Policy Meeting Week Closes with a Rate Decline

Swap rates fall to close out a busy week. Swap rates declined 3-7bps today despite little economic data and Fed commentary, as markets continue to absorb dovish 2024 Fed expectations that stemmed from Wednesday’s FOMC meeting. The fall cemented a near 20bp decline from this week’s highs. The yield curve has now been inverted for the longest time ever, stretching back to July 2022 and breaking the 624-day record set in 1978. The 2s10s inversion is currently -39bps as the curve has steepened significantly since July’s -108bps. Elsewhere, the USD edged toward its highest level of the year across multiple indicators after this week’s slate of global policy meetings.

Central bank policy shifts were significant across the globe. This week’s rate activity was headlined by policy meetings in the US, England, Japan, Switzerland, and Turkey. The Fed announced their fifth consecutive rate pause while releasing a dot plot that showed they expect three 25bp rate cuts in 2024. The forecast was consistent with December’s dot plot, and monetary easing is still not expected until June or July. The BOE’s policy meeting played out similarly: they announced another rate pause and flashed dovish signals, as two significant hawks moderated their stance, now in agreement with the pause. Elsewhere, the BOJ’s rate hike and end of negative rates, Turkey’s unexpected 500bp rate hike, and Switzerland’s surprise 25bp rate cut provided for a volatile week.

Chinese yuan falls by most in two months. Following a weaker-than-expected daily exchange rate fixing by the People’s Bank of China (PBOC), the yuan fell up to 0.4% to 7.2299 per dollar intra-day, below the 7.20 per dollar psychological threshold that policymakers have been supporting for months. The dip prompted state-level banks to purchase yuan with US dollars in an attempt to support the currency, according to anonymous sources. This is the most recent development following months of pressures on yuan strength, such as proposed US policy to prevent mutual funds from investing in certain Chinese equity indices, continued US dollar strength, and expectations of Chinese policy easing in the near term. Commenting on the impacts of a weaker yuan on Chinese equities, Carlos Casanova of wealth management firm UBP said that if China allows the yuan to depreciate to 7.3 per dollar, “it would definitely make it more difficult for the equity rally to continue, because a lot of people would try to diversify into US dollar exposure.”