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Bond Market Insights - Mon, 25 Mar 2024

Last week closed with a rally, UST’s being helped by strong UK Gilts and German Bunds. The market stabilized with 2yrs inside 4.60%. Swap spreads continued to push wider, a move evident since the FOMC’s “Fairly soon” comment.

What’s priced in? A little over 50bps of cuts into the next four meetings (May/June/ July/Sept). By year end around 80bps are priced into the market, 8bps more than pre-FOMC.

Central bank comments have supported a bullish stance on risky assets. The BOE delivered a “dovish hold”, the Swiss National Bank delivered a 25bps cut and the ECB indicated that June might see their first move on the easing cycle. Latam central banks have been cutting for a while and Banxico joined them last week. The Riksbank could be next to join the fray.

The Fed’s median collective expectation of the committee remains at three cuts, but mean expectation paints a less benevolent picture, dropping substantially. Only one official sees 4 or more cuts in 2024, compared to five officials in December. The other four dropped to 3 cuts, while one of the 3 cuts officials moved to 1 cut this year. Nine of the nineteen dots are for fewer than 3 cuts.

The longer plots also show some increase in the “neutral” rate, which is less likely to go back to zero. If the neutral rate were to be at 2%, and CPI were running at 2.5% the neutral long term nominal rate would be a 4.5%, basically where we are now. Short end rates can eventually move lower, but long term rates will be weighed upon by the growing imbalance of supply and demand.

Key FedSpeak this week will be from Powell, from Waller and from Cook and then on Thursday we get the all important PCE inflation. Almost the whole street is looking for 0.3% m/m. This would be the 2nd warm print in a row and would raise the 3mo moving average to above average trend.

Europe and Japan will also be updating core inflation from Wednesday through to Friday. Europe could be hotter than expected, while pundits will be watching to see if Japan’s will fall.

The Shunto wage negotiations, which includes autoworkers, got what they asked for, 5.28%. Toyota didn’t even counter! The 7 million member Rengo, or Trade Union Confederation, said that the average rate of wage increases was 5.85%, the largest increase since 1993. UA Zensen, which covers retail and restaurants secured record high part-time wage increases of 6.96%. Not much of a surprise that the BOJ changed its stance.


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