Vidya Ranganathan looks ahead to European and global markets
The Japanese holiday is giving markets time to digest the Bank of Japan’s major monetary policy decision and focus on an equally significant policy decision scheduled for Wednesday.
Before that, there are the German inflation figures and the more hotly debated British inflation figures, which markets believe the Bank of England misread.
The Bank of England is expected to hold interest rates on hold when it meets on Thursday. The initial easing in June is 50-50, with 25bps for August and 60bps for all of 2024 fully priced in.
The pound, which had already been the best performing major currency this year, rose further against the yen overnight, just as the euro rose to a 16-year high against the yen.
That’s because even though the Bank of Japan has abandoned negative interest rates, the yen remains the cheapest funding currency in the region, and the Fed is sure to spread that message further.
With the US central bank looking certain to keep interest rates at 5.25-5.5% on Wednesday, all eyes will be on the FOMC’s dot plot of interest rates and inflation.
Analysts assume that policymakers will view the recent trend in unhelpfully high inflation as a seasonal and statistical anomaly, but the median of the dot plot is lower this year than the previous three. There should be a risk that instead of a rate cut, there will be two 25bp rate cuts.
Futures now suggest the market is pushing back the Fed’s first rate cut to June or even July.
A number of European Central Bank officials, including Christine Lagarde, will speak later in the day. Some officials support June as the likely month to start discussions on ECB rate cuts.
In Europe, Kering warned on Tuesday that first-quarter sales could fall by around 10% due to the impact of star brand Gucci, dashing hopes that it had halted sales declines. All eyes will be on luxury goods stocks.
Key developments that may impact the market on Wednesday:
Data: UK inflation, German inflation, Eurozone consumer confidence, FOMC.
Speaker: ECB Policy Commissioner Pablo Hernández Decos. ECB President Christine Lagarde, Chief Economist Philippe Lane Lagarde and Board Member Isabel Schnabel attended the meeting in Frankfurt.
Debt Auction: Germany – Resumption of 28 Years Debt.
(Edited by Sam Holmes)
