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It’s March, and for many of us in the U.S. (and for some around the world), this month is most notable for being college basketball championship season. We’re about to witness the culmination of hard work, sacrifice, and strategic vision that has been years in the making for these student-athletes. I can’t help but draw comparisons to central banks, and how investors are closely watching them this month for signs that central bankers believe they have seen enough success in achieving their goals and will soon be ready to change their policies.
Today’s monetary policy “season” began in 2022, when central bankers in Western developed economies started hiking rates to combat inflation; it’s taken them years to get where they are today. The next few months and beyond – rather than a few weeks of playoff games – will likely tell us whether their efforts have been successful.
The good news is that, like many youth sports programs nowadays, everyone can be a winner. Central banks aren’t competing against each other. They need only meet their objectives – for most, that means merely vanquishing too-high inflation. They all seem on track to do that, although each has its own particular strategy for success given the individual characteristics and factors impacting each respective economy.
This is where we currently stand:
The Bank of Canada (BOC) met two weeks ago and registered its apprehension about cutting rates just yet. BOC Governor Tiff Macklem was rather emphatic that “It’s still too early to consider lowering the policy interest rate.”1 I think the Bank of Canada is reluctant to be a first mover and remains anxious about inflation, which seemed appropriate at first blush given the strong February jobs report. It showed 41,000 jobs were created last month in Canada, about double what was expected.2 Canada is experiencing a significant increase in population, however, so the labour market is loosening. Wage growth remains elevated but has eased to 4.9% year-over-year.2
The European Central Bank (ECB) met last week and decided to keep its key policy rate static, although it seems closer to the start of rate cutting. It’s seeing some signs of improvement in the services economy: The S&P Global/HCOB services Purchasing Managers’ Index (PMI) for February was 50.2, the first time it has been in expansion territory (over 50) in seven months.3
However, despite this positive development, the manufacturing sector remains disappointing. What’s more, in February the European Commission downwardly revised its forecast for economic growth for 2024 as well as its forecast for inflation.4 The eurozone economy is clearly cooling.
As ECB President Christine Lagarde explained recently, “We are making good progress toward our inflation target, and we are more confident as a result – but we are not sufficiently confident. We will know a lot more in June.”5
The Federal Reserve (Fed) will no doubt keep rates static as well when it meets this month, but change seems to be in the air. We got to hear a lot from Fed Chair Jay Powell during his two-day Humphrey-Hawkins testimony before Congress earlier this month. There were many takeaways and a lot of quotes from this semi-annual event but key highlights for me were these:
Powell’s testimony helped change market expectations about when a first rate cut may happen, with markets becoming more comfortable with June. That expectation remained consistent after Friday’s release of the February jobs report, which showed that while the United States economy remains resilient, it has cooled a bit:7
And so you could say we are in the midst of Monetary Policy Madness, although it won’t be resolved in March. This will play out over the course of 2024, and we may not know who the winners are until much later.
What we do know is that many central bankers have exhibited “herding behavior” because of fears of a resurgence in inflation; no one wants to go down in history as the next Arthur Burns (the Fed chair who presided over a massive rise in inflation in the 1970s) – and that has made them overly hawkish in their rhetoric. I harken back to the comments of former St. Louis Fed President Jim Bullard who, no longer tethered by the need to tamp down financial conditions as a Fed official, proclaimed last month that the Fed should start cutting in March.
I don’t believe they’ll cut in March, but they know policy is very restrictive, and they should be cutting soon, regardless of the state of the economy. Despite progress toward central bank goals, markets are likely to continue to worry about each data point and what it will mean for central bank decision-making.
March 9 marks the 15th anniversary of the bottom of the S&P 500 Index following the Global Financial Crisis. I remember it like it was yesterday. The stock market had been in a freefall for months, and there was an incredible lack of confidence in markets and institutions after the collapse of Lehman Brothers and the ensuing chaos in the fall of 2008. Negative sentiment only accelerated in early 2009, culminating in the S&P 500 falling below 700 – yes, 700 – in early March.
One moment in particular stands out from that crazy period. At the time, I sat on the board of an endowment, and some very nervous hedge fund managers who also served on the board wanted to exit all long positions in equities in those very difficult days. Although usually a cordial group, we had a heated exchange over differing views on a conference call one night. Ultimately, common sense – and our investment policy statement – prevailed, and we remained in equities, so we were able to enjoy the ensuing strong multi-year rebound that was very much helped by accommodative monetary policy.
For some, this day is a miserable memory because it was when stocks hit rock bottom – the lowest they had been in 13 years. For me, it’s a positive memory because it marked the start of an incredibly strong market recovery. More importantly, it is a powerful reminder of the importance of staying invested and sticking with a prudent long-term allocation plan – no matter what surprises and disappointments come our way. What an anniversary to never forget!
Kristina Hooper is Chief Global Market Strategist at Invesco.
Notes
1. Source: Barron’s, “Canada central bank holds key lending rate at 5%,” March 6, 2024.
2. Source: Statistics Canada, March 8, 2024.
3. Source: S&P Global/HCOB, March 6, 2024.
4. Source: European Commission, Feb. 15, 2024.
5. Source: European Central Bank, March 7, 2024.
6. Source: The Wall Street Journal, “Jerome Powell says Fed on track to cut rates this year,” March 6, 2024.
7. Source: U.S. Bureau of Labor Statistics, March 8, 2024.
8. Source: Bloomberg, L.P., as of March 8, 2024.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of March 11, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
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