Shunto negotiations: the end of negative rates
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
Comments from central banks were again an important part of the market backdrop last week. Fed chairman Powell Jerome Powell said that it was “not far” from gaining the confidence needed to cut rates and his ECB counterpart Christine Lagarde hinted at easing in June. Data from the February US nonfarm payrolls report were complicated but seemed to solidify the case for mid-year rate cuts. Yet profit taking meant the S&P 500 declined slightly last week (-0.2% in USD). Of note was the late-week correction in the price of the most high-profile AI chipmaker. Greater certainty on the timing of the first rate cuts helped bond markets, with yields dropping across the curve in Europe and the US. Japanese stocks rose even though the yen rallied against the US dollar. Whereas the US dollar suffered more generally on intimations of Fed rate cuts, the decline in real US rates meant that gold extended its rally to reach all-time highs.
GEOPOLITICS
After Super Tuesday, the 2024 US election looks set for a repeat of the 2020 Trump/Biden race. Geopolitical tensions are a growing factor in this year’s race and fiscal policy is likely to be expansionary post-election, whoever wins.
KEY DATA
US nonfarm payrolls rose 275,000 in February, while job gains for the previous two months were revised down by 167,000. The jobless rate rose to 3.9% in February from 3.7% in January, while average hourly wages slowed to 4.3% from 4.5%. The ISM purchasing managers’ index for services fell to 52.6 in February from 53.4 in January is still above the 50 market that separates expansion from contraction for the 14th consecutive month.
Chinese trade data improved markedly in January and February, with exports rising by 7.1% over the two months compared with a year earlier and imports up 31.5%. Both figures were ahead of consensus expectations.
Industrial production in Germany picked up more than expected in January, rising 1% over the previous month compared with a 2% decline in December. However, January industrial production was still 5.5% lower than a year before and January factory orders declined 11.5% from December.
MARKETS VIEW
Bumper pay hikes in the Japanese Shunto collective wage negotiations pave the way for the Bank of Japan to normalise monetary policy and lift negative rates. We have moved forward our expectation for the BOJ’s first hike to April from mid-2024 previously. We are short Japanese duration.
The BOJ could move before other leading central banks, which are looking to cut. In the US, data on consumer price inflation and retail sales this week will give a fresh readout on the economy ahead of the Fed’s March 19/20 meeting. We expect the Fed and the ECB to make their first cuts in June.
A stabilisation in economic prospects and a revival in manufacturing activity makes us more upbeat on equities, also as rates in the US and Europe are likely to fall this year. We are neutral on US equities and overweight Japanese equities. We like gold as a hedge against geopolitical risks. A plunge in Egypt’s currency last week shows accidents can happen in markets.
