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Our views 26 March 2024

ClockWise: Hikes, cuts and holds – markets take a dovish message regardless

5 min read

Equity markets responded positively to a busy week for policy makers. Last week, multiple central bank meetings resulted in a mixture of action, but the overwhelming message taken by investors was a dovish one.

The market response has been to price in further rate cuts this year which, as a result, saw equity markets record their best week of returns in 2024.

This performance saw US markets close at fresh all-time highs on Friday, while European shares continued to advance for their ninth consecutive week (a record not beaten for over 12 years). Japanese stocks also returned to the top of the leaderboard, advancing close to 6% in sterling terms over the week.

A busy week of central bank decisions saw the Bank of Japan hike interest rates, others cut rates, and some decided to keep rates unchanged. However, the bulk of these actions were taken on the dovish side. In the markets eyes: dovish cuts, dovish holds, and even dovish hikes.

Central bank summary

Policy tightening

Japan: As we discussed in last week’s blog, the Bank of Japan made a historic decision to raise their policy rate out of negative territory. In addition, the BoJ also ended their purchases of ETFs and ended their yield curve control programme.

Policy easing

Switzerland: A surprise for markets came from Switzerland, where the Swiss National Bank (SNB) cut rates 25 basis points from 1.75% to 1.5%. Lower inflationary pressures and recent Swiss franc appreciation were cited as motivation for this decision. A decision was made to cut rates in Mexico also.

Policy unchanged

US, UK, Australia, and Norway: In line with expectations, there was no change of policy from central banks in these regions. However, messaging was taken more on the dovish side and saw bond markets move to price in looser policy over the rest of the year.

In the US, the Federal Reserve (Fed)  played down firmer recent inflation prints as a “sometimes bumpy road” towards its target of 2%, and the latest median forecast from Federal Open Market Committee participants continued to show 75bps of rate cuts this year. In UK, the Bank of England (BoE) voted to keep rates on hold, but markets reacted positively to two members who had previously been voting to hike rates shifting to hold, in addition to more dovish comments from Governor Andrew Bailey. In Australia, the Reserve Bank of Australia kept rates on hold as expected but they dropped the sentence that said, “a further increase in interest rates cannot be ruled out.” The Norges Bank also kept rates on hold last week, in line with expectations, a signal that was not taken with any dovish connotations.

Overall, the tone of dovishness from central banks echoed globally. Those central banks who kept rates unchanged provided more dovish signals, and even the policy hike from the BoJ being seen as a ‘dovish hike’ from some commentators – with the BoJ not sounding in a hurry to raise rates further. Global bond markets reacted and moved to price in additional rate cuts in 2024 (see chart 1 for change in expectations compared to just a week earlier). Even in regions which did not see major central bank actions, such as the euro area, more rate cuts were priced in.

Chart 1: Market cuts expected over the year

Chart 1 shows the market cuts expected over the year using Friday 15th March and Friday 22nd March as examples.

Source: Bloomberg as at 22/03/2024

So far, both equity and bond markets have taken this more dovish sentiment positively. However, with so much priced into markets, there may be a risk of a reversal. Central banks may disappoint. The beginning of a policy loosening cycle often does not seem to come until there has been a strong downturn in growth, often ending in recession. On this occasion, it seems that we have skipped the downturn and moved straight into the restart of a new cycle. Markets are pricing in further rate cuts but equity markets are not pricing in a substantial downturn. Stronger growth or inflation data could pose a risk to the timing or magnitude of cuts that central banks make this year. This would be a challenge for bond market returns as long-dated yields could rise further as markets readjust to expect fewer cuts in the future.

However, if corporate profits continue to improve alongside these improvements in growth, we believe that equity markets may generate positive returns in this environment, given the historically strong relationship between the global growth environment and corporate earnings. So far this year we have seen greater resilience in our global growth indicator being met by an improvement in earnings and we expect this to continue for a while (Chart 2).

Chart 2: Corporate earning revisions and Global growth scorecard

Chart 2 shows the corporate earning revisions and Global growth scorecard as at 14/03/2024

Source: LSEG Datastream as at 14/03/2024


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.