Let’s talk about central banks and inflation – Who is actually winning the fight?

Central banks in Europe and the U.S. are inching closer to a collective sigh of relief, hinting they might just have inflation, that relentless beast, on the back foot. With the new stats rolling in, there’s chatter about possible rate cuts come summer. This wishful thinking is actually backed by solid data pointing to a slowdown in the inflation surge we’ve been battling.

So, last Friday, U.S. job growth figures for the last couple of months took a nosedive from previous estimates, which pretty much set the stage for a rate cut by June. On the other side of the pond, eurozone numbers are telling a similar story with wage and profit growth taking it easy for once.

Jay Powell of the Federal Reserve dropped a hint that they’re nearly ready to ease up on borrowing costs. Christine Lagarde, steering the ship at the European Central Bank, isn’t far behind, suggesting they’re considering taking their foot off the pedal a bit, although she’s playing it cool with the “we’re getting there, slowly but surely” line.

Here’s where it gets interesting. U.S. employment data surprised us with 275,000 jobs added last month, blowing past what everyone guessed. But hold on, there’s a catch – previous job figures got a major haircut, strengthening the guesswork that rate cuts could be on the horizon by June.

Eurozone isn’t throwing any curveballs either. Late last year’s numbers show things are not as heated as feared, with both labor costs and profit margins climbing at a pace that doesn’t scream “panic”. This cools off the worry that companies might be pushing inflation higher by slapping bigger price tags on us because they’re shelling out more in wages.

For a while, the betting scene was all tensed up, thinking interest rate cuts in 2024 were a far-off dream as inflation in Europe was sticking around longer than a bad cold, and the U.S. job market seemed too pumped up to touch. But oh, how the tables have turned. The market is now eyeing up to four 0.25 percentage point rate cuts by the Fed and ECB within the year, up from three just a blink ago. And guess who might join the party? The Bank of England, with Governor Andrew Bailey spotting some rays of hope on inflation.

Now, insiders are whispering about the ECB possibly making a move as early as April, or June at the latest. That’s a shift from the stern “hold the line” stance they had just a month back, thanks to some less-than-stellar wage data supporting a more relaxed approach.

A couple of ECB decision-makers gave a thumbs up to this new vibe. François Villeroy de Galhau out of France is hinting at a rate cut in April or June, while Finland’s central bank head, Olli Rehn, thinks the danger of jumping the gun has pretty much evaporated. Even Austria’s central bank, usually on the cautious side, is signaling they might be gearing up for a rate adjustment.

But don’t get carried away – not everyone’s on board with popping the champagne just yet. A couple of U.S. Federal Reserve officials are pumping the brakes, suggesting the American economy’s still too spry for any drastic cuts. And over in Germany, Bundesbank’s head honcho, Joachim Nagel, is waving the caution flag, hinting it’s too soon to throw a victory parade.

Switching gears to a broader view, financial markets globally are now playing the “when will they” game regarding interest rate cuts, marking a potential end to the most aggressive rate-hiking phase in decades. The ECB and others kept their poker faces on recently, neither hiking nor cutting rates but nodding towards easing inflation, which has everyone reading between the lines.

Here’s a quick run-down: the U.S. is dialing back on how many rate cuts they think are coming, with a possible first move in June. New Zealand’s keeping things steady but less hawkish, hinting at a chill in their rate hike outlook. The UK’s Bank of England might ease up on rates later than others, with high interest rates but showing signs of softening their stance.

Canada’s standing its ground, keeping rates unchanged, betting on a June move. The Eurozone took a tiny step towards rate cuts, with the market now betting on a significant easing this year. Norway, Australia, Sweden, and Switzerland are all on various paths, each adjusting to their inflation outlooks. And then there’s Japan, sticking out with a potential rate hike, aiming to leave behind years of negative rates.