This week witnessed significant events from major central banks, adding complexity to the interpretation of their signals, which have become intertwined with political considerations.
Japan's decision to terminate its NIRP policy, albeit belatedly after three years, was accompanied by ultra-dovish guidance. Despite a recent agreement by the largest labor union for a 5% annual pay rise, the Bank of Japan remains cautious about achieving its 2% inflation target (the current inflation rate is 3.2%). Consequently, the market perceives the JPY as the preferred funding currency, prompting continued shorting of it, with additional short positions advisable should the BoJ intervene at 152, against purchasing assets with a real yield.
The recent Federal Reserve meeting was marked by complexity and political considerations. Despite an uptick in inflation prints, with core PCE estimations rising to 2.6% from 2.4% in December, the Fed maintained its guidance of three rate cuts this year. Growth projections were revised higher to 2.1% from 1.4%, aligning more closely with market consensus. Additionally, unemployment forecasts for 2024 and 2025 were revised downward. Inflation is projected to hit the 2% target in 2026 (whatever). The big trick to contain the selloff in the long end was the preannouncement of tapering in the pace of QT. The market reactions were rational, with the USD selling off, a slight drop in the short end, and a flat long end. Equities gained, supported by a lower USD and reduced apprehension of hawkish comments. Given the soaring market, near-full employment, accommodative financial conditions, and rising inflation expectations, higher allocations to real assets are advisable to mitigate CB policy risks.
In the realm of equities, sentiment remains euphoric, with new all-time highs reached after a two-week pause. While the market does not appear overly bubbly, certain sectors, such as the cloud sector, exhibit hyped valuations, having underperformed by 10-15% year-to-date. Conversely, materials and commodities have begun to rally, presenting opportunities for gains, particularly if global PMIs continue to improve. While these sectors may not drive broad market indices, they can impact our P/L, as active managers.
Alexandros Tavlaridis