ECB in focus as gold reaches a new high and the yen surges

The ECB meeting later today is the key focus for Europe. The backdrop to the meeting is mixed. While there are definite wage pressures, and signs that monthly inflation pressures are picking up, there are also serious downside risks to growth to manage. German factory orders fell 11.3% in January, nearly wiping out a rise of 12% in December. The annual rate of decline for orders is 6%. Germany is the currency bloc’s economic powerhouse, yet it has failed to show sustainable signs of recovery this year, after the economy contracted in Q3. This is the dilemma facing the ECB today: sound tough on inflation, or sound concerned about growth>

Jerome Powell sticks to his mantra

There were no surprises from Jerome Powell when he spoke to Congress on Wednesday, he will say much the same again on Thursday. He reiterated that the Fed is on track to cut rates again this year, even though the monthly core PCE figure rose at its fastest pace for a year. Once again, Powell said that he wanted to see more data before he was confident that rates could be cut, pretty much the exact same phrase he used in January. Stocks rose, and all but one sector on the S&P 500 posted a gain, while Treasury yields edged lower. US stocks are poised to open lower later today, and they are still lower on the week after the sharp sell off on Tuesday. The dollar has fallen broadly this week, and the dollar index is at its lowest level since early February, as signs of change start to appear in the FX market.

The yen fights back

The yen is the best performer in the G10 FX space so far this week, and is 1.53% higher vs. the USD. It is also up more than 1% vs the GBP, the euro and the Canadian dollar. This comes as speculation grows that the BOJ will start to hike rates at its 19th March meeting. The market expects a 10 basis point increase in the main interest rate this month, which would bring rates back to 0%. The next 10 basis point rate hike is not expected until July. Even if the BOJ do start to normalise interest rates it is likely to be a slow process,  that could be disrupted by external factors such as a global economic slowdown. However, it is a milestone moment, and we do expect to see some yen repatriation that will boost the yen in the lead up to the BOJ meeting, with 145.00 in focus for USD/JPY. Whether or not a slow normalisation of interest rates will lead to the yield advantage that can sustain yen strength this year, we are not sure, and we will wait from guidance from the BOJ later this month.

Gold: up, up and away

Elsewhere, the gold price continues its ascent and has made a fresh record high. This is in reaction to expectations that central banks will signal that rate cuts are coming. The ECB will be the first test of this market theory. If the ECB sounds dovish, then the gold price may extend gains. Its rally in March has been spectacular, and it is up by 6%, $2,000 seems like a distant memory! However, one hawkish-sounding comment from Lagarde today, or a less dovish tone from Fed chair Powell could knock the gold price off course. The rally in gold is also a sign that the market does not trust central bankers: they are the ones that hiked too late and let inflation run out of control. The market is not convinced of their timing as they decide when to cut rates. Gold is the ultimate inflation hedge, and it is clear that there is still inflation in the system: large monthly increases in inflation in the US and Europe, as well as near 10% wage increases from some key British retailers. This could make it harder for central banks to reach their 2% target inflation rates, and this is partly driving the gold price rally.

US banks: new capital regulation scrapped

Elsewhere, watch banks in the US later today. The banking index in the S&P 500 rose to a record on Wednesday, after Fed chair Powell’s testimony to Congress signalled that the Federal Reserve would roll back on plans to force banks to hold more capital. Big hitters like Jamie Dimon at JP Morgan have been vocal about their dislike of this plan, so this is a victory for Wall Street. The plan was a Biden -era policy that is now at risk of being scrapped. This took the market off guard, as some did not expect such clarity from the Fed chair at this stage. Although most lenders had the capital to meet the new standards, by rolling back, banks will now have more money to lend, which could boost their profits, and help the US economy down the line. Whether or not this is designed to sweeten Wall Street ahead of the Presidential election, we shall never know. However, we expect further gains for bank shares this week, which could help to broaden out the market rally aside from tech.

US bank stocks rally on

In the last week, there has been a bit of a changing of the guard at the top of the S&P 500. The S&P 500 gold index is the top performing sector, followed by the AI darlings, and then regional banks. The regional banks sector is up by 5.82%, and it may extend gains on the back of the end of the new capital requirement plan. Since regional banks are also under pressure from pressures in the commercial real estate sector, this is a good performance and shows resilience in the sector, even with these tail winds.

UK Budget: unlikely to have a long lasting impact on financial markets

In the UK, the pound and Gilt yields are mostly stable. The 10 year Gilt yield slipped below the 3% level on the back of the Budget and is at its lowest level since early February, after the OBR downwardly revised their inflation forecasts. However, the Budget was mostly neutral from a macro-economic perspective, which may limit its impact on financial markets.