SNB cuts rates, Turkey hikes, and BoE on hold

It was a day of central bank surprises on Thursday, with the Swiss National Bank cutting rates in a surprise move, ahead of the ECB, while central bank of Turkey unexpectedly hiked its policy rate by 500bp. The Bank of England kept rates on hold as expected but two MPC members who had voted for rate increases at the last meeting appear to be more confident that inflation would continue to move towards target and voted to hold yesterday. One MPC member voted for a 25bp cut. The statement was dovish and seemed to be preparing the ground for a move lower in the coming months, saying that “the stance of monetary policy could remain restrictive even in the Bank Rate were to be reduced, given that it was starting from an already restrictive level.” The market is pricing an 80% probability of a rate cut in June.

The Turkish central bank surprised to the upside with a 500bps hike yesterday, taking the benchmark one-week repo rate to 50.00%. The market expectation had been that the TCMB would remain on hold, but it cited resilient domestic demand and ‘stickiness in services inflation, inflation expectations, geopolitical risks, and food prices’ as all keeping inflation pressures ‘alive.’ This takes the cumulative hiking since a more orthodox monetary policy was adopted in June 2023 to 4,150bps and the bank remains committed to maintaining the tight policy ‘until a significant and sustained decline in the underlying trend of monthly inflation is observed.’ The bank predicts that disinflation will set in in the second half of the year, after headline CPI inflation rose to a 15-month high of 67.1% y/y in February.

The SNB was the first developed market central bank to cut rates in this cycle, reducing its policy rate by 25bp to 1.5%, and not ruling out further rate cuts in the coming months as it revised its inflation outlook lower. The SNB expects inflation to average 1.4% this year and 1.2% in 2025, well below 2%. It revised up its growth forecast from 0.5% - 1.0% to “around 1%”.

Preliminary PMI data for March showed an improvement in the Eurozone where the composite PMI rose to 49.9 from 49.2 last month, on stronger services sector activity. The UK’s composite PMI slipped slightly to 52.9 from 53.0 in February, with manufacturing still just below the neutral 50.0 and the services PMI slowing as well. In the US, the composite PMI declined to 52.2 from 52.5 on slower services sector activity with manufacturing coming in higher than expected at 52.5, up from 52.2 in February.

Inflation in Japan rose to 2.8% y/y in February, up from 2.2% in January but slightly lower than forecast. Core inflation eased to 3.2% y/y from 3.5% in February.

Today’s Economic Data and Events

11:00 UK retail sales (Feb) forecast -0.4% m/m and -0.8% y/y

13:00 GE IFO business climate (Mar) forecast 85.9

Fixed Income

• 2y treasury yields rose 4bp to 4.64% on Thursday, while the 10y yield was broadly unchanged at 4.27%. The 2s10s yield curve has been inverted for a record 429 trading days according the Bloomberg, the longest period since they have compiled the data.
• 10y benchmark bond yields declined across the board in Europe yesterday. Gilt yields fell -1.7bp to just under 4% after a somewhat dovish MPC meeting. 10y bunds fell -3bp to 2.4%.

FX

• The USD index regained some ground on Thursday as yields rose, closing 0.6% higher. CHF weakened slightly after the SNB’s surprise rate cut and lower inflation outlook, ending the session at 0.8926. JPY strengthened 0.4% after four sessions of losses but remains above 151/USD. EUR and GBP also appreciated against the USD by 0.7% and 0.6% respectively.

Equities

• US equities closed higher on Thursday with the DJIA gaining 0.7% to a record high of 39781 points. The Nasdaq100 rose 0.4% while the S&P500 closed 0.3% higher on the day. European equities performed better with the EuroStoxx50 up 1% and the FTSE100 up 1.9% on Thursday. Asian equity markets are trading in the red this morning however.
• Regional markets were mixed with the Tadawul ASI up 0.8% and ADGI up 0.2% on Thursday, while the DFM closed slightly lower, down -0.3%.

Commodities

• Oil prices declined again on Thursday despite a report that the US government is looking to buy 1.5mn barrels of crude to refill the Strategic Petroleum Reserve, according to Bloomberg. This is part of the 3mn barrel repurchase plan announced earlier this month. Brent closed -0.2% lower at USD 85.78/b while WTI closed -0.8% lower at USD 81.07/b.