Markets Price in Delayed Rate Cuts Ahead of March Fed Meeting

Equities fall on quarterly market event. The SP500 and NASDAQ fell ~0.6% and ~0.9%, respectively, as a confluence of expiring derivatives positions known as the quarterly “triple witching” event largely drove today’s heightened market activity. UST yields were generally unchanged immediately following data releases this morning but ended the day ~2-4bps higher across the long end of the curve, as traders continued to shift expectations for the first 25bp rate cut from June to July. Both the 2-year and 10-year UST yield ended over 20bps higher on the week, at ~4.73% and ~4.31%, respectively.

Wage bumps may push BOJ to hike rates next week. Japan’s largest union group, Rengo, announced today that its members have successfully negotiated wage increases that average ~5.3%. This follows last year’s 3.8% raise that was the biggest in 30 years, yet another sign that returns on Japanese wage negotiations appear to be strong. The Japanese Association of Metal, Machinery and Manufacturing Workers previously reported similar progress among their 60 affiliated unions, while Toyota said this week that they fully agreed to its union’s demands. The material wage increases could boost BOJ confidence that inflation will be sustained long-term, allowing for the shift to rate hikes from negative rates.

ECB’s Vujcic says economic woes could accelerate pace of rate-cuts. Concerned about a stagnating European economy, ECB Governing Counsil member Boris Vujcic said that the pace of rate-cuts could accelerate, once the first cut occurs, if the economy slows down faster than expected. He said, “If there’s a significantly faster slowdown of the economy, that would then of course have consequences for interest-rate policy. Given where we are right now, probably not affecting the timing of the first cut, but it could have an effect on the pace.” Germany, the bloc’s largest economy, is a key driver of the growth concerns, but Vujcic noted that, “The problems that we see in Germany are more of a structural nature, rather than cyclical…that shouldn’t be confused with the rate cycle.”