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The DXY Index appreciated 2.9% to 104.3 in 1Q 2024, contrasting sharply with the 4.6% depreciation to 101.3 in 4Q 2023. The US Federal Reserve started 2024 by pushing back the market’s aggressive bet for seven Fed rate cuts discounted at the end of 2023. The market is now aligned with the three rate cuts reaffirmed in the Fed’s Summary of Economic Projections. After declining 69.2 bps to 3.88% in 4Q23, the US Treasury yield recovered 31 bps to 4.19% this quarter. The S&P 500 index rallied 10% ytd to 5248 yesterday, in addition to the 11.2% surge in 4Q23. Today, the US Bureau of Economic Analysis will likely reaffirm that the US economy expanded by a healthy annualized 3.2% QoQ saar in 4Q23 vs. the exceptional 4.9% growth in 3Q23.
However, the Atlanta Fed GDPNow model is projecting more growth deceleration to 2.1% in 1Q24. The US employment rate increased to 3.9% in February, its highest since January 2022. Tomorrow, consensus expects the PCE deflator inflation to rise by 0.4% MoM (2.5% YoY) in February from 0.3% MoM (2.4% YoY) in January. Conversely, the Fed’s preferred gauge, the PCE core deflator, is expected to slow to 0.4% MoM to 0.3%, keeping it unchanged in YoY terms at 2.8%. The above US data are near the Fed’s economic assumptions underlining its call for three rate cuts this year, i.e., real GDP growth hitting 2.1% QoQ saar in 4Q24 amid an unemployment rate of 4%, PCE inflation of 2.4% YoY, and PCE core inflation of 2.6%.
The first quarter was also significant for changes to monetary policy and its outlook. The Bank of Japan ended its negative interest rate policy and yield curve control framework in March, one month earlier than the polls on March 19. The Swiss National Bank lowered interest rates by 25 bps to 1.50% on March 21. Despite the divergent policy actions, the JPY was not spared from the selling pressures in the CHF triggered by falling currency volatility, which encouraged carry trades with wide interest rate and bond yield differentials. USD/JPY and USD/CHF broke above 150 and 0.90, spilling over into USD/CNY, rising above 7.20. Apart from Japan seen going slow in normalizing policy, and Switzerland and China adopting dovish biases, a few Fed officials suggested the Fed might delay and deliver fewer rate cuts. We expect Japan and China to keep dampening the speculation against their currencies and await signals from the Swiss on when they consider the CHF’s overvaluation corrected.
Other global central banks also signalled the end of their hiking cycle and a more balanced bias between inflation and growth. The European Central Bank sent the strongest signal about lowering rates before the summer recess that starts after its July meeting. Some ECB members have pushed for two cuts before the recess, However, ECB President Christine Lagarde and senior ECB officials do not want to commit to any number beyond the summer cut, staying data-dependent and making decisions meeting by meeting. As we enter the second quarter, we will also pay attention to signs of the weak EU and UK economies turning the corner amid a less exceptional US economy. Hence, we cannot rule out the DXY reverting to weakness again in 2Q24 after its partial rebound in 1Q24 from 4Q23.
Quote of the day
" Success is a collection of problems solved.”
I.M. Pei
28 March in history
The Louvre Pyramid designed by I. M. Pei was inaugurated by French President François Mitterrand in Paris in 1989.
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