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 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.
Disclaimer
This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) 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 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. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.
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 forecasts made will come to pass. 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. 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.
All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.
Some of the Services and/or products may not be available for offer to retail investors.
This publication has not been reviewed by the Monetary Authority of Singapore.