Cela's Weekly Insights - March 24, 2024

Welcome back to this Sunday's edition of Cela's Weekly Insights (CWI). This week was particularly intriguing in the financial markets, especially with major central bank decisions. It's rare for three major central banks from leading economies to announce three distinctly different actions: maintaining current rates, cutting them, and raising them. Let's dive in.

A Historic Moment for Japan Amid Decades of Deflationary Pressure

Japan isn't a frequent topic in my newsletters. Despite my admiration for Japanese culture, my experience with their market and individual stocks is limited. However, my interest is growing, both on a macroeconomic and microeconomic level.

According to the World Bank, as of 2022, Japan had the world's third-largest economy, with a GDP of 4.23 trillion USD, trailing behind China (17.96 trillion) and the United States (25.46 trillion), and ahead of Germany (4.07 trillion). Japan has battled deflationary pressures since it began lowering interest rates in Q4 2008 and entered negative interest rate territory in 2016. This Tuesday, the Bank of Japan (BoJ) implemented its first interest rate hike in 17 years, adjusting its short-term policy rate from -0.1% to between zero and 0.1%. This slight increase in borrowing costs is due to the BoJ's belief that its 2% inflation target is attainable.

As indicated in the chart above, Japan has faced challenges in sustaining inflation since the early 1990s. But why is inflation so vital? While many parts of the world grapple with high inflation rates, moderate inflation is actually key to stimulating economic growth. It encourages spending and investment, facilitates the adjustment of real wages within organizations, and can even diminish the value of government debt. This is precisely why central banks globally strive to maintain long-term inflation rates slightly below 2%.

Fed Signals First Rate Cut in June

In the US, the Federal Reserve, led by Chair Jerome Powell, opted to keep rates steady, with the federal funds target rate remaining at 5.25% to 5.5% since summer 2023, its highest level in over two decades. Despite a substantial reduction in inflation, a recent producer price index report exceeding expectations has sparked speculation about a potential rate cut in June, possibly followed by two more within the year.

Powell's recent remarks suggested that high inflation readings haven't altered the broader trend of gradually subsiding inflation in the US. However, the Fed remains data-driven and will monitor CPI, PPI, and PCE figures closely. Fund managers still view inflation as a significant risk, with concerns increasing from February to March (see chart above).

Switzerland Takes the Lead in Cutting Interest Rates

While the Bank of Japan marginally raised interest rates and the Fed maintained the status quo, the Swiss National Bank (SNB) surprisingly cut its main interest rate by 25 basis points to 1.50%. Switzerland may be the first country to claim victory over inflation, which seems natural given that inflation there fell to 1.2% in February. The SNB is confident that inflation will stay within its 0 to 2% target range in the coming years.

Last Week's Market Performance: A Global Overview

Cela’s Weekly Insights Indicator

That's all for today, folks. For more insights, make sure to join me every weekday morning on my Podcast "Capital Markets Quickie." Tomorrow morning, we'll discuss the most important events in the week ahead.

Cheerio!

Endrit Cela The Investment Fella - #ECB #mm #411 ??