IMF sees an eventual return to very low interest rates

OVERNIGHT

Asian equity markets are up this morning aside from Chinese indices which are posting small losses. China March annual CPI inflation unexpectedly slowed to 0.7%y/y from 1.0% in February, while producer prices inflation eased to 2.5%y/y. In Japan, the new Governor of the Bank of Japan said that a significant near-term turnaround in Japanese monetary policy was unlikely. The British Retail Consortium’s March report showed sales on a like-for-like basis up 4.9% year-on-year, unchanged from February. Meanwhile, the IMF has said that UK interest rates will fall back to ultra-low levels once inflation is tamed. 

THE DAY AHEAD

Last week saw a renewed rise in concerns about downside risks to economic activity, particularly in the US. Those seemed to be fuelled by weaker-than-expected March US survey data for both manufacturing and services. Although, more positively, there have been indications that Eurozone and UK service activity have strengthened in Q1 and that Chinese services are seeing a strong post-Covid restrictions rebound. The US March US labour market report, which was close to expectations, seems to have had little initial impact on these growth concerns. 

The uncertain global outlook and what it means for interest rates is bound to be a key topic of discussion at this week’s semi-annual IMF/World Bank forum for global policymakers. Back in January the IMF, in its last forecast update, revised up its economic growth projections and lowered its inflation forecast. It seems likely to further reduce its headline inflation estimates at today’s update but the outlook for its growth projections is more uncertain. Of particular interest may be the extent to which it sees recent events in the banking sector as raising the risk of tighter credit conditions.

It is a quiet start to the week for data releases with the key ones both domestically and internationally coming later. In the Eurozone, the Sentix investor confidence measure has risen in recent months, although it is still at a relatively depressed level. Something of a setback is expected for the latest reading for April reflecting the recent uncertainty around banks. Meanwhile, already released data for some countries points to a fall in March Eurozone retail sales. In the US, the NFIB small business indicator will provide an update on an important part of the economy.  

Chicago Federal Reserve President Goolsbee is scheduled to speak. He is a relatively new appointee whose views on current US economic conditions are not well known. However, he is a voter on interest rates this year and so his views, particularly on credit conditions, will be interesting.

MARKETS

In early post-holiday trading, US Treasury yields are modestly higher reflecting Friday’s March labour market report that showed further sizeable employment gains. However, the report did not seriously dent expectations of significant US interest rate cuts later this year. In currency markets, the US dollar is slightly lower versus both the euro and sterling.