Week #5 — Market Update for January 29 – February 2, 2024

Executive Summary

The major U.S. stock indices grew for the fourth week in a row on, led by several tech giants – Amazon, Meta Platforms, Microsoft, and Nvidia, which accounted for approximately 88% of the weekly rise in market capitalization of the S&P 500 Index. Though it was not a broad rally – in contrast, small-cap segments declined, with Small Value falling by 2.1%.

Global stock markets posted mixed dynamics, with China once again becoming an outsider. Since its peak in February 2021, the dollar-measured MCHI has lost about 63% of the value and now is trading much lower than the pandemic lows. And the flow of negative market news seems inexhaustible. Last week, Bloomberg reported that against the background of growing disenchantment with the domestic stock market, Chinese investors massively diverted their funds into overseas equities, marking a record inflow of $2 billion into onshore ETFs targeting foreign benchmarks in January.

The earnings season is halfway through. According to Refinitiv, 230 companies in the S&P 500 Index reported earnings for Q4 2023 to date. This meant the total share of companies that had already reported their earnings stood at 46% (up 21 percentage points over the week). Of these companies, 80.4% exceeded analysts' expectations, up from 78.2% the previous week. This rate was still higher than the long-term average of 66.6% and the four-quarter average of 76.4%, signaling robust financial outcomes from S&P 500 firms. Over the past week, earnings growth projections for the quarter were considerably revised upwards. The S&P 500 companies are now forecasted to see a year-on-year growth of 7.8%. Excluding the Energy sector, the projected annual growth is 11.3%, which contrasts with the previous projections of 4.9% and 8.6%, respectively.

Market expectations regarding the Federal Reserve's future actions indicate a shift. The probability of a rate cut at the March 20 Fed meeting declined to 38.0% from 47.7% a week ago. Interestingly, market participants still consider such a high probability of commencing monetary easing in March despite the clear opposite commentaries from the central bank chief.

In the bond market, the U.S. Treasury yield curve saw a movement only on the long-term part, with 10-year bond yields decreasing by 12 basis points to 4.03%, and 30-year bond yields falling by 16 basis points to 4.22%.

For a more detailed understanding and context, it is recommended to refer to the full article.

US Stock Market

The major U.S. stock indices grew for the fourth week in a row on, led by several tech giants – Amazon, Meta Platforms, Microsoft, and Nvidia, which accounted for approximately 88% of the weekly rise in market capitalization of the S&P 500 Index. Though it was not a broad rally – in contrast, small-cap segments declined, with Small Value falling by 2.1%.

Microsoft Corp. (+1.8% over the week) experienced its most substantial revenue growth since 2022, driven by heightened interest in AI products, which in turn fueled increased spending on cloud computing. The company reported an 18% revenue increase to $62 billion in the second quarter, surpassing analysts' expectations. Azure cloud-services sales grew by 30%, indicating a stable growth trajectory. Despite some investors hoping for more significant AI contributions, Microsoft's efforts in integrating AI into products like Azure, Office, and Windows began to show promising results.

Alphabet Inc.'s (-6.4% w/w) fourth-quarter earnings revealed a shortfall in its core search advertising business revenue, overshadowing strong overall performance. Although total sales, excluding partner payouts, rose by 15% to $72.3 billion, the core search business revenue of $48 billion slightly missed projections. Alphabet faced challenges from the rise of generative AI, which has enabled competitors like Microsoft Corp. and OpenAI to offer conversational AI products, potentially threatening Google's dominance in search.

Meta Platforms Inc. (+20.5% w/w) announced a significant move with plans to buy back an additional $50 billion in shares and issue its first-ever quarterly dividend, signaling confidence in its investments in the metaverse and AI. The company reported a 25% increase in sales and profits that tripled, with revenue projections for the current period exceeding expectations.

Amazon.com Inc. (+8.0% w/w) reported strong sales and an operating income outlook that exceeded estimates, highlighting the effectiveness of CEO Andy Jassy's cost-cutting measures and focus on profitable services. The company experienced its strongest online sales growth since the pandemic's early days, with the cloud computing division showing signs of stabilization. Amazon's cost reduction efforts appeared to pay off, with a 14% increase in fourth-quarter revenue to $170 billion and a rise in operating income to $13.2 billion.

Apple Inc. (-3.4% w/w) faced challenges in its China business. Despite weaker demand in China, the company reported stronger iPhone sales in the holiday quarter and a return to revenue growth. Apple's struggles in China, where sales dropped 13% to $20.8 billion, contrasted with an overall revenue gain of 2.1% to $119.6 billion. The company is navigating through regulatory pressures, maturing markets, and the high cost and complexity of its new Vision Pro headset.

In terms of sector performance, nine out of eleven sectors exhibited positive dynamics, with the remaining two showing a decline.

The Fear & Greed Index, which measures market sentiment, fell to 67 from 77 a week ago, swiftly exiting the ‘extreme greed’ territory.

SPY, the ETF that tracks the S&P 500 Index, continued the uptrend.

The earnings season is halfway through. According to Refinitiv, 230 companies in the S&P 500 Index reported earnings for Q4 2023 to date. This meant the total share of companies that had already reported their earnings stood at 46% (up 21 percentage points over the week). Of these companies, 80.4% exceeded analysts' expectations, up from 78.2% the previous week. This rate was still higher than the long-term average of 66.6% and the four-quarter average of 76.4%, signaling robust financial outcomes from S&P 500 firms.

Over the past week, earnings growth projections for the quarter were considerably revised upwards. The S&P 500 companies are now forecasted to see a year-on-year growth of 7.8%. Excluding the Energy sector, the projected annual growth is 11.3%, which contrasts with the previous projections of 4.9% and 8.6%, respectively.

During the week of February 5, 76 companies from the S&P 500 index are scheduled to present their financial results. Among all stocks, the most eagerly awaited earnings reports include:

Global Markets

Global stock markets posted mixed dynamics, with China once again becoming an outsider. Since its peak in February 2021, the dollar-measured MCHI has lost about 63% of the value and now is trading much lower than the pandemic lows. And the flow of negative market news seems inexhaustible. Last week Bloomberg reported that against the background of growing disenchantment with the domestic stock market, Chinese investors massively diverted their funds into overseas equities, marking a record inflow of $2 billion into onshore ETFs targeting foreign benchmarks in January.

The ACWX ETF, representing the MSCI All Country World Index excluding the USA, barely moved, and, broadly speaking, stayed at the same level for the past 8 weeks already.

Economic Indicators and Statistics

Several important macroeconomic indicators and economic news were published during the week:

Global

·      The International Monetary Fund (IMF) revised its global growth forecast for this year to 3.1%, up from the 2.9% projected in October, driven by unexpected expansions in the US and fiscal stimulus in China. However, the IMF maintained its 2025 growth prediction at 3.2%. The IMF highlighted that this growth rate is slower than the pre-pandemic average of 3.8% due to tighter monetary policies and reduced public spending in some countries. Despite these challenges, the global economy showed resilience, particularly in light of the Covid-19 shocks and subsequent interest rate increases.

The IMF emphasized the risks that could impact global growth, including potential commodity price spikes due to geopolitical tensions or supply disruptions. Persistent inflation could also lead central banks to maintain higher interest rates for an extended period. The IMF's outlook is based on the assumption that commodity prices will fall and that major central banks, including the Federal Reserve, European Central Bank, and Bank of England, will hold interest rates in the first half of the year before gradually reducing them.

Inflation is expected to slow down, with global inflation projected to decrease to 4.4% from 6.8%. Advanced economies are likely to experience faster disinflation compared to emerging markets. The IMF also warned about the fragmentation of global trade and the proliferation of new trade restrictions, which could hamper world trade growth.

Central banks face the challenge of normalizing monetary policy without acting prematurely or delaying rate reductions excessively. For the US, the IMF raised its growth forecast to 2.1% for this year, reflecting strong consumer spending, although it anticipates a slowdown from the 2.5% growth in 2023. The Euro area's growth forecast was lowered to 0.9%, mainly due to the impact of the Ukraine war. China's growth projection increased to 4.6%, attributed to robust growth last year and increased government spending.

India is expected to be one of the fastest-growing economies at 6.5%, while Russia's growth is projected at 2.6%, partly due to increased military spending. Argentina, however, is anticipated to contract by 2.8% this year, reversing the previous growth estimate, due to significant policy changes under President Javier Milei's new government. The IMF remains vigilant about potential escalations in the Middle East and their impact on global inflation and supply disruptions.

US

·      In the United States, house prices have continued to rise, albeit at a decelerating pace, influenced by high mortgage rates impacting potential buyers. According to the Federal Housing Finance Agency's House Price Index (HPI), there was a 0.3 percent increase in house prices from October to November 2023, with an annual rise of 6.6 percent from November 2022 to November 2023.

Similarly, the S&P CoreLogic Case-Shiller data indicates a deceleration in home-price growth with a 0.2% increase in November from the previous month, compared to a 0.6% gain in October. Despite the cooling growth, the year-over-year price gains accelerated, with a 5.1% increase in November. This reflects a continued trend of high home prices, compounded by an affordability crunch due to high mortgage rates and a limited housing supply.

·      The Texas factory activity index, as reported by the Federal Reserve Bank of Dallas, experienced a significant decline at the beginning of the year, reaching its second-lowest level since the pandemic began. This downturn is part of a broader trend of weakening manufacturing activity across various regions in the United States.

In January, the general business activity index in Texas dropped by 17 points to a level of minus 27.4. This decrease was marked by a notable slowdown in production and capacity utilization. The survey results revealed that over a third of the respondents reported worsening business conditions.

This negative sentiment in Texas aligns with similar trends observed in other regional surveys conducted by the Federal Reserve Banks of New York, Philadelphia, Richmond, and Kansas City. These surveys also showed a decline in manufacturing activity, with the New York and Richmond Fed districts recording their lowest factory index levels since May 2020. In the Kansas City Fed district, manufacturing contracted at its fastest rate since July.

The declining activity in the manufacturing sector contrasts with broader government data, which suggested strong economic momentum entering the new year.

·      In January, US consumer confidence reached its highest level since the end of 2021, driven by more positive perceptions of the economy, job market, and inflation. The Conference Board's sentiment gauge rose to 114.8, reflecting these improved attitudes. This boost in confidence was attributed to slower inflation rates, expectations of lower interest rates in the future, and strong employment conditions.

The current conditions measure hit its highest point since March 2020, while expectations for the future reached a six-month peak. Consumers' 12-month inflation expectations dropped to 5.2%, the lowest since March 2020.

However, the data indicated a decline in consumers' plans to make significant purchases, with reduced intentions to buy cars, homes, and major appliances. Whirlpool Corp., for instance, forecasted weaker sales for the year, reflecting concerns about consumer spending on big-ticket items and a sluggish housing market.

·      The Federal Reserve held interest rates steady at a range of 5.25% to 5.5% for the fourth consecutive meeting, signaling a cautious approach towards future rate cuts despite acknowledging progress in inflation reduction. Fed Chair Jerome Powell indicated that the central bank is unlikely to have sufficient confidence to lower rates by the March meeting, emphasizing the importance of more data to confirm a sustainable trend towards the 2% inflation target. This stance resulted in a reevaluation of market expectations for rate reductions, with Goldman Sachs Group Inc. adjusting their forecast for the initial cut from March to May, maintaining anticipation for further cuts throughout the year and into 2025.

Despite this caution, the Fed's policy-making committee updated its statement to reflect a more balanced view of the risks to employment and inflation goals, suggesting that it sees the economy and inflation moving towards a more stable condition. The economy's performance surpassed Fed officials' expectations last year, with inflation declining more steeply than anticipated, GDP growth exceeding projections, and a strong labor market.

However, Powell highlighted concerns about premature rate cuts and the potential need to maintain current rates longer if necessary. The Fed also plans to begin discussions on managing its balance sheet in March, which continues to be reduced by up to $95 billion per month. These discussions and decisions on rate adjustments will be informed by incoming economic data.

·      The US factory activity measure, as reported by the Institute for Supply Management (ISM), increased to a 15-month high at the beginning of the year. Despite remaining below the 50 mark, which signals shrinking activity, the manufacturing gauge rose to 49.1, surpassing the expectations of most economists. The orders index saw a significant jump, the largest monthly increase in over three years, indicating robust demand in the latter half of 2023. This surge in orders contributed to production expansion for the first time in four months and the leanest customer inventory levels since October 2022.

Timothy Fiore, chair of the ISM manufacturing survey committee, expressed optimism that this could signal the start of growth for the manufacturing sector, though he mentioned the need to observe the sector's performance through the quarter. The survey revealed optimism among the nation's purchasing and supply management executives regarding the economy, encouraged by the Federal Reserve's indications of potential interest rate cuts within the year.

The ISM report also highlighted challenges facing the manufacturing recovery. Despite steady domestic demand, the export orders gauge declined significantly, indicating a reduction in overseas customer activity, marking the most rapid contraction since May 2020. Additionally, the prices-paid index indicated a rise in material costs for the first time since April, suggesting emerging price pressures in January.

·      The labor market exhibited mixed trends at the beginning of 2024, with indications of both resilience and cooling demand.

In December, US job openings unexpectedly rose to 9 million, marking the highest level in three months, as reported by the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey (JOLTS). Concurrently, the number of voluntary job quits declined to 3.4 million, the lowest in nearly three years, indicating a growing caution among workers despite strong labor demand. This situation underscored a gradually moderating but still solid labor market, potentially signaling a more stable, low-churn year ahead, according to ZipRecruiter Chief Economist Julia Pollak.

Moreover, the Employment Cost Index (ECI) for the fourth quarter showed a more significant cooling in US labor costs than forecasted, increasing only 0.9%, which was the smallest advance since 2021, after rising 1.1% in the prior three-month period. The data suggested that wage and inflation pressures from the labor market were likely continuing to dissipate.

Additionally, the ADP Research Institute reported an unexpected slowdown in private payroll growth in January, with an increase of only 107,000 jobs, indicating a gradual cooling of the labor market.

However, nonfarm employee productivity surged at a 3.2% annualized rate in the fourth quarter, highlighting efficiency gains that bolster economic growth as inflation recedes.

Contrastingly, the Bureau of Labor Statistics revealed a significant job growth in January, with 353,000 new jobs, nearly double the expected amount, suggesting a reacceleration of the labor market. This unexpected surge, coupled with a 0.6% increase in average hourly earnings, suggested that immediate rate cuts by the Federal Reserve might be delayed.

The labor market's robust performance, evidenced by substantial job creation and wage growth, complicates the Federal Reserve's decision-making regarding interest rate cuts. Despite a cooling in certain labor cost metrics and productivity improvements, the strong January jobs report challenges the narrative of a significantly cooling labor market and raises questions about where employers are finding workers to fill positions.

A notable discrepancy emerged between two surveys: the employer survey, which reported robust job gains, and the household survey, which indicated much slower employment growth. Some analysts suggested that the Census Bureau data, which the Labor Department uses, might underestimate population growth and, consequently, employment levels, potentially due to a larger increase in net immigration than reflected in official estimates. This situation presents a challenge for the Federal Reserve and investors, as the conflicting signals complicate assessments of the job market's capacity to grow without causing inflation, thereby influencing decisions on interest rate cuts.

·      US consumer sentiment in January experienced its most significant surge since 2005, as diminishing inflation bolstered views on the economy and personal finances. The University of Michigan’s final sentiment index for the month increased by 9.3 points from December, reaching 79. This uplift in sentiment came as Americans adjusted their inflation expectations downward, anticipating a 2.9% increase in prices over both the next year and the next five to ten years. This newfound assurance among consumers, marking the highest confidence level since July 2021, could sustain household demand and support ongoing economic expansion.

·      The New York Fed Staff Nowcast model upgraded its U.S. GDP growth forecast for Q1 2024 to 3.3%, up from last week’s 2.8%. Positive surprises from nonfarm payroll employment and ISM manufacturing survey data drove the increase. Similarly, the Atlanta Fed's GDPNow model updated its estimate upwards to 4.2% from 3.0%.

Europe and Asia

·      Germany and Greece experienced exceptional demand for their bond sales, with investors seeking high yields before anticipated European Central Bank (ECB) rate cuts. Germany's 30-year bond sale attracted bids exceeding €74 billion, a record high, surpassing the previous record set in 2020. Meanwhile, Greece's 10-year debt sale, its first since regaining investment grade, drew €35 billion in orders, the most ever for the country. This trend follows similar historic demand seen in Spain and Belgium earlier this month.

The rush for government bonds stems from investors' desire to capitalize on current yields before major central banks start reversing their recent aggressive monetary tightening. The ECB is projected to reduce rates by up to 1.5 percentage points this year, with an initial cut possibly in April.

Italy is also tapping into this investor interest, planning a new 15-year note sale after a successful 30-year bond issue earlier in the month with near-record bids.

Greece's strong bond demand reflects market confidence following its upgrade last year and return to investment-grade bond indexes after over a decade as junk. The country's economic growth and fiscal consolidation have led to a significant yield drop in its 10-year bonds, the best performance in the developed world over the past year. In contrast, Italy, the second-best performer, saw a smaller yield decline in the same period.

Greece raised €4 billion through its sale, achieving 40% of its €10 billion bond sales target for the year. The strong demand allowed Greece to pay a lower spread than initially guided. Germany raised €6 billion, paying a slightly lower premium than initially expected.

Despite limited scope for further spread tightening, Greece's bonds attract investors due to their inclusion in the ECB's bond-buying program (PEPP), offering a backstop. Fund managers note that while Greek spreads have tightened significantly and are close to Spain's, there's still potential for further narrowing and investor interest.

·      The euro zone managed to avoid a recession in the second half of 2023, showing unexpected resilience in its economy. Gross domestic product (GDP) remained flat in the last quarter of the year, following a slight decline of 0.1% between July and September. This outcome defied economists' expectations of another drop, as the 20-nation bloc dealt with challenges such as high interest rates, weak foreign demand, and geopolitical tensions.

The avoidance of a recession was largely due to stronger economic performances in Italy and Spain, which compensated for the downturn in Germany, the region's largest economy. Despite this, the overall economic situation in the euro zone remains difficult, with survey data indicating a weak start to 2024, especially with Germany potentially entering a recession.

·      Japan's industrial production rose by 1.8% in December, signaling a potential return to growth for the economy, which could influence the Bank of Japan's (BOJ) decision on a possible interest rate hike. This increase in factory output, the largest since June, was driven by the expansion of machinery and chemical production, although it fell short of the 2.5% increase expected.

Contrastingly, retail sales in December fell by 2.9% from November, only 2.1% higher than the previous year, suggesting that rising inflation is impacting consumer spending and household budgets. This decline in retail sales highlights the ongoing economic fragility and might encourage caution within the BOJ regarding future rate hikes, even after potentially ending its negative interest rate policy.

·      The Bank of England signaled openness to interest rate cuts, acknowledging that inflation is expected to decrease to the target level this spring. This move represented a shift from previous guidance suggesting rates might need to rise. The decision to maintain the key rate at 5.25% came amid a three-way split among the nine Monetary Policy Committee members, with one member advocating for a rate cut and two for an increase. This decision reflects the first vote for a reduction in nearly four years.

Market participants maintained their expectations for at least four quarter-point rate cuts within the year, anticipating the first cut could occur as early as June.

·      Inflation in the euro zone eased less than expected at the beginning of the year, putting pressure on the European Central Bank (ECB) and challenging the expectation of interest rate cuts as early as spring. Consumer prices in January increased by 2.8% from the previous year, slightly above economists' predictions, with core inflation also declining less than anticipated to 3.3%. Despite this, the ECB anticipates a slower pace of disinflation throughout the year, not expecting to meet its target until 2025.

Meanwhile, Germany experienced a more significant slowdown in inflation than anticipated, with consumer prices rising by 3.1% in January, suggesting a broader retreat in inflation across Europe that might open the door for the ECB to reduce interest rates in the upcoming months. This development aligns with the Bundesbank President's observations that inflation is moving in the right direction, despite concerns over core price pressures and uncertain future wage growth.

Similarly, France saw inflation decrease more than expected to 3.4%, reaching its lowest point since the onset of the Ukraine conflict, driven by reductions in energy, food, and manufactured product costs. However, services costs in France saw a slight acceleration in January.

·      The official manufacturing purchasing managers index (PMI) in China remained in contraction territory in January, posting a reading of 49.2, indicating continued challenges in the manufacturing sector despite slight improvements from December. On the other hand, the non-manufacturing gauge showed marginal progress, signaling expansion in services and construction but with construction activity slowing down. Despite government efforts to stimulate the economy, including a series of measures aimed at increasing long-term bank liquidity and supporting the property sector, investor confidence remained low, as reflected in the ongoing stock market downturn.

Conversely, the Caixin manufacturing PMI, which focuses more on smaller firms and export-oriented businesses, maintained expansion for the third consecutive month, with a January reading of 50.8. This contrasted with the official data, highlighting a divergence in the performance of different segments of the manufacturing sector. The Caixin report acknowledged improvements in supply and demand but noted ongoing contraction in employment and persistent deflationary pressures. The disparity between the two PMIs indicated variations in performance across the economy, with the Caixin index possibly reflecting better conditions for export-oriented firms compared to the broader challenges captured by the official PMI.

Foreign Exchange Markets

The Dollar Index, which reflects the value of the US dollar against a basket of major currencies, increased by 0.5% over the week.

Commodities and Energy Markets

In the commodities sector, assets ended the week with mixed dynamics.

Oil prices slumped due to discussions aimed at pausing the conflict between Israel and Hamas, reducing the geopolitical risk premium associated with crude oil. The potential for a resolution to the four-month conflict, which threatened Middle East energy flows, along with oil's drop below significant technical levels, spurred the decline. This was further exacerbated by trend-following algorithms. Despite previous concerns over disruptions in the Red Sea due to the conflict, fuel markets also experienced significant price drops upon news of potential ceasefire discussions, with gasoil futures and diesel prices falling sharply.

Debt and Fixed Income Markets

Market Movements

According to the CME data, the implied Fed Funds rate curve for the next sixteen months (for the period until July 2025) slightly moved upwards by an average of 7 basis points.

In contrast, the long part of the U.S. Treasury yield curve moved downwards, with 10-year bond yields decreasing by 12 basis points to 4.03%, and 30-year bond yields decreasing by 16 basis points to 4.22%.

The US Treasury reduced its borrowing estimate for the current quarter, unexpectedly lowering it from $816 billion to $760 billion. The decrease in borrowing needs is attributed to higher net fiscal flows and a greater cash balance at the start of the quarter than anticipated. However, for the April-to-June quarter, the Treasury expects to borrow a net $202 billion, maintaining a cash balance of $750 billion at the end of the period.

Many Wall Street strategists had initially expected an increase in the borrowing estimate due to a widening fiscal deficit. Despite this, the reduced borrowing needs and expectations of a pivot to easing by the Federal Reserve in 2024 have positively impacted market sentiment. The Treasury's cash balance was about $830 billion as of late January, slightly down from about $838 billion in October. There is increased uncertainty about financing estimates for the second quarter, particularly due to the Fed’s plans for its quantitative tightening program and the potential impact of a proposed $78 billion tax bill.

Concurrently, there's an anticipated pullback in Treasury bill supply, aligning with the Federal Reserve's plans to taper its balance sheet unwind. The Treasury’s latest borrowing estimates suggest a reduction in bill sales of over $250 billion between April and June. The drop in the supply of Treasury bills comes as the gap between total money-market fund assets and total bills outstanding narrows, indicating reduced demand for short-dated government debt.

The significant increase in Treasury bills issued since mid-2023 has led to a decrease in usage of the Fed’s overnight repurchase agreement facility, as firms have favored Treasury bills and private repo-market activity. This shift is important for market participants, as it may signal a need for the Fed to adjust its balance sheet reduction strategy. The Treasury is also seeking feedback on how the Fed's quantitative tightening program might affect money markets.

Barclays Plc strategist Joseph Abate predicts that the reduction in bill supply and a possible decrease in investor demand indicate that quantitative tightening will continue at its current pace until the end of June. He also suggests that structural demand for bills may soften this year, potentially leading to changes in money fund balances and the relative attractiveness of bills.

The US Treasury announced an increase in the issuance of longer-term debt for the third consecutive time but indicated that further increases are unlikely until next year. It planned to sell $121 billion of longer-term securities, including 3-, 10-, and 30-year Treasuries, at its upcoming quarterly refunding auctions. This decision matched dealer expectations and followed the pattern set in previous refundings. The Treasury stated it does not foresee a need for additional increases in nominal coupon or floating-rate note auction sizes for several quarters, suggesting a period of stability in borrowing needs.

Central Bank Insights

·      The Bank of Japan (BOJ) appears to be moving closer to its first interest rate increase since 2007. During the January 22-23 meeting, board members discussed the possibility of exiting current policy settings, with some suggesting that the conditions for ending the negative interest rate policy are being met. This sentiment is based on expectations of better outcomes in this year’s wage negotiations and positive signs in the economy and inflation.

One BOJ member highlighted the importance of seizing the current opportunity for policy revision before other major central banks, such as the Federal Reserve, alter their policies. This would avoid the side effects of prolonged existing measures. The Japanese currency and bond yields reacted to these discussions, indicating heightened market anticipation of an impending rate hike.

Shoki Omori from Mizuho Securities Co. noted that the BOJ is laying the groundwork for tightening monetary policy, with the removal of the negative interest rate policy likely in March or April. Overnight swaps also showed a slightly increased chance of a rate hike in March.

The BOJ members discussed various aspects of a potential exit strategy, including the sequence of unwinding measures and the bank’s commitment to overshooting its price goal. The summary also suggested that the overall policy will remain supportive of the economy even after the interest rate turns positive.

Governor Kazuo Ueda assured that financial conditions would remain highly accommodative, even if the subzero rate is abolished. The BOJ's terminal rate is expected to be much lower than those of the Federal Reserve and European Central Bank.

The International Monetary Fund (IMF) also weighed in, stating that while the BOJ's accommodative policy stance is currently appropriate, the bank should be ready to raise rates if inflation rises faster than expected. IMF Chief Economist Pierre-Olivier Gourinchas emphasized the need for preparedness by the BOJ.

Inflation in Japan is expected to decelerate before picking up due to base effects from government measures. The BOJ has revised its price forecast to 2.4% for the fiscal year starting in April. Following the BOJ’s recent communications, some economists are now considering an earlier timeline for a rate increase, possibly in March.

·      European Central Bank (ECB) officials expressed varied views on the timing and approach for potential interest rate cuts, emphasizing the need for more data, especially on wages, before making a move.

Klaas Knot highlighted the necessity of certainty on wage growth adaptation to slower inflation as a prerequisite for rate reductions, aiming for wage growth to return to around 2.5% from the current 5%.

Luis de Guindos expressed optimism about inflation's downward trajectory influencing monetary policy.

Peter Kazimir cautioned against acting hastily, suggesting June might be more probable than April for a rate cut.

Mario Centeno advocated for starting interest rate reductions sooner and in smaller steps, emphasizing the importance of gradualism and the ECB's role in stimulating economic growth.

Boris Vujcic preferred quarter-point steps to larger ones and mentioned that the timing between April and June was less significant than ensuring a smooth transition to rate cutting.

Christine Lagarde refrained from specifying a timeline but stressed the critical role of wage data in determining when to commence easing policy, hinting at a potential initial cut around mid-2024.

Philip Lane pointed out that rising wages and corporate profitability would play key roles in the trajectory of consumer prices, with firms expected to absorb some labor cost increases.

Frank Elderson underscored the ECB's determination to bring inflation back to the 2% target, also highlighting the importance of not ignoring climate risks in the context of price stability.

Meanwhile, European company leaders who expect rising business costs plan to pass some of these increases onto customers, a survey by EY revealed, posing a challenge for the European Central Bank (ECB) as it aims to manage inflation. Over half of the CEOs surveyed anticipate higher operational costs this year, with more than 80% intending to transfer at least half of these extra charges to consumers. Despite concerns over high interest rates and geopolitical uncertainties affecting the global economy, almost 60% of the executives believe their companies' profitability will rise in 2024. This trend, often referred to as "greedflation," has been monitored by the ECB, especially as Europe teeters on the brink of a recession and consumer purchasing power wanes, potentially limiting companies' ability to keep raising prices.

·      Federal Reserve Governor Michelle Bowman and Federal Reserve Bank of Chicago President Austan Goolsbee both emphasized caution regarding the potential reduction of interest rates, indicating a focus on ensuring inflation continues its decline towards the Fed's 2% target before any rate cuts are considered. Bowman, speaking at the Southwestern Graduate School of Banking in Maui, Hawaii, stated that it was too soon for the Fed to consider cutting rates and highlighted the importance of avoiding premature rate reductions that could necessitate future increases to stabilize inflation. She acknowledged the encouraging signs of slowing inflation but pointed out remaining risks such as geopolitical tensions, easing financial conditions, and tight labor markets that could pressure prices. Goolsbee, in an interview on PBS, expressed a desire for more evidence of progress towards the inflation goal and avoided committing to a rate cut in the Fed's March meeting, emphasizing decisions should be data-driven. Both officials underscore the Fed's careful approach to policy adjustments in light of recent economic developments and inflation trends.

·      Bank of England Chief Economist Huw Pill indicated that the first interest rate reduction is likely still a significant distance away, even though there are indications that borrowing costs may have reached their maximum. After a closely divided decision to keep the key rate at 5.25%, Pill emphasized the necessity for policy to stay "restrictive" to eliminate persistent inflation components. Although Bank of England forecasts suggest lower rates might be needed to prevent a recession, Pill described these predictions as contingent on inflation trends aligning with their expectations. He expressed the need for more evidence of sustained inflation suppression before considering rate reductions. The Monetary Policy Committee's recent rate decision, the most divided since 2008, reflects this cautious stance. Pill also highlighted ongoing concerns over the UK's "weak" economic activity, despite Governor Andrew Bailey's more optimistic outlook. Bank of America Merrill Lynch analysts predict that the Bank of England might increase rates in August due to persistent inflation, suggesting the UK could lag behind other major central banks in initiating and pacing rate cuts.

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