Central bank words are carefully chose/Earnings comments/Other

When a central banker speaks, they know to choose their words very carefully because how sensitive markets are to every single word. When a speech is prepared, those words can be especially crafted. With the topic yesterday being focused on Canada, Fed Chair Powell could have chosen to say nothing about US monetary policy. Instead he said this from written notes, "The recent data have clearly not given us greater confidence, and instead indicate that it's likely to take longer than expected to achieve that confidence...If higher inflation does persist, we can maintain the current level of restriction for as long as needed." We saw the 2 yr yield touch 5% in immediate response but did back off. Message though has been sent, by him and his colleagues that June is likely off the table. In the fed funds futures market, rate cut odds at that meeting are down to just 16%. As for July, they stand at 32%. A rate cut in fact is not fully priced in until November with September odds at 80%. Again though, this will all change with incoming data but it is how the market is priced today. 

I agree he should not have greater confidence. When he celebrated New Year's Eve, the 2 yr inflation breakeven was at 2%. He was looking good going into 2024. Today it stands at 2.93% with the CRB index up 12.5% year to date. Now, he doesn't have to conduct policy just on commodity prices but it does complicate their decision making and influences their confidence on achieving 2% SUSTAINABLY. 

We also heard from ECB president Christine Lagarde yesterday in a long form interview on CNBC with Sara Eisen. Lagarde acknowledged the rise in energy and other commodity prices. She acknowledged the euro weakness, especially in light of the weak yen, and how that can influence inflation. Irrespective of these factors, she and her colleagues seem pretty set on cutting rates in June with the swaps market pricing in a total of 3 this year. 

Interesting too is with the ECB balance sheet. In February 2020 it stood at 4.67 Trillion euros and almost doubled in size by June 2022 at 8.84 Trillion euros. Part of this huge expansion was the ECB's Targeted LTRO program where they lent banks money at cheap rates. As a lot of that has been paid back and why the ECB balance sheet is down to 'just' 6.60 Trillion euros, Lagarde said yesterday that they plan to keep on shrinking it even as they cut interest rates. 

The Fed's balance sheet, where likely in May they'll announce the slowdown in monthly QT but possibly extent it out time wise, it still remains well above its February 2020 level of $4.15 Trillion with it currently at $7.44 Trillion, down about $1.5 Trillion from its peak.