Investment Institute
Macroeconomics

Causes and FX

  • 29 April 2024 (10 min read)
KEY POINTS
The Fed will need more time – even if a softer GDP print is the first ingredient in a resumption of disinflation
Despite some green shoots of recovery, we side with Panetta’s view: the ECB will need to diverge from the Fed
No easy choice for the BOJ – weak FX is of course a concern, but does it make sense to try to “run after the dollar”?

Among the rich dataflow of last week in the US, the market focused squarely on the higher-then-expected print for core inflation. As of last Friday, only one-and-a-half rate cuts by the Fed remain priced in for this year. The details of the PCE release brought no more relief than the overall number: services inflation rose again, while manufactured goods inflation moved back in positive territory, on a 3-month annualised basis, for the first time since June of last year. We expect Jay Powell this week to make it plain that the Fed is in no position to cut soon. We still expect the Fed to cut this year though (twice, starting in September), on the assumption that the softer than expected GDP print for Q1– below potential growth for the first time in nearly two years– points to the beginning of a lasting slowdown which would help re-start the disinflation process, especially given the tightening in overall financial conditions, with 10-year yields returning to levels unseen since last autumn.

Still, another dollop of “higher for longer” in the US has serious implications for the rest of the world. While cutting rates in June seems now quite consensual across the Governing Council, hawks may point at the risk of stoking imported inflation in the Euro area via currency depreciation if the ECB diverges too much from the Fed. Banca d’Italia Fabio Panetta made a powerful case for decoupling last week, pointing to the overall tightening in financial conditions which a Fed on hold would trigger for the rest of the world, and we explore in some details a paper Panetta referred in his speech which quantifies the spill-over effects of US monetary policy. We side with him in considering that the optimal reaction of a central bank facing lower inflationary pressure domestically and challenging demand dynamics should be to offset contagion from the US by cutting policy rates. The Bank of Japan is already facing acute pressure on its exchange rate, which has fallen below the levels which had triggered a FX intervention in 2022. The latest inflation data however vindicates Ueda’s cautious approach to policy normalisation. 

Download the full article
Download report (671.6 KB)

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Macroeconomics

Uncertain Winds

Macroeconomics

Fast-Forwarding

Macroeconomics

Mexico’s General Elections: Continuity likely but headwinds ahead

  • by Luis Lopez-Vivas
  • 21 May 2024 (10 min read)

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top