish shifts in the 2025, 2026, and long-term Dots. Like we've been saying all along, it will ultimately come down to the data and the data say no cuts are likely near-term. We'd fade this bout of dollar weakness as we view it as an overreaction to what we believe is a not so dovish hold.

Financial conditions remain loose. After tightening modestly over the course of several weeks from late January through mid-February, the Chicago Fed’s measure of financial conditions has loosened five straight weeks through last week and are back to being the loosest since January 2022. Conditions are likely to loosen again this week.

March survey readings continue to roll out. S&P Global reports its preliminary PMIs. Manufacturing is expected at 51.8 vs. 52.2 in February, services is expected at 52.0 vs. 52.3 in February, and the composite is expected at 52.2 vs. 52.5 in February. ISM PMIs won’t be reported until next week. Philly Fed manufacturing index will also be reported and is expected at -2.5 vs. 5.2 in February.

Weekly jobless claims will be closely watched. That’s because initial claims will be for the BLS survey week containing the 12th of the month. These are expected at 213k vs. 209k last week. Continuing claims are reported with a one-week lag and are expected at 1.820 mln vs. 1.811 mln last week. Bloomberg consensus for March NFP stands at 200k vs. 275k actual in February, while its whisper number stands at 224k.

Banco de Mexico is expected to cut rates 25 bp to 11.0%. If so, it would be the first cut after keeping the rate on hold at 11.25% since August 2023. At the last meeting February 8, Banco de Mexico kept rates steady at 11.25% but removed the phrase that it would hold rates “for some time” and instead said that it will make any decisions “depending on available information” at its next meetings. Since then, inflation has continued to ease. Mid-March CPI will be reported tomorrow. Headline is expected at 4.44% y/y vs. 4.35% previously, while core is expected at 4.63% y/y vs. 4.66% previously. The swaps market is pricing roughly 200 bp of rate cuts over the next 12 months followed by another 125 bp over the subsequent 12 months.

Brazil COPOM cut rates 50 bp to 10.75%, as expected. There has been 200 bp of cumulative rate cuts since the easing cycle started in August 2023. However, the bank noted that “Due to heightened uncertainty and the need for more flexibility in the conduct of monetary policy, the Committee members unanimously decided to communicate that, if the scenario evolves as expected, they anticipate a reduction of the same magnitude in the next meeting.” This suggests that the bank will contemplate smaller 25 bp cuts after a 50 bp cut at the next meeting May 8. Of note, the swaps market is pricing in 150 bp of total easing over the next six months that would see the policy rate bottom near 9.25%.

EUROPE/MIDDLE EAST/AFRICA

Bank of England meeting ends shortly. It is widely expected to leave the policy rate at 5.25% but the risk is that the MPC voting shifts less hawkish. Judging from recent comments, Haskel is the most likely to switch his vote from a 25 bp hike to a hold. Mann will likely stay the course favoring a 25 bp rate hike while Dhingra should maintain her preference for a 25 bp cut. Finally, we don’t anticipate material changes to the policy statement. The BOE will likely reiterate “monetary policy needs to be restrictive for an extended period of time” and that it “will keep under review for how long Bank Rate should be maintained at its current level.” Market pricing still sees August 1 as the likely start of the easing cycle.

U.K. reported mixed preliminary March PMIs. Manufacturing came in at 49.9 vs. 47.8 expected and 47.5 in February, services came in at 53.4 vs. 53.8 expected and actual in February, and the composite came at 52.9 vs. 53.1 expected and 53.0 in February. This was the first drop in the composite PMI since September but remains in expansionary territory and indicates that the U.K. economy will recover quickly from its technical recession.

Eurozone also reported mixed preliminary March PMIs. Headline manufacturing came in at 45.7 vs. 47.0 expected and 46.5 in February, services came in at 51.1 vs. 50.5 expected and 50.2 in February, and the composite came in at 49.9 vs. 49.7 expected and 49.2 in February. This was the highest composite reading since June 2023. Looking at the country breakdown, the German composite came in at 47.4 vs. 47.0 expected and 46.3 in February and the French composite came in at 47.7 vs. 48.7 expected and 48.1 in February. Italy and Spain will be reported with the final PMI readings.

Swiss National Bank delivered a dovish surprise. The SNB cut the policy rate by 25 bp to 1.50%. The market was only pricing 37% odds of a cut today and Bloomberg consensus was for no change. The SNB noted that “the easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective.” Indeed, Swiss headline and core CPI inflation have been running under the SNB’s 2% per annum target since June 2023. The updated inflation forecasts are significantly lower than that of December, leaving the door open for additional rate cuts. The OIS curve implies 50 bp of further easing over the next 12 months.

Norges Bank kept rates steady at 4.50%, as expected. The bank reiterated that “the policy rate needs to be maintained at the current level for some time ahead.” The Norges Bank still projects the policy rate to stay around 4.50% until Q3 2024 before gradually moving down and doesn’t appear to be in a rush to loosen policy, in part due to concerns about the krone. According to the Norges Bank, “the Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain high, among other things, because the krone might then weaken.” The market is pricing in the start of the easing cycle in H2.

Turkey central bank delivered a hawkish surprise. It hiked rates 500 bp to 50% vs. no change expected, though we had warned of a hawkish surprise as inflation is running too hot. Headline inflation unexpectedly quickened to 67.07% in February, the highest since November 2022, and core CPI inflation surged to a new high of 72.89%. Reports suggest the bank changed its operational framework, but we await further details. Turkey’s OIS curve now implies another 250 bp of rate hikes over the next three months. The central bank is playing some catchup but more likely needs to be done. Stay tuned.

ASIA

The Bank of Japan is trying to manage market expectations. Reports suggest the bank is considering the next hike to be in July or October, as an unnamed BOJ official said that “additional hikes are of course on the table.” The main reason why the yen weakened after BOJ liftoff was due in large part to the bank’s dovish forward guidance. As such, it makes sense for the BOJ to try to manage market tightening expectations in order to help support the yen. Elsewhere, Governor Ueda noted that waiting too long to normalize the policy rate would have strengthened the need for “very rapid and large rate hikes.” Ueda also reiterated that accommodative financial conditions will be maintained for the time being and the BOJ is not planning to sell its stock of JGBs now. When all is said and done, the swaps market is still only pricing in 50 bp of tightening over the next two years.

The weak yen is a growing concern. Both Finance Minister Suzuki and Chief Cabinet Secretary Hayashi said the government is watching the FX market with a high sense of urgency. FX intervention is certainly on the table, and we believe the risks will rise on a break above 152. The BOJ has not intervened since October 2022, when USD/JPY was last trading around 152. However, policymakers cannot be shocked by a weak yen if they continue to push a dovish BOJ narrative.

Preliminary March PMIs were reported. Manufacturing came in at 48.2 vs. 47.2 in February, services came in at 54.9 vs. 52.9 in February, and the composite came in at 52.3 vs. 50.6 in February. The composite reading is the highest since August and suggests that the economy has moved past its recent soft patch.

February trade data were also reported. Exports came in at 7.8% vs. 5.1% expected and 11.9% in January, while imports came in as expected at 0.5% y/y vs. -9.8% in January. This was the first y/y gain in imports since March 2023 and suggests domestic demand is on firmer footing.

Australia reported strong February jobs data. A total of 116.5k jobs were created vs. 40.0k expected and a revised 15.3k (was 500) in January. This led the unemployment rate to fall to 3.7% vs. 4.0% expected and 4.1% in January, which is below the lower end of the RBA’s estimated full-employment range of 4.00-5.75%. In addition, the mix was favorable as full-time jobs rose 78.2k and part-time jobs rose 38.3k.

Preliminary March PMIs were also reported. Manufacturing came in at 46.8 vs. 47.8 in February, services came in at 53.5 vs. 53.1 in February, and the composite came in at 52.4 vs. 52.1 in February. The composite reading is the highest since April 2023. Bottom line: tight Australian labor market conditions and faster growth momentum in services business activity both validate current money market pricing of only 50 bp of cumulative RBA policy rate cuts this year.

New Zealand reported soft Q4 GDP data. Growth came in at -0.1% q/q vs. 0.1% expected and -0.3% in Q3. This was the second straight quarter of contraction and fourth of the past five. With inflation coming down and the economy still contracting, markets are now pricing in the start of an RBNZ easing cycle in August vs. October at the start of this week, with three cuts seen this year vs. two as the start of this week. With the growth trajectories between Australia and New Zealand diverging, no wonder the AUD/NZD cross is trading at the highest since November. That month’s high near 1.0945 is coming into view.

Taiwan central bank delivered a hawkish surprise. It hiked rates 12.5 bp to 2.0% vs. no change expected. Governor Yang said “Inflation has been high since 2021. The thing we worry about is that the whole structure of inflation has become a bit different now. We need to keep an eye on inflation expectations and whether electricity prices will go up.” Of note, the bank raised its 2024 inflation forecast to 2.16% vs. 1.89% in December and was based on the assumption that power prices would be raised 10%. The market is pricing in another 12.5 bp hike over the next six months.