Pro Perspectives 3/14/24





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March 14, 2024

Stocks were broadly down today, globally.  Bonds were down, globally (yields up).  And most commodities (excluding energy) were down.
The selling was largely attributed to hotter than expected producer prices in February (another inflation data point).  And retail sales for February "rebounded." 
Does that mean the Fed's going to push the beginning of rate cuts out further.  Does it mean they won't cut?  Does it mean that might return to the view of raising rates again?
None of the above.  
Keep in mind, the producer price index has been under 2% (year-over-year change) for ten consecutive months.  And the "rebounding" retail sales, rebounded from a contraction in January, which was revised even lower in today's report. 
So, for perspective, if we look at where we are today, compared to where we were going into last Friday's jobs report:  The market has simply priced out a small possibility of a fourth rate cut this year.
Remember, the market view in early January was for six quarter point rate cuts this year (with a small chance of seven), while the Fed had projected just three.  And over the past two months, the Fed has successfully manipulated the market view to align with the Fed's projections, of just three quarter point cuts this year
That's where we stand heading into next Wednesday's Fed meeting, where the biggest news will likely be, what numbers the nineteen meeting participants determine to go in these yellow boxes (projections of PCE inflation and the end of year Fed funds rate).  
Now, we head into this Fed meeting with most advanced economies in the world preparing to cut interest rates (ease monetary policy) after the fight with four decade high inflation.  We should expect them to do it in coordination, as they did with the response to the pandemic, and with the response to the related inflation.
In coordination, the major global central banks were able to curtail record inflation, without having to raise interest rates above the rate of inflation — the historical inflation beating formula, but also a formula that would have crippled the economies of the Western world.
And as we've discussed along the way, that Western world victory over inflation has only been made possible by the liquidity that continued to pump into the global economy from Japan.
With that, there has been a clear effort from the Bank of Japan (BOJ), over the past several months, to start setting expectations in markets that they will, at some point, exit emergency level policies.  And that communication to markets has been dialed up in recent days, telegraphing the end of negative interest rates in Japan.
Today there were rumors that it could come as early as next week's BOJ meeting.
Negative rates and QE in Japan have been the BOJ and Japanese government's strategy to fight decades of entrenched deflation.  Only with the post-pandemic global ballooning of money supply, might they have it beat.   
But an exit at this point seems premature, unnecessary, and dangerous.
What's dangerous about it?  Japan's negative rates (and unlimited QE) have promoted (implicit and explicit) investment into global stock and bond markets.  Importantly, the BOJ bought a lot of sovereign debt of the Western world to help keep important global rates in check, while central banks were fighting inflation. 
With that in mind, while the U.S. inflation data got a lot of attention this morning, it was another report that likely triggered the sell-off in stocks, and this spike (below) in yields.  News was circulating this morning that the BOJ could act as early as next week.