Pesky Data
- 19 February 2024 (10 min read)
- The Fed favours the PCE over the CPI, but the latter’s January print strengthens the point that, at least in the US, the last mile of disinflation could be arduous.
- François Villeroy de Galhau implicitly offers a quid pro quo: an early start of rate cuts against a measured pace for the subsequent accommodation and a landing policy rate above the pre-Covid cruise level.
The market’s pricing of the Fed has finally converged towards the FOMC’s dot plot: there are now less than four full 25 bps cuts priced in by the end of 2024. Even if that shift has been developing since the beginning of the year, last week’s trigger was the release of a disappointing core CPI print for January. On a 3-month basis the re-acceleration since a trough in August was confirmed. True, the message from the core PCE – the Fed’s favourite gauge – has diverged lately (no clear re-acceleration trend there ) but some of the CPI resilience will likely find its way to the PCE this time. Indeed, fast-growing rents – which play a smaller role in the PCE – are not the only driver of robust price growth in the services sector. The dataflow needs to change quickly, otherwise there is a risk the market will take its shift further and “overtake the dot plot” to push the start of accommodation to very late, if at all, in 2024.
Meanwhile, the ECB Governing Council is busy discussing publicly which “policy mistake” is the most plausible. Isabel Schnabel and Joachim Nagel took a firm view: the risk of cutting too soon still dominates. We agree that the policy space at the ECB is now ample enough that failing to respond early to the deterioration of the real economy could be offset by deep and quick rate cuts down the line. Yet, we are concerned that the adverse consequences for the Euro area of a delayed monetary policy response could be compounded by the restrictive turn of the fiscal stance. Moreover, having the ECB slashing rates in an emergency mode after a late first cut would not do wonders to the central bank’s credibility. BDF Governor Villeroy de Galhau is clearly preoccupied by the risk of cutting too late. We think his interview to L’Echo last week was implicitly an offer of a quid pro quo to the hawks: an early cut would be “offset” by a slow pace of subsequent loosening, and the final level of the policy rate would not be as low as what was seen between the Great Financial Crisis and Covid. This strengthens our view that there should be a floor to the overall quantum of rate cuts priced by the market this year, now significantly larger than for the Fed.
Disclaimer
This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone.
Some of the services listed on this Website may not be available for offer to retail investors.
This Website has not been reviewed by the SFC. © 2024 AXA Investment Managers. All rights reserved.