On your marks

Global equities had a strong week, rising 2.1% and 2.9% in local currency and sterling terms respectively. Japanese equities performed best with a 5% rise while China lagged behind with no change, reversing the previous week’s pattern when China was the star performer and Japan the worst.

Bonds also rallied with Gilts and Treasuries both gaining 1% or so on the back of a 0.1% fall in government bond yields. Central banks were the stars of the show and behind the market gains with the Federal Reserve, Bank of Japan, Bank of England and Swiss National Bank all meeting.

Most important, as ever, was the Fed and the message here was a benign one which the markets duly lapped up. The Fed revised up significantly its growth forecast for this year to a firm 2.1% and also nudged up its end-year core inflation forecast to 2.6%. Yet it stuck with its projection of three 0.25% rate cuts later this year, even if it did scale back the number of cuts pencilled in for next year from four to three.

Importantly, Chair Powell seemed none too concerned about the recent uptick in inflation, dismissing it as a bump along the way to inflation eventually returning to 2%. The market had begun to worry that the Fed might scale back this year’s rate cuts, so this was greeted with relief.

The BOE on Thursday echoed the picture painted by the Fed the day before and the ECB the previous week that rates are on course to be lowered in the second half of the year. Governor Andrew Bailey was quite upbeat, pointing to the recent downward trend in inflation and upward trend in the economy.

Tuesday’s inflation numbers were helpful in this respect, declining a bit more than expected in February. The headline rate fell to 3.4% from 4.0% while the core rate dropped to 4.5% from 5.1%. Even though services inflation continues to run at a high 6%, the BOE believes inflation overall is still on course to drop, at least temporarily, below 2% over coming months.

Meanwhile, UK business confidence was little changed in March, remaining comfortably in expansionary territory and reinforcing hopes that this year will see the economy return to positive albeit modest growth.

The Fed, ECB and BOE are basically all now suggesting that rates should start to be cut around June with three or so 0.25% reductions likely by year-end. The Swiss National Bank, however, jumped the gun last week, unexpectedly cutting rates to 1.5% on the back of inflation retreating to close to 1%.

The BOJ meeting was a rather different story. It raised rates from -0.1% to 0-0.1%, taking them out of negative territory for the first time in eight years. It also removed the cap on 10-year government bond yields, which it had already started to back away from over recent months.

Crucially, the bank implied that these moves were not the start of a rapid tightening of policy. The result – and a reminder that currencies remain the most fickle of asset classes – was that the yen weakened, rather than strengthened as expected, and is now testing a 32-year low against the dollar.

The BOJ was not the only central bank to tighten policy. Turkey jacked up rates 5% to 50%…but that’s another story.

Last week’s gains leave global equities up some 9% year-to-date in both local currency and sterling terms. These increases look warranted as, by hook or by crook, the central banks seem to have pulled off the elusive soft-landing, or at the very least avoided a hard-landing.

The current backdrop of receding inflation, moderate growth and looming interest rate cuts is a positive one for markets. The only fly in the ointment is that the good news is now largely in the price. The global price-earnings ratio is back up to 17.7x and 10% above the long term average.

But as we all know, the overvaluation is very much concentrated in the US. While the scope for additional gains here look correspondingly limited, we believe there is ample scope for catch-up by the cheaper areas which have lagged – namely emerging markets, the UK, and small and mid-cap stocks.

After all last week’s excitement, this coming week is a quiet one on the macro front. The only data release of any real consequence for markets is the Fed’s favoured inflation measure on Good Friday.

Rupert Thompson – Chief Economist