Fed – Habemus cuts (just not in March)
The Fed delivered a balanced message in their meeting last week, acknowledging the progress in inflation but pushing back against early cuts. Powell said March cuts were “not the base-case”, but kept all options on the table while allowing himself to gain more confidence that inflation is anchored at target. While he was unable to define what exact progress needs to be seen, it is clear that the Fed is comfortable with stronger growth as long as inflation doesn’t reaccelerate. Markets trimmed bets for March cuts following the meeting and strong labour market data, now down to 16%.

US data – Strong turns stronger
US economic data continues to be strong. On Friday, January non-farm payroll printed at +353k, almost twice consensus estimates and above the top end of the range. Three-months job creation was revised higher by more than 60k, changing the perceived picture of the US economic landscape over the past quarter. The unemployment rate was slightly lower than expected at 3.7%. After 4Q23 GDP was also stronger than expected, it is clear that US data continue to surprise on the upside despite relatively low inflation print. Powell clarified this does not affect the outlook for cuts near terms, as real rates and inflation are more important. Persistent economic strength may still ultimately affect the level the Fed ends up cutting too, remaining the key risk to rates over the quarters ahead.

Eurozone CPI – Steady disinflation progress
Eurozone headline and core CPI for January fell 0.1% YoY, to 2.8% and 3.3% respectively. Non-energy industrial goods showed continued disinflation, at -2.4% MoM and 2.0% YoY. Services inflation stayed sticky at 4.0% YoY and drove the 0.1% upside surprise relative to consensus. This was the first upside surprise in five months and takes some pressure from early cuts for the ECB, who signalled in their recent meeting continued data dependence.

Algebris Investments’ Global Credit Team