Economic and financial risk insights: the first US rate cut is taking its time

• Strong US CPI and payrolls suggest outperformance will continue. This raises the risks of later, and fewer, interest rate cuts from the Federal Reserve.
• Euro area disinflation continues and growth could improve in the coming quarters, especially if the ECB cuts rates soon.
• Japan has exited its negative interest rate policy. A strong US dollar vs the yen could raise the risk of another (small) rate hike from the BOJ this year.
• China's manufacturing PMI and CPI inflation returned to expansionary territory for the first time in six months, but housing market remains sluggish.

US resilience continues. The Atlanta Federal Reserve's Nowcast suggests 2.4% real-terms GDP growth in Q1 2024, still above-trend. The US unemployment rate fell last month (3.8% vs 3.9% in February), non-farm payrolls were higher than expected (303k), and wage growth remains firm. These developments pose upside risks to our 2.2% US real GDP growth forecast for 2024.

Meanwhile, surveys suggest a moderate recovery ahead in Europe, with the euro area services sector PMI further improving in the >50 expansionary territory. China's NBS Manufacturing PMI returned to expansion (50.8) in March for the first time in six months, but housing market activity remained sluggish. 

Figure 1. US core PCE inflation and core CPI

US disinflation has stalled, but recent catastrophe events are not globally inflationary. March 2024 produced a third consecutive strong US CPI inflation print (3.5%, up from 3.2%), though US core PCE inflation decreased to 2.8% in February, the lowest since March 2021 (see Figure 1). The Baltimore bridge accident is not expected to materially affect disinflation in motor prices, while the Taiwan earthquake has also not caused prolonged disruption to the tech supply chain.¹

Figure 2. Goods and services inflation for the euro area

Disinflation is continuing in Europe and wage deals are expected to soften, though trade union activism is set to stay higher post-pandemic (see Figure 2). The five-month rally in crude oil prices does not constitute a global inflation shock, but does add gradual inflation pressures (see Figure 3).

Figure 3. Prices for crude oil and natural gas  

In many emerging Asia and Latin America economies, a strong US dollar and recent uptick in food prices (see Figure 4) will also add slightly to inflation pressure again.

Figure 4. FAO Food Price Index and sub-indices 

Later US rate cuts likely as ECB prepares to move first. Strong US inflation, jobs, and activity data is likely to delay the Fed's first rate cut into Q3, but the bar for rate hikes remains high. In Europe, we maintain our baseline that the ECB and BOE will cut rates before the Fed, with easing inflation and wage growth reinforcing the case for a June cut. However, risks are skewed to fewer and more gradual rate cuts after the initial cut with the ECB noting this week it won't pre-commit to a particular rate path.

The Bank of Japan exited its negative interest rate policy in March and made the first interest rate hike in seventeen years. We expect a gradual normalisation ahead, but yen weakness (driven by the higher-for-longer Fed Funds outlook) adds risk of another hike in 2H24.  

Table 1: Key economic forecasts

Continued US economic resilience raises upside risks to our forecasts. Europe likely to see a moderate economic recovery, whilst China is showing signs of improvement but still faces structural challenges.