Central banks likely to ease later and less

The market has become a lot less dovish about the US Federal Reserve ’ s (Fed) outlook, and global assets have suffered for it. Two months ago markets were priced for six 25 basis point (bps) cuts — 150bps in total — in the federal funds rate by the end of 2024.

The market is now poised for only three cuts, wiping off 75bps in easing in 2024.

Where the market expected that the Fed would start cutting in March, it has moved the timing of easing out four months to July. This adjustment in interest rate expectations has been echoed across multiple markets.

Like the Fed, all central banks are forecast to start easing later and ease a lot less in 2024.

The European Central Bank is now forecast to cut four times in 2024; in January market participants were looking for seven cuts.

From the Bank of England the move has been from seven cuts to two, and so on. Much of this is related to economies in the developed world that have performed better than expected and markets that have continued to outperform. The US economy, its equity and corporate credit markets, seem bulletproof.

Changes in expectations around the SA Reserve Bank have mimicked those we have discussed about the Fed. Forward rates are pricing in less than 50bps of cuts in 2024, and an easing cycle starting only in September.

When this year started, rates were discounting 100bps starting in March.

Market participants are betting the Bank cannot move before the Fed. Moreover, the bet appears to be that the Bank must cut by less than the Fed when it finally moves. I suspect this position will come into question.

On some level, the expectation of co-ordination between the Reserve Bank and Fed is understandable.

Inflation is seen as elevated relative to the target, the currency remains weak and the monetary policy committee is notoriously cautious. However, local fundamentals are different from the US, the euro zone and the UK, and this will count at some point.

Developments in local inflation are likely be the anchor to a more dovish interest rate outcome.

Powerful disinflationary factors will set in as 2024 progresses and could dominate offshore considerations in local monetary policy decisionmaking, creating scope for divergence between the local and US policy rates.

My expectations regarding motor vehicle price inflation illustrate these forces.

The first is rand stability. Cars are imported and currency stability since the second half will be a disinflationary force into the middle of the year.

The second is weak demand and pricing power. Passenger car sales peaked in November 2022 and since then have declined.

This reflects low vehicle demand, spurred by weak consumer income growth and throttled credit supply by the banking system.

We suspect dealers will be more interested in moving stock than raising prices in this environment.

The last factor and the most interesting is competition from new Chinese manufacturers. I see more new car brands on the roads now, and Chinese brands are priced at deep discounts to traditional carmakers.

I am a big believer in German cars, but it is difficult to justify spending R1.5m on a BMW SUV when I can pay R500,000 for a Haval with all the trimmings.

The Chinese auto sector is flooding the world with cars, and good ones at that.

It looks as if they plan to do for cars what they did for manufactured goods.

Where vehicle price inflation was about 8.4% in October 2023, it last printed at 7.4% and should continue to fall.

The reaction in local rates and rand after the better-thanfeared budget reflected an internalisation of the muchweakening dovish conviction across global financial markets. The budget was clearly inadequate to argue against a move in defiance of global considerations.

At some point there will be a justification for divergence.