The Swiss National Bank (SNB) may be the first developed central bank to cut rates this past week, but it won’t be the last in 2024, Invesco’s Chief Global Market Strategist Kristina Hooper predicted in a new investor note today.
“I think of it as a trend setter, and I think the very act of its small rate cut will help encourage other developed central banks to follow suit sooner rather than later,” said Hooper, adding that the SNB’s decision makes it easier for the Fed, Bank of England (BOE), the European Central Bank (ECB) and other developed central banks to begin shaving rates in the next several months.
The U.S.’s Federal Reserve Bank and BOE, which both also met last week, decided not to cut rates yet. But there were “small psychological gains” that are likely to lead to a series of rate cuts as we proceed into 2024, Hooper said.
She predicts that the Fed is likely to start cutting interest rates by the end of the second quarter despite recent "hotter than expected" inflation data. Hooper points to prior interest-rate-hiking cycles, when the Fed began cutting rates about 8½ months after its last rate hike. The last time the Fed raised interest rates was summer 2023, she noted.
“What happened last week in terms of monetary policy will matter this year for markets. I think we could be entering a period that is very different than 2022, when ... dramatic rate hikes created an annus horribilis for many asset classes. Gentle rate cuts by a number of central banks this year could create a mildly supportive environment for risk assets,” the market strategist said.
The result of such rate cuts? Money that has been sitting off to the side, and there is a pile of it, is likely to move back into the markets, buoying both stock and bond market performance this year, Hooper predicted.
“Keep in mind there is a high level of cash (I would call it an overweighting) sitting on the sidelines, some of which could rotate into equities and fixed income, especially if rates begin to fall and/or more investors develop FOMO (a fear of missing out),” she argued.
It happened before in May of 2009, when stocks “began a strong and lengthy multi-year rally in March of 2009,” Hooper said.
Which is why the fact that five developed market central banks and seven emerging market central banks met last week, with two making “historical decisions” is so “momentous” for markets, she said.
First, the Bank of Japan (BOJ) raised rates for the first time in 17 years, ending negative interest rates there. The vote was 7-2 to move the policy rate range to between 0% and 0.1%, up from a -0.1% short-term rate.
“The BOJ’s decision is thus far turning out to be a ‘best possible scenario,’ in my view, because the very act of starting to normalize represents a vote of confidence in the Japanese economy,” she said, noting that dovish statements at the BOJ press conference led to the Nikkei 225 Index finishing the week at a record 40,888.
In contrast, the Swiss National Bank (SNB) unexpectedly cut rates by 25 basis points last week, surprising the markets and possibly jumpstarting other rate cuts, Hooper said.
“The SNB’s decision is history-making because it’s the first developed central bank to cut rates in this rate cycle. It’s symbolic of what I expect to be a small cascade of developed central banks that will begin to enact rate cuts in 2024,” she added.
The Bank of England (BOE) also met last week but, as with the majority of banks, did not make a policy change. While British rates remain at 5.25%, a blistering 16-year high, the market strategist said she believes rate cuts for the BOE are “in close sight.”
While the Fed made no change to rates at its meeting last week, the dovish tone of the press conference that followed, with the March dot plot showing three rates cuts instead of the two some market pundits feared, was welcomed, Hooper said.
The markets were further buoyed by Fed Chairman Jerome Powell’s press conference remarks stating he wouldn’t overreact to recent higher than expected inflation data.
“We’re seeing developed economies in general proving to be more resilient than expected. This is good news for markets. And we’re seeing disinflationary progress continuing, albeit imperfectly, in Western developed economies. This in turn is resulting in the start of gentle rate cuts for 2024, which is also good news for markets,” Hooper said.