The week of 8th-12th April 2024- US interest rate cuts in jeopardy!

Last week, Swiss CPI dropped to an annual rate of 1%. Three US employment figures, ADP employment change for March, the little-known ISM Services employment (index) for March, and Non-Farm Payrolls (March) all exceeded expectations, (Payrolls by more than 50%) showing that the US employment situation is in robust health. Year on year average hourly earnings stayed at 4.1%. The US unemployment rate dropped to 3.8% from 3.9%.

Let’s have a quick look at the Federal Reserve’s mandate.

The Congress established the statutory objectives for monetary policy—(a) maximum employment, (b) stable prices, and (c) moderate long-term interest rates--in the Federal Reserve Act- November 1977.

Clearly point (a) is being met. It is the balance between points (b) and (c) which appears to be the challenge. I concur with Former Treasury Secretary Chairman Larry Summers who said in a Bloomberg interview on 21st March, "My sense is still that the Fed has itchy fingers to start cutting rates and I don't fully get it!" He followed up by stating, "We've got unemployment if anything below what they think is full capacity. We've got inflation, clearly even in their forecast for the next two years above target. We've got GDP growth rising if anything faster than potential. We have financial conditions, the holistic measure of monetary policy at a very loose level."

Summers sees a 15% potential for a hike! And why not? What was that quote attributed to Keynes? “Markets can stay irrational for longer than you can stay solvent.” In a certain way, trend followers believe this. So too does George Soros with his Theory of Reflexivity. “Traders make money by following a perceived trend (prevailing bias). Markets react to participants expectations and those perceptions influence prices, tending to validate themselves in self-reinforcing loops until some unpredictable event jolts expectations.”

To me the US economy is in strong health. It wasn’t so long ago that + or -5% was considered normal for interest rates. The Global Financial crisis ushered in an era of low interest rates which has allowed people to over borrow and speculate whimsically. I believe markets are currently quite rational. Higher interest rates for longer is my mantra!

To this week and there are 3 interest rate decisions of note. New Zealand and Canada on Wednesday and the ECB on Thursday. I expect all to remain unchanged at 5.5%, 5% and 4.5% respectively. US CPI and FOMC minutes are also released on Wednesday. Expectations are for both Headline and Core inflation to drop by 0.1% to 3.2% and 3.7% year on year for March. US PPI (out on Thursday) is expected to post a slight gain for an annual figure of 2.3% and a drop in the monthly number to 0.3%.

Friday’s main figures are German inflation expected at 2.2% y.o.y for March, UK GDP which is teetering around zero, and The University of Michigan Consumer Sentiment Index (preliminary for April which is expected to dip slightly from 79.4 to 79.

Good Luck and Good trading!

Ben Robson?

Ben Robson is Head of Institutional E-FX at Swiss Finance Corporation. He is also the Amazon Best Selling Author of Currency Kings – How Billion traders Made their Fortune Trading Forex. McGraw Hill