How far is “Not Far”?

Thoughts of the Day

Fed Chair Powell said they’re “not far” from confidence needed to cut interest rates. Despite the recent higher-than-expected CPI, he is optimistic about disinflation driving inflation towards the 2% target. They remain highly data-dependent, and if inflation should continue to moderate, interest rate cuts are becoming imminent.

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Day Ahead

The US Nonfarm Payrolls is expected to show that +200k jobs are being added to the economy in February, down from +353k in Jan. The unemployment rate is expected to remain at 3.7%.

The Canadian Employment Change is expected to show that +20k jobs are added to the Canadian economy in Feb compared to +37.3k in Jan. The unemployment rate is expected to tick slightly higher to 5.8% from 5.7%.

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What Happened Yesterday

Market Movements as of New York Close 07 Mar 24

The European Central Bank kept interest rates unchanged at 4.5%, balancing between the risk of recession and ongoing high core inflation rates. The ECB updated its inflation forecasts, predicting an average of +2.3% for 2024 (down from December’s +2.7% estimate), +2.0% for 2025 (previously +2.1%), and +1.9% for 2026. Core inflation is now forecasted to be +2.6% in 2024 (down from +2.7%), +2.1% in 2025 (down from +2.3%), and +2.0% in 2026 (previously +2.1%). Additionally, the ECB lowered its 2024 growth outlook to +0.6%, indicating expectations of continued muted economic performance for the near term. ECB President Christine Lagarde noted that market expectations for a rate cut in June are aligning with the ECB’s predictions. (more in headline 3) Despite the dovish sounding statement from Lagarde, the EURUSD did not weaken due to Powell’s testimony (see headline 1).

In his testimony before the Senate Banking Committee Federal Reserve Chair Powell mentioned that careful removal of the restrictive policy stance will begin if the economy continues to perform as expected and that the Fed is “not far” from the confidence required to start cutting interest rates. This “not far” comment sets a new tone and brings the Fed a step closer to starting the rate cut cycle, and as such, boosted investor confidence. 

The US Treasury Yield curve inversion widened to 0.44% as the US 2-year bond yield rose +0.01% to 4.55% while the 10-year yield slipped -0.02% to 4.11%. 

The US stock futures traded within a wider range with the S&P 500 hitting a low of -0.54% in the London hours before bouncing +1.11% from the lows when the New York session began.

The US stock market opened higher from Wednesday. It then continued to grind higher through the New York session due to stronger risk sentiment on the day. As a result, the S&P 500 rose +1.03% (high: +1.19%, low: +0.46%), the Dow Jones increased +0.34% (high: +0.64%, low: +0.18%) while the Nasdaq climbed +1.56% (high: +1.78%, low: +0.47%).

The Nasdaq futures saw a -0.81% drop following poor earnings guidance from some tech companies after market hours.

MongoDB (Nasdaq: MDB, -9.23% in after market trading) expects revenue of between $436 million and $440 million for the current quarter, below the Street’s consensus estimate of $452 million for Q1’ 24. For the full year, MongoDB sees revenue of between $1.9 billion and $1.93 billion, compared with the Street’s target of $2.04 billion.

Marvell (Nasdaq: MRVL, -7.74% in after market trading) also contributed to the weakness in the Nasdaq futures as it forecasted first-quarter results below market expectations due to soft demand in its wireless infrastructure, consumer and enterprise markets. Marvell said it expects first-quarter net revenue to be $1.15 billion compared with estimates of $1.37 billion.

Broadcom (Nasdaq: AVGO, -3.27% in after market trading) traded weaker along with the other 2 tech stocks despite providing forecasts of $10 billion in revenue from chips related to artificial intelligence this year. A possible reason for the underperformance could be the company’s failure to update its annual revenue forecast of $50 billion from its last earnings guidance. 

The crypto market continued to make attempts to climb higher as inflows into the BTC ETFs continue. ETH seems to be taking over in leading the move higher as BTC stalls ahead of new highs, but ETH continues to make new cycle highs.
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Headlines & Market Impact

Fed’s Powell: “Not far” from confidence needed to cut rates

Notable Snippet: Federal Reserve Chair Jerome Powell said on Thursday the U.S. central bank was “not far” from gaining the confidence it needs in falling inflation to begin cutting interest rates.

“I think we are in the right place,” Powell said in a hearing before the Senate Banking Committee. “We are waiting to become more confident that inflation is moving sustainably to 2%. When we do get that confidence, and we’re not far from it, it will be appropriate to begin to dial back the level of restriction so that we don’t drive the economy into recession.”

Powell earlier in the hearing told U.S. lawmakers the central bank was “well aware” of the risks its tough monetary policy posed to workers, but said rate cuts would still depend on the economy evolving as the Fed expects, with continued lower inflation.

Powell was pressed by the panel’s chair, Ohio Democrat Sherrod Brown, on why the Fed was not quicker to cut rates “to prevent workers from losing their jobs.”

“We’re well aware of that risk, of course, and very conscious of avoiding it,” Powell said. “If what we expect and what we’re seeing – continued strong growth, strong labour market…progress in bringing inflation down – if the economy evolves over that path, then we do think that the process of carefully removing restrictive…policy…can and will begin over the course of this year.”

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Sweden formally joins NATO military alliance, ending centuries of neutrality

Notable Snippet:  Sweden officially joined NATO as its 32nd member on Thursday, almost two years after first applying to the military alliance.

Earlier on Thursday, the Swedish government said in a statement it was holding an extraordinary meeting to vote on joining NATO after all current members had approved its accession to the military alliance.

The news was then confirmed later Thursday with a statement from NATO, with Secretary General Jens Stoltenberg saying the country was “taking its rightful place at our table.”

“Sweden’s accession makes NATO stronger, Sweden safer, and the whole Alliance more secure. I look forward to raising their flag at NATO HQ on Monday,” he added.

Swedish Prime Minister Ulf Kristersson travelled to Washington, D.C., this week to hand over the final documents. The country first applied to join NATO in May 2022, not long after Russia’s war on Ukraine began. This marked a significant change in Sweden’s previous policy of military non-alignment which stretches back to the Napoleonic Wars.

Finland became an official member of NATO last April, also prompted by Russian President Vladimir Putin’s decision to invade Ukraine. Authorities in both Helsinki and Stockholm decided that in the wake of Russia’s full-scale invasion of Ukraine in February 2022, their nations were no longer safe on their own and applied to join the alliance a few months later.

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European Central Bank hints at June rate cut as it trims inflation forecast

Notable Snippet: “We are in the disinflationary process and we are making progress,” Lagarde said during a press conference on Thursday.

“We are more confident as a result, but we are not sufficiently confident, and we need more evidence, more data, and we know this data will come in the next few months. We will know a little more in April and a lot more in June.”

Policymakers have repeatedly signalled May as a key date, since wage settlements are set to be released that month.

The ECB will be “laser-focused” on two areas of inflation that could surprise, namely wage growth and profit margins, Lagarde said. There could also be a downside surprise to the outlook if monetary policy dampens demand more than expected or the global economic environment worsens unexpectedly, she added.

The announcement increased market bets on rate cuts taking place in the summer of this year.

Market expectations had already shifted to a June cut in recent weeks. The ECB’s key rate is currently 4%, up from -0.5% in June 2022, following a run of 10 hikes.

Lagarde said Thursday that market pricing “seems to be converging better” with the ECB’s own view. Policymakers were earlier this year spurred to firmly push back on market bets on cuts in March or April.

Lagarde also said Thursday that the ECB would not need to wait for headline inflation to hit its 2% target before taking a decision.

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Phan Vee Leung
CIO & Founder, TrackRecord