Beware The Subsides Of March

By Michael Every of Rabobank

Central bankers are no soothsayers: and what Fed Chair Powell said didn’t soothe. He didn’t cut rates, as the pink, dayglo-frosted end of market ‘Fed Put 101’ cereal-box thinking had it; and he made it clear he won’t sprinkle sugar-coated mini donuts with a rate cut in March either. As hopes for March subsided, markets moved: stocks down, the US dollar up, but bond yields looking more to slightly softer data than Powell’s guidance.

Some think a near-term Fed cut can still be forced by a quick stab in the back, like the assassination of Caesar (15 March), which we can fit in before the next FOMC meeting. Lo and behold, we have the falling knife of shares in New York Community Bankcorp, which had helped out Signature Bank in the 2023 banking wobble, and related issues with commercial real estate. Yet the Fed has acronymic firepower that can be used instead of easing monetary policy: it can just extend its Bank Term Funding Programme (BTFP) if needed.  

Clearly, the FOMC are no longer biased towards policy tightening, and are looking to when it may be appropriate to loosen. However, that never meant they were about to pour immediate, large policy easing into our cereal bowls, then add chocolate milk, then sprinkle candy on top, like a traditional, healthy American breakfast. As our Fed watcher Philip Marey puts it, ‘Forget about March’. He expects a first, 25bp, cut in Fed Funds in June, and then a steady-as-she-goes pace of one cut a quarter, depending on how things play out on both the economy and inflation, which is now partly determined geopolitically. This is an uncertain process in very uncertain times.

• In the US there is push-me-pull-you on key data and in terms of fiscal policy: the House just passed a $78bn business and child tax-break bill that does not scream ‘rate cuts!’ Of course, the US, and Canada and Mexico, soon holds elections that could shake the policy box even more.

• In Brazil, rates were cut 50bp to 11.25%. Argentina is in a Milei maelstrom. Sanctions might go back on Venezuelan oil: and the worry is if Venezuela goes into Guyana for its oil.

• In the UK, data are gloomy, an election looms, the government seems doomed, yet the opposition will inherit so many problems and contradictory policy stances it’s unclear what they will be able to achieve. And the BOE has to steer through this all.

• In Europe, we have disinflation; and deindustrialisation; and Macron, Scholz, and Rutte saying Europe must rearm to help Ukraine beat Russia’s war economy – this from a Chancellor who didn’t arm Ukrainians, and a PM who didn’t arm the Dutch.

• In the Middle East, we might get another Israel-Hamas ceasefire and hostage release: but the view is this will still be followed by more fighting, with the risks of an Israel-Hezbollah conflict evident. That, as we wait to see what the US is going to do to Iran, if anything.

• In India, it’s federal budget day ahead of a crucial election, as its economy grows steadily, stocks and bonds rally, and foreign investors turn their heads towards it.

• In China, the Caixin PMI was 50.8, as the CCP again skipped setting a date for the already-delayed Third Plenum supposed to lay out its longer-term economic plans; as local stocks shrug off the $278bn bailout floated last week, and local media suggests foreign investors are at the back of the queue for any cash if property giant Evergrande gets liquidated.

Yet even as much of the world looks like the Elmo-as-Satan meme, parts of the market —taking a lead from the US president— are listening to the platitudes of muppets and waiting for ‘Fed Put 101’ sugar. I would beware of them as much as the Ides, and subsides, of March!