Monetary Policy

The US Consumer Price Index (CPI) surprised on the upside for the third month in a row. There was nowhere to hide in the release with a majority of sub categories and sub aggregates posting worse numbers than expected.

Yesterday’s US CPI report delivered a few interesting numbers but is still consistent with the Fed’s goals and timelines, which should allow it to cut rates in the context of some sort of a soft landing.

The latest US non-farm payroll numbers increased by 275,000 for February (payroll survey) incorporating a two-month payroll revision of -167,000, most likely due to seasonal factors, leaving a net revision of just 108,000 jobs added.

Next week markets will receive January Consumer Price Index (CPI) inflation prints from the US and the UK, which will no doubt be widely followed. In the US, the Bloomberg consensus is for a significant drop in headline CPI from 3.4% to 2.9%, while core is expected to decline by a less spectacular 20 bps from 3.9% to 3.7%. For the UK, consensus is for a small increase in CPI inflation from 4.0% to 4.1%.

The minutes to December’s Federal Open Market Committee (FOMC) meeting were released earlier this month and provided some interesting insights on the potential path for quantitative tightening in 2024, with several participants ultimately recommending slowing the pace of quantitative tightening (QT), which is running at $95bn, to zero.

The worsening US consumer credit data has largely fallen under radar. A few weeks ago, November 2023 data came in at $23.8bn representing a substantial increase from October’s $5.77bn and September’s $10.9bn.

With most central banks presumably at highs in terms of monetary policy rates during the current cycle, the focus has rightly shifted to the timing of the first cut. 

We recently highlighted in our 2024 outlook our expectations of significant inflows into fixed income to be an important technical driver of performance in the year ahead.

The tightening of monetary policy has given rise to concerns about the health of mortgage markets due to higher interest rates , leading to questions about the expected resilience of residential mortgage-backed securities (RMBS).

The direction of monetary policy rates going forward is more clear, following the Federal Reserve's release of its new summary of economic projections and the dovish remarks of Jerome Powell.

After a horrible year for financial markets in 2022, the macro-outlook for 2023 had a lot of consensus views, with most predicting a much better year ahead, helped by supportive rate cuts from central banks and positive returns from both government bonds and credit.  

Following yesterday’s publication of the quarterly Senior Loan Officer Opinion Survey (SLOOs) by the Fed, it revealed how lending conditions have evolved over the quarter amongst US banks.