Shaw and Partners

Last week was dominated by central banks. Kicking things off, the Bank of Japan ended its negative interest rate policy on Tuesday, shifting its rate target to 0-0.1%, up from -0.1%, as well as ending its Yield Curve Control framework. The move prompted a weaker yen which in turn boosted equity markets. Although markets were closed on Wednesday, the Nikkei 225 still managed to add 5.6% for the week and hit a fresh record high. It was further boosted as core inflation rose 2.8% on an annualised basis in February, up from 2% in the previous month, raising hopes that price stability would be able to be achieved.

Wednesday saw the conclusion of the Federal Open Market Committee’s two-day policy meeting, where the interest rate was left unchanged, as widely expected. The latest dot-plot revealed that policymakers were still expecting three rate cuts this year and markets were also encouraged by comments from Federal Reserve chairman Jerome Powell, who seemed to overlook the recent uptick in inflation. All three major US equity indices hit fresh all-time highs during the week, with the tech-heavy Nasdaq Composite closing the week at a high, helped in part by chipmaker Nvidia touching a new peak on Friday. The Dow Jones Industrial Average and S&P 500 drifted slightly on Friday, with declines in retailers such as Nike and Lululemon weighing. Nevertheless, the two indices both ended 2% and 2.3% up for the week. Meanwhile Treasury yields declined on the news from the Fed.

Another central bank that remained on hold was the Bank of England (BoE). The BoE maintained its rate at 5.25% for a fifth consecutive meeting, with two members of the Monetary Policy Committee switching from previous calls for a rate hike to voting for rates to stay the same. Governor Andrew Bailey said that things were “moving in the right direction” and signalled rate cuts could occur in future meetings, helping to lift the UK FTSE 100 2.7% for the week. In addition, the latest consumer price index reading eased to 3.4% in February, its lowest rate since September 2021. Norway’s central bank also stayed on hold however, the Swiss National Bank unexpectedly cut its borrowing costs by 25 basis points, the first major developed market central bank to do so. In response the Swiss franc weakened against the US dollar. The pan-European STOXX 600 managed to hit a fresh high during the week and added 1% overall. This was its ninth consecutive winning week, its longest streak since 2012.

MSCI’s Latam equity index ended modestly higher, with most regional indices seeing similar small increases although Argentina’s Merval index surged over 14%. The Argentinian index built on gains from the prior week, continuing positivity around its primary fiscal surplus recorded for February. The Brazilian central bank cut rates for a sixth consecutive meeting, reducing its benchmark interest rate by 50 basis points to 10.75%. Meanwhile Mexico kicked off its rate cutting phase, reducing its interest rate by 25 basis points to 11%.

Weekly macro highlights

Fed leaves rates unchanged in March

At its Federal Open Market Committee (FOMC) meeting on 20 March, the US Federal Reserve (Fed) left the target range for the Fed funds rate unchanged at 5.25-5.50%. An updated Summary of Economic Projections (SEP) was released, highlighting that the median FOMC member expects to cut interest rates by 75 basis points this year. This was despite an upward revision to the median core Personal Consumption Expenditures (PCE) inflation projection from 2.4% to 2.6% in 2024. Stronger economic activity data was also acknowledged in the SEP, with GDP expected to grow 2.1% this year instead of 1.4% as projected in December. Additionally, the projection for the unemployment rate was revised down from 4.1% to 4.0%. The post-meeting FOMC statement was little changed from previous meetings, highlighting 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 percent”.

SNB cuts interest rates in March

The Swiss National Bank (SNB) agreed to lower the SNB policy rate by 25 basis points to 1.5% at its meeting on 21 March. 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”. The SNB targets inflation below 2% and headline CPI inflation has been below this level since June 2023. Furthermore, the SNB’s conditional inflation forecasts were revised down, with inflation expected to be 1.4% this year instead of 1.9% as previously forecast in December. In addition to noting progress on inflation, the post-meeting press release by the SNB highlighted that the decision also takes into account the “appreciation of the Swiss franc in real terms over the past year” and “supports economic activity”. The SNB expects Switzerland’s GDP to grow by around 1% this year, having grown 0.7% in 2023.

BoJ exits its Negative Interest Rate policy in March

At its Policy Board meeting on 19 March, the Bank of Japan (BoJ) raised interest rates for the first time since 2007, exiting its Negative Interest Rate policy. Previously, a three-tier system was used to target policy-rate-balances of -0.1%, while allowing it to fluctuate between -0.1% and 0%. Going forward, the BoJ will use the uncollaterized overnight call rate as its policy interest rate, encouraging it to remain between 0% and 0.1% by applying an interest rate of 0.1% to current account balances. The BoJ described the move as an increase in its policy rate of “around 0.1%”. Additionally, the BoJ announced it will end its Yield Curve Control framework, which saw it target a yield on 10-year Japanese government bonds (JGBs) of 0% with a reference upper bound of 1%. Nonetheless, the central bank will continue purchasing JPY 6 trillion JGBs per month, broadly equivalent to the amount it was previously purchasing.