Markets Get No Extra Help from Central Banks Despite Recession Risk
Markets Get No Extra Help from Central Banks Despite Recession Risk
By:Ilya Spivak
No extra help is on offer from central banks even as the risk of global recession grows
- Stocks winced but sentiment held up as the Fed waved off rate cut urgency.
- The Bank of England looks all set for a broadly anticipated interest rate cut.
- Markets may sour as central banks dither despite building recession threat.
A vague monetary policy statement from the Federal Reserve was met with caution by the financial markets. Officials curtly noted that “uncertainty about the economic outlook has increased further,” adding that “the risks of higher unemployment and higher inflation have risen.”
This lines up with the message on offer in March, when the U.S. central bank updated its forecasts to reflect weaker growth and higher inflation, but shied away from signaling what these divergent objectives might do to change the path of interest rates. Now as then, the Fed seems locked in “wait-and-see” mode and aiming for maximum flexibility.
Stocks wince as the Fed digs into “wait-and-see” mode
That mildly disappointed traders wanting to see greater urgency. Stocks swung lower as the policy statement crossed the wires, with the bellwether S&P 500 probing the lowest levels in a week, then recoiled upward to erase the move into the close. Treasury bond yields fell, implying speculation about catch-up rate cuts downwind.
The spotlight now moves across the Atlantic as the Bank of England (BOE) prepares to deliver a policy update of its own. A 25-basis-point (bps) rate cut is widely expected. From there, the markets have priced in 84bps in further easing through the end of next year. The scales seem tilted to three more cuts this year, and perhaps a fourth one in 2026.
Purchasing managers index (PMI) data from S&P Global paints a dour picture of the U.K. economy. Activity growth turned negative for the first time since October 2023 last month as the service sector faltered, ending 17 months of growth. The manufacturing sector shrank for a seventh consecutive month.
Will the markets cheer a Bank of England interest rate cut?
Meanwhile, consumer price index (CPI) data shows that inflation cooled to 2.6% year-on-year in March. Moreover, disinflation appeared to broaden across spending categories, with notable progress in stubbornly sticky areas like recreation and hospitality.
All this is compelling evidence to justify a BOE rate cut, but with so much stimulus already priced it, the central bank is probably unable to signal anything further. Taken alongside inaction from the Fed, the upshot for the markets seems to be that a U.S. slowdown has dialed up global recession risks, and central banks have little else to do at the margin.
This may resolve as a “risk-off” proposition for stock markets, where traders may be reluctant to deploy more capital while waiting for the depth of the downturn to reveal itself without more rate cuts in the pipeline. Bonds may rise alongside gold however, as speculators reason that central bank dithering now will translate into sharper easing later.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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