Global Markets Focus on Fed’s Interest Rate Decision

Global markets remained mixed this week amid ongoing uncertainties about when the Federal Reserve (Fed) will begin its interest rate cuts, with eyes turning to the Fed’s interest rate decision to be announced next week.

As uncertainties persist regarding whether the fight against inflation has reached its conclusion globally, uncertainties also linger over future monetary policies to be implemented.

Analysts noted that the likelihood of the Fed starting interest rate cuts in the first half of the year weakened this week, as both consumer and producer inflation in the US exceeded expectations.

In the money markets, while it is widely expected that the Fed will keep interest rates unchanged at its monetary policy meeting on March 19-20, the possibility of the bank starting interest rate cuts is priced at 7 percent in May and 59 percent in June.

Emphasizing the importance of the guidance to be provided by Fed Chairman Jerome Powell following the bank’s interest rate decision next week, analysts also noted that investors’ focus will be on the bank’s projections for the economy and the “dot plot” graph showing members’ expectations for the policy rate.

US Treasury Secretary Janet Yellen expressed regret for calling inflation “transitory” in 2021, stating that she expects the biggest contributor to inflation in the country, housing costs, to decrease this year and that changes in rental rates take some time to be reflected in the CPI.

Meanwhile, international credit rating agency Fitch Ratings raised its growth expectation for the global economy for this year by 0.3 percentage points to 2.4 percent.

The yield on the 10-year US Treasury bond closed the week at 4.30 percent, up about 20 basis points, while the price of gold closed the week at $2,158, down 0.86 percent.

The dollar index rose to 103.4, up 0.6 percent from the previous week’s close.

Developments regarding the Israel-Palestine conflict and the Russia-Ukraine War continue to impact oil prices, with the price of Brent crude ending the week at $84.8, up 4 percent.

Negative Trend in New York Stock Exchange

The New York Stock Exchange trended negatively this week amid mixed signals from macroeconomic data released in the US.

In the US, after the Consumer Price Index (CPI) recorded an increase higher than expectations in February, the Producer Price Index (PPI) also exceeded forecasts.

The CPI in the country rose by 0.4 percent on a monthly basis in February, exceeding market expectations with a 3.2 percent increase on an annual basis.

The PPI rose by 0.6 percent on a monthly basis and 1.6 percent on an annual basis in February, exceeding expectations. The core PPI, which excludes volatile food and energy prices, also exceeded expectations, rising by 0.3 percent on a monthly basis and 2 percent on an annual basis during the same period.

Contrary to expectations of a flat trend in February, industrial production in the country increased by 0.1 percent on a monthly basis. Retail sales in the country also recorded a lower-than-expected increase of 0.6 percent in February.

The manufacturing index announced by the New York Fed showed that manufacturing continued to contract in March with a reading of -20.9. The number of initial jobless claims filed for the first time also remained below expectations at 209,000 for the week ending March 9.

While consumers’ short-term inflation expectations remained unchanged at 3 percent in March on a monthly basis, long-term inflation expectations remained at 2.9 percent for the fourth consecutive month. Meanwhile, technology stocks saw a decline last week, with shares of Amazon and Microsoft, two of the US’s largest technology companies, losing over 2 percent.

Shares of Adobe, which produces graphic and media software, also fell by nearly 14 percent after the company failed to meet revenue expectations. Shares of US steel producer US Steel fell by over 6 percent after US President Joe Biden opposed the acquisition of the company by Japan’s largest steel producer, Nippon Steel.

On the other hand, a bill passed the House of Representatives in the US paving the way for the ban on TikTok, which has about 170 million users.

With these developments, the Nasdaq index fell by 0.7 percent, the S&P 500 index by 0.13 percent, and the Dow Jones index by 0.02 percent in the New York Stock Exchange last week.

In the week starting March 18, building permits and housing starts will be announced on Tuesday, the Fed’s interest rate decision and Fed Chairman Jerome Powell’s statements along with existing home sales data will be watched on Wednesday, and weekly jobless claims and the Manufacturing Purchasing Managers’ Index (PMI) will be followed on Thursday.

Eyes on Inflation Data in Europe

European stock markets saw an upward trend last week, with eyes turning to inflation data to be announced next week along with the interest rate decision of the Bank of England (BoE) on Thursday.

While statements by European Central Bank (ECB) members were followed throughout the week, ECB Vice President Luis de Guindos said the ECB would have sufficient information to decide whether to lower interest rates in June.

ECB member Klaas Knot also said that if wage growth continues to confirm slowing inflation expectations, the bank could cut interest rates at least three times this year and could make the first move in June.

ECB member Francois Villeroy de Galhau said, “There is a very broad agreement in our Governing Council to lower interest rates in the spring,” indicating a possible rate cut in the coming months.

ECB member Martins Kazaks also suggested that the interest rate cut decision could come in the next few meetings, saying there is no need to delay the cut too much.

Analysts noted that the possibility of the ECB starting its first interest rate cuts is priced at 11 percent in April and 88 percent in June in the money markets.

On the other hand, according to data released in the region last week, the UK economy grew by 0.2 percent in January, while it contracted by 0.1 percent compared to the previous three months in the November 2023-January 2024 period.

Industrial production in the Eurozone fell below expectations in January with a monthly decline of 3.2 percent and an annual decline of 6.7 percent.

The EU data protection authority reported that the European Commission violated Union privacy rules by using Microsoft 365 software, while Josep Borrell, High Representative of the Union for Foreign Affairs and Security Policy, said they need to strengthen the defense industry and technology base and increase production.

Borrell said that after two years of intense conflict, existing stocks have run out and the conflict has turned from a stock war to a production war, stating, “With the New European Defense Industry Strategy, we aim for joint procurement to account for 40 percent by 2030.”

Developments in the ongoing Ukraine-Russia war were closely monitored, with French President Emmanuel Macron saying that if Russia, which he described as a rival, wins the war, Europe’s credibility will be reduced to zero.

With these developments, the DAX index in Germany gained 1.3 percent, the FTSE 100 index in the UK gained 0.9 percent, the CAC 40 index in France gained 1.7 percent, and the MIB 30 index in Italy gained 2.3 percent last week.

In the week starting March 18, inflation data will be announced in the Eurozone on Monday, the ZEW Economic Sentiment index will be announced in the Eurozone on Tuesday, the economic sentiment index will be announced in the Eurozone on Wednesday, the BoE’s interest rate decision will be announced on Thursday, and Ifo Business Confidence Index data will be followed in Germany on Friday.

It is expected that the BoE will not change its policy rate in its March meetings.

Mixed Trend in Asian Stock Markets

Asian stock markets saw a mixed trend last week, with eyes turning to the interest rate decision to be announced by the Bank of Japan (BoJ) next week.

Analysts noted that uncertainty persists regarding whether the BoJ will raise interest rates at its monetary policy meeting next week, but expectations for the bank to make such a decision in the near future are strong.

BoJ Governor Kazuo Ueda said last week, “When we achieve the 2 percent inflation target stably and sustainably, we will seek an exit from negative interest rates, yield curve control, and other large-scale monetary easing measures.”

Ueda said that how they will gradually remove various monetary easing tools will depend on the economic, price, and financial conditions at that time.

BoJ officials announced that they are considering ending purchases of exchange-traded funds (ETFs), which they started in 2010. Japanese Finance Minister Shunichi Suzuki said that the country is no longer in deflation and that a strong trend in wage increases is occurring.

Toyota’s acceptance of the wage increase demand by the labor union in Japan supported expectations that the BoJ is close to raising interest rates.

While this situation led to the appreciation of the Japanese yen against the dollar, it created downward pressure on the stock markets.

On the other hand, the People’s Bank of China (PBoC) kept the interest rate on one-year medium-term lending facility loans unchanged at 2.50 percent. Thus, the bank did not make any changes in interest rates for about the past 7 months.

After these developments, the Hang Seng index in Hong Kong gained 2.25 percent, the Shanghai Composite index in China gained 0.28 percent, the Kospi index in South Korea gained 0.5 percent, and the Nikkei 225 index in Japan fell 2.47 percent on a weekly basis.

In the week starting March 18, data to be announced in Japan will be in the spotlight. BoJ’s interest rate decision will be announced on Tuesday, and CPI data will be announced on Friday.

Domestic Focus on TCMB’s Interest Rate Decision

Domestically, while the BIST 100 index on the Borsa Istanbul completed the week at 8,828.70 points with a 3.57 percent decrease, the focus of investors turned to the interest rate decision to be announced by the Central Bank of the Republic of Turkey (TCMB) at the Monetary Policy Committee (MPC) meeting next week.

The dollar/TL closed the week at 32.0749, up 0.5 percent from the previous close.

According to the TCMB Market Participants Survey announced last week, the expectation for an increase in the Consumer Price Index (CPI) decreased from 37.78 percent to 36.70 percent for 12 months ahead and from 23.05 percent to 22.67 percent for 24 months ahead. Analysts noted that the TCMB could maintain its current tight monetary policy until there is a significant slowdown in inflation.

As part of additional tightening measures, the TCMB raised the interest rate for cash withdrawal transactions from credit cards and overdraft deposit accounts to a level compatible with the consumer loan interest rate, while taking new steps to increase the share of Turkish lira deposits in the banking system.

The bank also made changes to the calculation method of the maximum monthly contractual interest rate applied to cash advance transactions from credit cards and overdraft deposit accounts. According to the new method, the calculated maximum monthly contractual interest rate was increased from 4.42 percent to 5 percent.

Erich Arispe Morales, Senior Director and Turkey Analyst at international credit rating agency Fitch Ratings, said that the authorities’ primary goal in Turkey is to reduce inflation, stating that they expect policy tightening to continue consistently with the reduction in inflation after the elections.

Morales emphasized that they have increased confidence in Turkey’s current economic policy axis being more resilient and policies being sustainable, stating, “One development we notice is that the policy change in Turkey not only reduces the macroeconomic financial stability risk but also improves external financing conditions, and this is very important.”

In the week starting March 18, the housing price index will be announced on Monday, the consumer confidence index on Wednesday, TCMB’s interest rate decision on Thursday, and capacity utilization rate and real sector confidence index data will be followed on Friday.

Economists participating in the AA Finance expectation survey expect the Central Bank of the Republic of Turkey to keep the policy rate at 45.00 percent. The median of economists’ year-end policy rate expectations was 45 percent.

Analysts noted that technically, 8,800 and 8,700 levels are in support in the BIST 100 index, while 9,000 and 9,100 levels stand out as resistance.

source: prepared by Melisa Beğiç

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