Market Brief: Markets Go Dotty Ahead of Fed

CalendarMarch 20, 2024

Risk appetite is diminishing and the dollar is pushing higher for a fifth session as traders hedge themselves against a hawkish turn in the Federal Reserve's "dot plot" this afternoon. Long-term yields are inching lower, North American equity futures are setting up for a softer open, and oil prices are well off their highs.

The British pound was the lone mover among major currencies overnight after new data showed consumer price growth slowing more than expected last month, bringing a first Bank of England cut into closer view. Headline inflation rose 3.4 percent year over year in February, down from 4.0 percent, while the core measure slipped to 4.5 percent from 5.1 percent, both slightly below forecast. The central bank is now expected to deliver roughly 70 basis points in rate cuts by year end, with traders assigning coin-toss odds to an initial move as early as the June meeting.

The Canadian dollar is struggling to make headway after yesterday’s surprise inflation miss drove the market-implied easing trajectory for the Bank of Canada lower. An average of the central bank’s preferred core measures increased 3.15 percent over the same period last year, down from the 3.35 percent average in the prior month, and the older “CPI-X” measure, which importantly excludes mortgage interest, climbed just 2.1 percent over last year, approaching the middle of the target range. We believe this reflects a deeper drop in underlying domestic demand, and expect the Bank’s April Monetary Policy Report to bring downgrades in growth and inflation forecasts, decisively clearing the way for a first rate cut by June.

Japan’s yen remains on the defensive as the aftershocks from yesterday’s Bank of Japan decision fade. The central bank’s exit from negative-rate territory, termination of yield curve control, and end to private sector asset purchases were largely priced in, but Governor Ueda’s commitment to maintaining “accommodative” policy wasn’t - and the exchange rate is coming under sustained pressure once again as traders play chicken with the country’s intervention-happy Ministry of Finance.

The Federal Reserve will almost certainly keep policy rates at a 23-year high this afternoon, and the statement should remain broadly unchanged, but markets will focus on possible adjustments to the “dot plot” summary of economic projections. We expect the median 2024 estimate to remain at 4.625 percent, unchanged from last December, but a move higher is certainly possible - the recent easing in financial conditions and strength in inflation prints could give policymakers ample reason for caution. Based on anecdotal evidence, we estimate that roughly a third of market participants are braced for an upside move, meaning that some position adjustment is likely to occur regardless of the outcome.

But Chair Powell’s comments during the press conference might prove more important in driving market action. If he repeats language used during Congressional testimony in early March - when he emphasised economic downside risks and said officials were “not far” from having the confidence needed to begin cutting rates - markets could rally, potentially reversing any damage inflicted by hawkish signals embedded in the summary of economic projections. Broadly speaking, markets are currently priced for a gradual easing trajectory from the June meeting forward, and - with the economy cooling even as inflation slows in a bumpy manner - this looks reasonable to us.

Still Ahead


A record of the Bank of Canada’s early-March meeting could deliver insight into the factors that led policymakers to rule out easing in April, and might provide some colour on the quantitative tightening debate playing out behind the scenes. In the post-meeting press conference, Governor Macklem said “Governing Council remains concerned about the persistence of underlying inflation, and we want to see a further deceleration in core inflation in the coming months” - language that clearly anchored rate cut expectations further out - and noted that overnight repo operations were reducing stress in funding markets, saying “Our view on our QT (quantitative easing) strategy hasn't really changed significantly”. (13:30 EDT)

The Federal Open Market Committee will almost certainly leave the Fed Funds target in the 5.25-to-5.5 percent range for a fifth consecutive meeting and its forward guidance should remain basically unchanged, but the “dot plot” summary of economic projections could generate some drama. Most observers expect officials to pencil in a total of three rate cuts in the remainder of the year - the same as in December - but after a series of hotter-than-anticipated data releases, a significant minority think the number could be reduced to two. Markets could experience a relief rally if this fear goes unrealized. (14:00 EDT)


The Bank of England is overwhelmingly likely to leave its policy rates and forward guidance unchanged for a fifth consecutive meeting, but officials could continue to edge in a more dovish direction. Monetary Policy Committee members are gradually moving toward Swati Dhingra’s position, with slower inflation and wage growth numbers helping to silence calls for still-higher rates. (08:00 EDT)

Officials at the Banco de Mexico could vote by a narrow margin to cut key interest rates for the first time in three years, but should stick with guidance that sets out an extremely gradual easing trajectory ahead. With inflation subsiding at a rapid clip, Mexican real interest rates are the highest in Latin America, imposing a speed limit on the economy, while also helping support the carry trade that has made the peso one of the world’s best-performing currencies in the last few years. (15:00 EDT)


Markets think Canadian retail sales contracted by -0.4 percent in January, consistent with Statistics Canada’s preliminary estimate. Softness in gasoline prices probably played a role, but a pullback in vehicle purchases likely did much of the heavy lifting. (08:30 EDT)


Karl Schamotta

Karl Schamotta

Chief Market Strategist

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