It's all about the dots and spots.
Key points
The stronger US CPI report highlighted that inflationary pressures are taking time to subside. We continue to suggest that neutral interest rates in the US may be much higher than many believe. In the Eurozone, monetary policy rhetoric is growing more dovish, and we expect rate cuts starting in June. The spotlight remains on Japan, where we think that a March hike from the BoJ is likely.
US yields rose this week, following a stronger US CPI report, which highlighted that inflationary pressures are taking time to subside. Core inflation currently stands at 3.8% on a year-over-year basis and were you to annualise numbers for the last 3 or 6 months of data, then the picture is not particularly different, at 4.2% and 3.9% respectively.
Last week, Fed Chair Powell suggested that rate cuts are not 'far away' and this provided encouragement to bond bulls. However, we expect that next week's FOMC meeting will deliver a message that more patience will be required, before policy easing can commence. In a sense, it seems difficult to imagine that Powell will sound more dovish at a time when economic data remain robust and risk assets are trading at their highs.
On this basis, the main change that could generate interest could relate to an upward revision in the 2024 growth forecast and a possible upward revision in the forward-looking dot plot. Ostensibly speaking, only a couple of meeting attendees need to shift their projections to lift the dot plot higher, which could be taken by markets as a relatively hawkish outcome.
