Market Update

It was a positive week for markets, driven by consistent interest rate forecasts and relatively neutral commentary from central bank officials. The absence of significant deviations from expectations fostered a sense of stability and contributed to the market's upward trajectory.
As expected, the Federal Reserve chose to maintain interest rates on Wednesday, keeping them within the range of 5.25% to 5.50%. Chairman Jay Powell reaffirmed the Fed’s projection of three rate cuts this year, emphasizing that strong hiring alone would not deter them from implementing rate reductions. Powell viewed the slight uptick in inflation during January and February as a minor setback that does not alter the overall narrative of inflation converging towards 2%. Markets responded positively, finding reassurance in the continuity of the dot plot which forecasts 75 basis points in cuts this year.
The Fed also upgraded its economic growth outlook, expecting 2.1% GDP growth in 2024. Powell remarked during the press conference, “The economy is strong, the labor market is strong, and inflation has come way down.”
In the UK, the Bank of England’s Monetary Policy Committee voted by a majority of eight to one to maintain the Bank rate at 5.25%. Policymakers shifted towards a more dovish stance as two committee members dropped their previous calls for a rate hike, while another member called for an immediate cut.
Governor Andrew Bailey reiterated the committee’s commitment to achieving the 2% inflation target in Q2, noting that while it’s not yet time to lower rates, inflation is trending in the desired direction. Bailey observed that the labor market continues to loosen but remains relatively tight by historical standards, and although nominal wage growth has moderated, it remains elevated. The committee acknowledged that the restrictive stance of monetary policy is starting to weigh on activity in the real economy, but they require more confidence that inflation indicators are on a stable trajectory towards the 2% target.
In an interview with the Financial Times, Bailey expressed growing confidence in inflation’s trajectory towards the Bank’s target. He suggested that markets were correct in expecting multiple interest rate cuts and emphasized the relatively minor nature of the technical recession experienced last year. UK markets responded positively, with the FTSE 100 closing the week up 2.63%.
Additionally in the UK, the latest composite PMI data indicated a positive trend in private sector activity, signaling growth and recovery from last year’s brief recession. Marking the fifth consecutive month of expansion with a reading of 52.9 in March (above the 50-threshold indicating expansion), this is a promising sign for future economic stability.
Turning to Europe, in a surprising move, the Swiss National Bank (SNB) cut interest rates, becoming the first major Western central bank to do so in this cycle, raising hopes that cuts could be on the way for the UK soon. The SNB reduced its key policy rate by 25 basis points to 1.5%, marking the first cut in nine years. This unexpected move added to the positive momentum in markets this week. We also heard from European Central Bank President Christine Lagarde earlier in the week, affirming the likelihood of a June rate cut but stressing that “we will know a bit more by April and a lot more by June.” The monetary policy path beyond that remains unclear.
Looking ahead to next week's data releases, we anticipate US durable goods orders and the Fed’s preferred measure of inflation, PCE. Eurozone economic sentiment and final figures for UK Q4 GDP are also on the agenda, along with unemployment data, retail sales, and industrial production from Japan.