The global bond market is expected to record its strongest month of the year, while stock indexes around the world have set historic highs. For investors in the global market, although less than three weeks have passed since May, the performance of the global stock and bond market is undoubtedly enough to surprise people.
Behind this, people's optimistic anticipation that the global interest rate reduction cycle is about to fully kick off may have contributed immensely
Some insiders said that the global treasury bond market is expected to have its best monthly performance this year after the US core CPI month on month data fell for the first time in six months last week, while the MSCI global stock index hit a record high last Friday. In the United States, this data has boosted people's bets that the Federal Reserve is about to cut interest rates, while in other countries, it is also reassuring investors that their central banks will have enough room to cut rates.
In fact, June of this year is likely to become a key turning point for the global market, and multiple major central banks around the world are expected to officially embark on a journey of interest rate cuts at the midpoint of the year.
In the latest report released by Nomura Securities last week, it was mentioned that what is currently "less valued" is that the global interest rate cutting cycle has actually begun, and there is an unusual situation where non central banks already have appropriate domestic economic conditions to decouple from the Federal Reserve's policies.
Nomura Securities strategists Rob Subbaraman and Yiru Chen stated in their latest economic insights report that they expect the European Central Bank, Swiss Bank, Bank of Canada, and Bank of Thailand to cut interest rates by the end of June, and many central banks will adopt a dovish stance.
According to Nomura's forecast, the European Central Bank, which started cutting interest rates in June, will have four 25 basis point rate cuts throughout 2024, and the deposit mechanism interest rate will drop to 3% by the end of the year.
Nomura strategist wrote, "With the acceleration of the global interest rate reduction cycle, the cross-border comparison of core CPI, recession risk indicator Sahm Rule, and actual policy interest rates... highlights how some central banks are slower than other central banks in terms of the timing of interest rate cuts. Of course, there are other factors to consider, such as fiscal stance and financial stability risks."
The Sam's rule was first proposed by Federal Reserve economist Claudie Sam. According to her observation, when the average three-month unemployment rate rises by 0.5 percentage points from the low point of the previous 12 months, the economy will enter a recession or be about to enter a recession. This rule is more reliable than some known financial market indicators that may send incorrect signals. The St. Louis Federal Reserve has long added the "Sam's Rule recession indicator" to its massive Federal Reserve economic data system FRED.
"From these three indicators, it seems that the timing for the Bank of Canada to start cutting interest rates is ripe, as is the case with the Federal Reserve of New Zealand and the Bank of South Africa. Real interest rates in Brazil and Mexico remain high, and as the global interest rate reduction cycle expands, there seems to be a lot of room for them to cut rates," Subbaraman and Chen wrote.
For the Federal Reserve's rate cut window, Nomura's forecast is also ahead of the mainstream market trend (September rate cut).
Nomura Securities stated that the global interest rate cutting cycle is accelerating, and the Federal Reserve may cut rates in July and another rate cut in December. As the core CPI of the United States slows down in April and there is increasing evidence that the US economy is slowing down, their confidence in the Federal Reserve's interest rate cut in July is increasing.
Interestingly, in recent trading days, an almost euphoric mood has rippled across the global market: US bond prices have soared all the way, and the yield of 10-year treasury bond bonds has fallen more than 30 basis points from the high point year to date. If there is one similarity in the stock markets of these developed countries, from New York to London and then to Tokyo, it is that they are either at a new high or on the path to a new high.
The Next Focus of the Global Anti Inflation Campaign
From the latest pricing in the interest rate market, the current pricing in the UK interest rate market suggests that the probability of the Bank of England lowering interest rates by 25 basis points next month is about 50%, and it is expected to cut rates twice this year. In the United States, traders believe that the likelihood of the Federal Reserve cutting interest rates in September is about 75%. In Europe, swap pricing shows that the European Central Bank's interest rate cut in June is almost certain.
Industry insiders have indicated that after the US CPI showed a downward trend last week, the next global macro focus this week may shift to the UK inflation report. Although prices in the UK have significantly slowed since the end of 2022 (when the peak CPI was at 11.1%), some investors have warned that the downward path of inflation may not be smooth sailing.
According to the median estimate from media surveys, the year-on-year increase in the UK April CPI released on Wednesday may slow down from 3.2% to 2.1%, which is only one line away from the Bank of England's official target of 2%. If the data meets expectations, it will undoubtedly be the latest positive news for the global fight against inflation. But if the inflation data is higher than expected, traders may abandon their recent bet that the Bank of England will cut interest rates as soon as June, and question whether global investors are being too presumptuous about rate cuts.
RBC BlueBay Asset Management Chief Investment Officer Mark Dowding said, "Next week's UK CPI data will be very important, and we believe that its decline may be lower than many people's expectations. This may further put the enthusiasm for interest rate cuts on hold."
As of last Friday, the yield of the benchmark 10-year treasury bond of the United Kingdom had fallen for the third week in a row, the longest consecutive decline record since this year. However, the relatively uncertain prospect of the British economy and inflation has always prevented the overall rebound of British treasury bond like that of US bonds.
BCA Research strategist Chester Ntonifor said, "It's too early to long UK gilt bonds at this critical moment because service sector inflation is still too tight."