Pivot Trains Are Lining Up At Central Bank Central

By Philip Marey, Senior US Strategist at Rabobank

The pivot trains are lining up at Central Bank Central

US stock markets rose further and the 10 year US treasury yield briefly fell below 3.90%. The day after the Fed effectively pivoted by not pushing back against market expectations of early rate cuts, it was decision day for a number of European central banks. The three major central banks that we follow are lining up for the cutting cycle in clear order. In contrast to the Fed, the ECB pushed back against expectations of early rate cuts a little, but the Bank of England was the most forceful. We expect the first rate cut for the Fed in June, followed by the ECB in September and finally the Bank of England in November.

The Norges Bank hiked rates yesterday by 25 bps to 4.5%. As our Jane Foley noted, although the consensus was centred on a steady policy outcome, 40% of respondents in the Bloomberg survey were anticipating a hike. The Norges Bank left the door wide open for a move at the previous meeting on November 1, though mixed economic data had created the debate about whether another move was necessary. The Norges Bank have been worried about the inflationary implications of the weak NOK, so yesterday's surge will be welcome. The central bank has signalled that rates could stay at 4.5% until autumn 2024.

As expected the SNB left rates on hold at yesterday's policy meeting. Jane Foley noted that the language around inflation remained cautious. CPI inflation came in lower than expected at 1.4% y/y in Nov and the SNB said that " inflation is likely to increase again somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT." However, the latest SNB forecast shows a lower trajectory for inflation relative to September. Notable is the language around the FX intervention policy. This has changed with the SNB no longer stating that the focus of this policy was on selling foreign currency.

The Bank of England kept its policy rate unchanged at 5.25%. This was as expected. The 6-3 hawkish vote split was the same as in November. Our Stefan Koopman noted that the central bank also retained the same wording in its guidance, despite the slowdown in both inflation and economic activity since November. This indicates a stronger pushback against market expectations of early rate cuts. Governor Bailey wrote that the Bank will keep interest rates high enough for long enough. As long as UK inflation looks to have some deep domestic roots, the Bank of England will resist being sucked into the Fed's gravitational pull. Our view is that the Bank of England will be fashionably late to the pivot party, and see a series of rate cuts starting from November 2024 onwards.

The ECB kept rates on hold, leaving the deposit facility rate at 4.00% and the refi rate at 4.50%. PEPP reinvestments will be slowed in 2024H2. Monthly redemptions will average €7.5 billion in the second half of the year, with the remainder still being reinvested. The ECB intends to discontinue reinvestments of PEPP at the end of 2024. Our Bas van Geffen noted that Lagarde gave a little pushback against current market pricing. She strongly hinted that market pricing is quite unlikely, both in terms of a cutting cycle starting in March, as well as the total of six rate cuts that was priced in as the press conference started. Early termination of PEPP reinvestments may reinforce this message, but the ECB does not intend to make its asset portfolios the main policy instrument again. Based on our own inflation forecast we see a first rate cut in September, but the ECB’s latest projections hint at the risk that a first cut materialises in June already.

Meanwhile in the US, retail sales surprised to the upside with 0.3% MoM in November. At the same time, October was revised downward to -0.2% (from-0.1%). A similar pattern emerged for the retail sales control group (which is most relevant for the calculation of PCE). In real terms (using CPI), these core retail sales were flat in October, but grew by 0.3% in Nov. Initial jobless claims unexpectedly fell to 202K in the week ending on December 9, from 221K a week earlier. Therefore it seems both consumer demand and labor demand were strong recently.