Markets edge higher ahead of the Fed decision tomorrow

Dow rose 149, advancers over decliners 4-3 & NAZ slid back 77.  The MLP index was fractionally higher to 280 & the REIT index was off 1 to the 377s.  Junk bond funds fluctuated & Treasuries had limited buying which reduced yields (more below).  Oil crawled up the the 83s (another multi month high) & gold was off 6 to 2157.

AMJ (Alerian MLP Index tracking fund)

Forecasters in the CNBC Fed Survey are increasingly confident that the US economy will avoid a recession & pull off a soft landing, & unlike past surveys, don't even see growth slowing much below potential in the next couple of years.  The potential downside of the better forecast: less Fed easing with the possibility that officials at their meeting this week forecast fewer rate cuts in 2024 than they did in Dec.  “For now, the narrative that the U.S. economy is so fragile that it cannot survive without ultra-low rates has been debunked and discarded into the rubbish bin of history,” wrote John Donaldson, director of fixed income at the Haverford Trust Company, in response to the survey.  The Mar survey finds the average probability of a soft landing at 52%, up from 47% in the Jan survey, & the first time that it has been above 50% since the question was first asked in Jul.  The probability of a recession in the next 12 months fell to 32%, the lowest since Feb 2022 & down from 39% in Jan & 63% in Nov.  “The U.S. economy continues to move toward a modest growth and modest inflation environment,” said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute.  “This may take longer than initial expectations, but the trend is favorable.”  The Fed's 2-day meeting ends tomorrow, when the central bank is largely expected to keep the federal funds target rate at 5.25-5.50%.  Forecasters in general have a bad track record of predicting recessions.  The 27 respondents to this survey, among them economists, strategists & fund managers, joined other forecasters in the past year in being fairly certain a recession would hit in 2023.  That turned out not to be the case.  While the average recession probability is down, about 20% of respondents still say there's an even-money chance or greater of a downturn in the next 12 months.  Respondents still see 3 cuts this year, on average, which would bring the funds rate down to 4.6%.  Survey respondents never became as euphoric as futures markets about rate cuts & so they haven't had to backtrack from the 6 cuts that the markets priced in.  Even then, there are those who believe the Fed could be more hawkish at the upcoming meeting.

Fed could cut rates fewer times than expected as economy keeps growing, according to CNBC survey

Treasury yields were slightly lower ahead of the Federal Reserve's meeting, which investors are hoping will provide fresh insights into policymakers' expectations for the economy.  The yield on the 10-year Treasury yield was down 2.6 basis points at 4.314% & the 2-year Treasury  yield was last at 4.713% after dipping around 2 basis points.  Yields & prices have an inverted relationship & 1 basis point equals 0.01%.  Markets are widely expecting the Fed to keep interest rates unchanged, but uncertainty remains about the path ahead for them.  This includes when rates may be cut & how many rate cuts are likely to take place this year.  Traders have so far been pricing in the first rate cut for Jun, according to CME Group's FedWatch Tool, & were last pricing in an around 55% chance of this, slightly lower than earlier in the week.  This comes after recent inflation data raised concerns among investors that rates may remain elevated for longer than previously hoped for as it indicated that inflation appears sticky.  Fed officials have frequently said that their decision-making will be data-led & that they are still looking for evidence that inflation is moving sustainably toward the 2% target range.

Treasury yields dip as Fed meeting is due to kick off

The Bank of Japan (BOJ) ended 8 years of negative interest rates & other remnants of its unorthodox policy, making a historic shift away from its focus on reflating growth with decades of massive monetary stimulus.  While the move was Japan's first interest rate hike in 17 years, it still keeps rates stuck around zero as a fragile economic recovery forces the central bank to go slow on further rises in borrowing costs, analysts say.  The shift makes Japan the last central bank to exit negative rates, & ends an era in which policymakers around the world sought to prop up growth thru cheap money & unconventional monetary tools.  "We reverted to a normal monetary policy targeting short-term interest rates, as with other central banks," BOJ Governor Kazuo Ueda said.  "If trend inflation heightens a bit more, that may lead to an increase in short-term rates," Ueda said, without elaborating on the likely pace and timing of further rate hikes.  In a widely expected decision, the BOJ ditched a policy put in place since 2016 by former Governor Haruhiko Kuroda that applied a 0.1% charge on some excess reserves financial institutions parked with the central bank.  The BOJ set the overnight call rate as its new policy rate & decided to guide it in a range of 0-0.1% partly by paying 0.1% interest to deposits at the central bank.  The central bank also abandoned yield curve control (YCC), a policy in place since 2016 that capped long-term interest rates around zero.

Bank of Japan hikes interest rates for first time in 17 years

Policymakers widely expect the Fed to keep rates at their historic highs. The focus will be on the "dot plot" for any clues to the number & timing of any cuts this year.  The Bank of Japan ended its era of negative rates with its first hike in 17 years, which got the attention officials at central banks around the world.

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