Are the looser financial conditions preventing quick interest rate cuts?
Reading time:15 MIN
Current market commentary
After a strong December, most equity markets got off to a moderate start in 2024. This was also due to the recent countermovement in bond yields following the rapid downward trend since the end of October. In their latest speeches, Fed members expressed concerns that the interest rate cuts priced in by the market for 2024 are likely to be too optimistic. The enormous easing of financial conditions (interest rates, oil, USD, credit spreads down, equities up) in the last two calendar months is likely to have increased the probability of a "no landing" for the economy - with the result that inflation may not come down as much as hoped this year. In this scenario, the Fed would have to be significantly more restrictive than the market is currently pricing in. Against this backdrop, the upcoming Fed meeting at the end of January and the announcement by the US Treasury Department regarding US government bond sales in Q2 (volume and maturity structure) are likely to influence investors' risk appetite.
Short-term outlook
With the start of the Q4 reporting season, the market focus is likely to shift back to corporate fundamentals. Starting with financial stocks, around 60% of the S&P 500 will report in the next three weeks. At the (monetary) policy level, the ECB meeting on 25 January should provide insights into the further development of interest rates in Europe. In addition, the World Economic Forum in Davos will take place from 15-19 January and the presidential elections in Finland on 28 January. Today the GDP figures (2023) and tomorrow the ZEW economic expectations (Jan.) for Germany and the Empire State Index (Jan.) for the US will be published. On Wednesday, the Q4 GDP figures and the December data on industrial production and retail sales (Dec.) for China and the US will provide information on the robustness of the global economy. The Philadelphia Fed Index (Jan.) and the sentiment indicator from the University of Michigan (prel., Jan.) are due on Friday. This will be followed next week by the US Q4 GDP figures and durable goods orders.
Are the looser financial conditions preventing quick interest rate cuts?
- Financing conditions in the US have eased considerably in recent months with falling interest rates, lower credit spreads, stronger equity markets and a weaker US dollar.
- It is unclear whether the US economy will really "land" with so much tailwind. Nevertheless, the consensus expects the Fed to cut interest rates almost six times this year. However, the latest US inflation data shows that the normalisation of monetary policy could take longer than expected.
