Sive Morten
Special Consultant to the FPA
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Fundamentals
Guys, I understand that you probably will find something more interesting time spending on holidays than to read this report. Still, if somebody will decide to read it - here it is.
No doubts that the hot news of this week is turmoil in Red Sea and Yemen rebels activity around one of the major merchant seaway. We still yet to see the impact of this problem on the markets and global economy within 1-2 months. But for now it is obvious that the major looser is EU. All the others have some positive side as well, while EU has no even single positive result of this issue. Say, UK is major insurance country for all sea transportation, oil exporters expect price rise etc. And second bulk of data is the US statistics that was mixed. While PCE inflation was lower than expected, manufacturing activity in two big states has shown poor results and GDP was revised to lower level of 4.9% from initial 5.2%.
Market overview
Data on Wednesday showed U.S. consumer confidence increased more than expected in December amid optimism about the labor market, which could help to underpin the economy early next year.
The Federal Reserve's dovish December pivot has boosted the case for the weakening dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback's decline, according to investors.
The dollar hit a one-week low against a basket of major currencies on Thursday. Data earlier Thursday showed gross domestic product increased at a 4.9% annualized rate last quarter, revised down from the previously reported 5.2%. The consumer spending element of third-quarter GDP was revised downward to 3.1% from 3.6% in the previous estimate.
A separate report on Thursday showed the number of Americans filing new claims for unemployment benefits rose just marginally last week, suggesting underlying strength in the economy as the year winds down. Some investors expect slower inflation will prompt the Fed to ease policy to stop real rates from rising, and are wagering on early and aggressive action. Some analysts said month-end rebalancing in thin trade could weigh on the dollar in the near term.
British inflation fell in November to its lowest rate in over two years, prompting investors to fully price in a BoE rate cut by May 2024 and assign a nearly 50% chance of a cut by March.
Two of the European Central Bank's most prominent hawks on Wednesday joined the chorus of policymakers trying to talk traders out of betting on upcoming rate cuts, so far with no success. Bundesbank President Joachim Nagel and his Dutch colleague Klaas Knot both said the ECB needed time before declaring victory over historically high inflation and reversing the sharpest streak of rate hike in the euro's history.
European Central Bank policymaker Joachim Nagel said in an interview published on Wednesday that euro zone interest rates must remain high and traders betting on upcoming cuts in borrowing costs should be careful. He conceded, however, that rates had very likely reached their peak -- a comment that was echoed by Knot in his own interview with German financial daily Boersen-Zeitung.
The Dutch central bank governor said the ECB first needed to see data about wage settlements, which would only become available around the middle of next year, making a rate cut before then "rather unlikely". Still, money markets were fully pricing in 150 basis points worth of cuts next year, which would take the ECB's deposit rate to 2.5%, plus a slight risk that it could even end the year at 2.25%.
The European Central Bank said on Tuesday it had raised capital requirements for 20 banks after judging they had not set aside enough cash to cover for loans that had gone unpaid, a key concern for supervisors after borrowing costs rose sharply. The move was part of the ECB's push, set to continue next year, to ensure banks are preparing for more delinquencies and tighter liquidity after it jacked up interest rates to fight high inflation.
Residential property prices in Germany continued their fall, dropping 10.2% in the third quarter from a year earlier in a further grim sign for the real-estate sector in Europe's largest economy, data on Friday showed. It was the fourth consecutive quarter of declines and the biggest since Germany's statistics office began keeping records in the year 2000, underscoring the nation's biggest property crisis in decades.
The decline for single- and two-family homes in major German cities was especially pronounced in the third quarter - 12.7%, while apartment prices fell 9.1%. Other data on Friday showed that orders for the construction industry dropped a seasonally adjusted 6.3% in October compared with the month before. The German Construction Industry Federation said the home construction sector was headed for a further reduction in jobs.
The dollar index edged down on Friday, hitting a near five-month low as data showed annual U.S. inflation slowed further below 3% in November, cementing market expectations for a U.S. interest rate cut next March. In the 12 months through November, inflation, as measured by the personal consumption expenditures (PCE) price index, stood at 2.6%, easing from 2.9% in October. Excluding the volatile food and energy components, the so-called core PCE price index advanced 3.2% year-on-year in November, the smallest rise since April 2021.
The chief executive of Swiss banking giant UBS Sergio Ermotti, is not convinced central banks have got inflation under control, he said in a newspaper interview published on Sunday.
Heading into 2024, analysts say the U.S. recession they'd been forecasting for two years isn't coming anymore. Everyone else, from companies to investors, is still bracing for a slowdown caused by tepid consumer demand. Consensus forecasts from major banks, including Goldman Sachs, Morgan Stanley, UBS and Barclays, are for global growth to be constrained in 2024 by elevated interest rates, pricier oil and a weakened China, but with low odds for a recession. A year ago, many banks were forecasting a U.S. recession.
Businesses are sounding more grim than they did last year. In its collection of management commentary from 150 earnings calls in the third-quarter reporting season, Deutsche Bank last month said companies broadly characterized demand as being somewhat weak, but not alarmingly so. Companies have continued to cut inventories as they adjust to sluggish demand for goods.
Several companies are already feeling the slowdown. "The consumer is starting to slow down a little bit and the consumer-based companies, which really are almost all the big companies at this point, are starting to talk about that," said PGIM's McDonough. The global asset manager has $1.27 trillion in assets. Consumer spending has indeed been cooling, as per surveys from the Institute for Supply Management (ISM)
Reuters polls conducted through 2022 and until mid-2023 consistently showed economists' median probability for a U.S. recession within a year were above 60%. That probability is now closer to 45%.
Speaking about overall situation in EU, Chinese and the US economy - it remains depressed and worsen gradually. Things are getting worse and worse in the European Union. Or maybe the authorities of this entity are simply forced to reveal information that they have been hiding from the public for some time.
INTEREST RATE CUT RUN. WHO WILL BE THE FIRST ON THE FINISH LINE
Now it is widely anticipated that the Fed should stand in a head of rate cut cycle, while other central banks will follow later. And this idea is commonly accepted by the markets. Banks start making forecasts already on EUR appreciation, based on this idea. But, we're not sure that everything will go precisely in this way. I would say, we think that it will go different and the US as real gentlemen let woman (EU) to go in front of them. We consider this scenario as a primary one by few reasons. First is, in general - because all sanctions and global crisis are under control of the US and they decide what steps, measures and limitations have to be taken but their satellites. Puppets in Germany and Brussels will do everything as they will be ordered to. And the US will do everything to prevent any capital flows back to EU.
Second is, statistics shows that situation in EU is deteriorating faster. We already have mentioned that inflation is dropping ahead of forecasts, Impact on EU periphery and core countries of high rates is different. It means that starting of the crisis could come unexpectedly and right from so called PIIGS group. Despite strong demand for their bonds, the fundamental data remains poor as it was. Finally, we could see significant increase of default spread over risky (High Yields) rates in EU compares to the US. This indirectly hints on recession concerns in EU.
In the nine months to September, corporate insolvency in the EU rose 13% year on year and reached its highest level in eight years. The increase in bankruptcies comes as high rates and the end of the Covid relief program hit businesses hard. Germany, the EU's largest economy, reported that the number of bankruptcies increased by 25% from January to September. The US has similar situation, but they have wider tools of support.
As we've mentioned above, ECB demands higher capital coverage ratios for 20 banks, simultaneously drying liquidity out of the market, cutting its own balance. New cases of troubles of major EU banks start appearing with scaring regularity. Now it is Julius Baer. All the “centuries-old traditions of reliability” were safely flushed down the toilet. It’s always like this in finance - the biggest troubles happen to those you wouldn’t even think about. Finally, the Red Sea turmoil and Yemen forces attacks on major transition seaway will hurt EU economy even stronger as it increases all expenses, including insurance, shipping expenses and LNG costs. EU is a pure looser of this situation.
That's being said, throughout 2023, we have seen a macroeconomic horror show in the European Union and, in particular, Germany. In fact, the EU has been teetering on the brink of recession since the end of last year, and the largest economies (Germany, France, the Netherlands) are already stagnating or contracting. The results in the industrial sector are indicative: industrial production is in a tailspin in Germany, followed by Italy, France and Spain.
German cars were forced out of world markets by the Chinese, energy-intensive production was killed in favor of a crazy abandonment of Russian gas, and global demand for durable consumer goods and capital goods fell due to rising interest rates.
And some investors already start understand this.
Now speaking on the US. They have a lot of tools to extend the term of higher rates. First is, as we already mentioned previously, drop of the US inflation stands due only two components - food and energy, while other goods and services keep inflation relatively high and stable. With new reality is coming, dynamic of oil price could change the direction, as well as food because of raising shipping costs.
Market optimism over the potential for interest rate cuts next year is dangerously overdone, according to former FDIC Chair Sheila Bair. A developed economy should not have both low unemployment and high public debt. The theory suggests that low unemployment is evidence of a healthy economy, which helps reduce budget deficits and debt through rising incomes and reducing social benefits.
However, the current situation in the United States is different. Historically, with unemployment less than 6%, the budget deficit averaged 1.9% of GDP from 1970 to 2022, and now in 2023, with unemployment of 3.6%, the deficit has reached 6.3% of GDP, which is abnormal. This situation is due to a number of factors, including an aging population, increasing health care and social assistance costs, rising interest rates on the national debt, one-time factors of declining income and bankruptcies of US banks.
People no longer want to travel to the USA en masse, no matter how surprising it may seem to someone. The American Dream doesn't sell anymore. And the cost of real estate, medicine and education is such that “it’s cheaper not to work / not to go.” The United States has achieved zero population growth for the first time in more than 120 years. Hence the low unemployment with such a budget policy as if there is a recession and a war going on at the same time.
Under these conditions, any significant injection of liquidity into the economy from the Fed will lead to a sharp and rapid increase in wage inflation. The Fed's dovish turn does not mean that the problem of inflation has been solved. In 2024, there are risks of rising inflation (due to a rebound in the housing market and easing financial conditions) and risks of lower growth (due to the lag impact of Fed rate hikes on consumers, firms and banks). They may have changed their communication, but the Fed is not out of the woods yet, and the risks of rising inflation and downside risks remain significant. Also it’s worth emphasizing an important point once again - the fact that they are constantly revising forecasts means that they are not in control of the situation.
Since the last QE and the end of the lockdowns, it took a little more than a year for the CPI to rise above 9%. There is a feeling that the Fed will overdo it this time too. And there will be something to overdo. As already mentioned, now with a state budget deficit of 8% of GDP, the latter shows growth of only 4-5%, which means a drop in GDP by more (!) than 3-4% if the incentives are canceled. And this is still some positive for both investors and consumers. Look, everyone is waiting for rates to be lowered.
Moreover, if unemployment rises to the region of 10%+, as it usually happens, then there will be no other methods other than handing out money again. Moreover, why come up with something new if there is such a convenient and politically very beautiful tool?
The yield of short-term treasuries is driven by the rate, but the yield of long-term treasuries is driven primarily by inflation expectations. The oil painting is a financial crisis, and yields on the long end are rising and rising because everyone has stopped believing in the Fed's ability to fight inflation.
Making forecasts is a thankless task, especially if they do not come true, the authority of the expert falls. But for now, the onset of the crisis, or rather the acute phase of the crisis, which is already underway, is expected by the end of March next year, that is, somewhere in the second quarter. It's all too much to do with it. And the drying up of reverse repo, and the termination of BTFP, and the general trends for 3-6 months look like they are exclusively getting worse. Supposedly inflation to rise until the end of 2025.
But, 2024 should be relatively quiet. Although not everything is under the US control, but they will try to do the best to keep election year without big shakes. For instance, now some analysts suggest that they US Treasury could start buying of short-term debt while the Fed will keep reducing its balance of long-term Treasuries that could let to postpone QE for few months.
The growth of borrowings through BTFP under such conditions means that the banking system, along with a drop in yields on long-term bonds, began to experience a shortage of liquidity. The repo market probably clogged up and banks ran to the Fed for liquidity, since what the Fed offers through BTFP is quite favorable conditions.
In general, it won't be long until March 11, let's see how many people will be employed through BTFP by this point. But the problem, apparently, will only grow.
It turns out that financial institutions took advantage of the market difference (as much as 52 basis points) in interest rates: annual overnight rates fell on expectations of a reduction in the Fed's key rate in 2024. At the same time, the interest rates on reserve balances (IORB rate) on Fed accounts, where private banks can park funds, now amount to 5.4% — that's profit. So they borrow ~ 4.88$ by BTFP and put them on reserve accounts in the Fed for 5.4%...
All this stuff together point that the US has significantly wider amount of tools for keeping rates higher, while EU has no choice but to follow the reality. External geopolitical factors could speed up these processes which should show that EU has weaker position more evidently. This makes us doubt on EUR upside perspectives and think that euphoria on EUR/USD hardly will last for too long and somewhere in Feb-March we should get signs of exhausting. Fundamental picture points that upside EUR tendency is temporal and mostly is a retracement of longer term downside trend.
Guys, I understand that you probably will find something more interesting time spending on holidays than to read this report. Still, if somebody will decide to read it - here it is.
No doubts that the hot news of this week is turmoil in Red Sea and Yemen rebels activity around one of the major merchant seaway. We still yet to see the impact of this problem on the markets and global economy within 1-2 months. But for now it is obvious that the major looser is EU. All the others have some positive side as well, while EU has no even single positive result of this issue. Say, UK is major insurance country for all sea transportation, oil exporters expect price rise etc. And second bulk of data is the US statistics that was mixed. While PCE inflation was lower than expected, manufacturing activity in two big states has shown poor results and GDP was revised to lower level of 4.9% from initial 5.2%.
Market overview
Data on Wednesday showed U.S. consumer confidence increased more than expected in December amid optimism about the labor market, which could help to underpin the economy early next year.
The Federal Reserve's dovish December pivot has boosted the case for the weakening dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback's decline, according to investors.
The dollar hit a one-week low against a basket of major currencies on Thursday. Data earlier Thursday showed gross domestic product increased at a 4.9% annualized rate last quarter, revised down from the previously reported 5.2%. The consumer spending element of third-quarter GDP was revised downward to 3.1% from 3.6% in the previous estimate.
A separate report on Thursday showed the number of Americans filing new claims for unemployment benefits rose just marginally last week, suggesting underlying strength in the economy as the year winds down. Some investors expect slower inflation will prompt the Fed to ease policy to stop real rates from rising, and are wagering on early and aggressive action. Some analysts said month-end rebalancing in thin trade could weigh on the dollar in the near term.
British inflation fell in November to its lowest rate in over two years, prompting investors to fully price in a BoE rate cut by May 2024 and assign a nearly 50% chance of a cut by March.
Two of the European Central Bank's most prominent hawks on Wednesday joined the chorus of policymakers trying to talk traders out of betting on upcoming rate cuts, so far with no success. Bundesbank President Joachim Nagel and his Dutch colleague Klaas Knot both said the ECB needed time before declaring victory over historically high inflation and reversing the sharpest streak of rate hike in the euro's history.
European Central Bank policymaker Joachim Nagel said in an interview published on Wednesday that euro zone interest rates must remain high and traders betting on upcoming cuts in borrowing costs should be careful. He conceded, however, that rates had very likely reached their peak -- a comment that was echoed by Knot in his own interview with German financial daily Boersen-Zeitung.
The Dutch central bank governor said the ECB first needed to see data about wage settlements, which would only become available around the middle of next year, making a rate cut before then "rather unlikely". Still, money markets were fully pricing in 150 basis points worth of cuts next year, which would take the ECB's deposit rate to 2.5%, plus a slight risk that it could even end the year at 2.25%.
The European Central Bank said on Tuesday it had raised capital requirements for 20 banks after judging they had not set aside enough cash to cover for loans that had gone unpaid, a key concern for supervisors after borrowing costs rose sharply. The move was part of the ECB's push, set to continue next year, to ensure banks are preparing for more delinquencies and tighter liquidity after it jacked up interest rates to fight high inflation.
Residential property prices in Germany continued their fall, dropping 10.2% in the third quarter from a year earlier in a further grim sign for the real-estate sector in Europe's largest economy, data on Friday showed. It was the fourth consecutive quarter of declines and the biggest since Germany's statistics office began keeping records in the year 2000, underscoring the nation's biggest property crisis in decades.
The decline for single- and two-family homes in major German cities was especially pronounced in the third quarter - 12.7%, while apartment prices fell 9.1%. Other data on Friday showed that orders for the construction industry dropped a seasonally adjusted 6.3% in October compared with the month before. The German Construction Industry Federation said the home construction sector was headed for a further reduction in jobs.
The dollar index edged down on Friday, hitting a near five-month low as data showed annual U.S. inflation slowed further below 3% in November, cementing market expectations for a U.S. interest rate cut next March. In the 12 months through November, inflation, as measured by the personal consumption expenditures (PCE) price index, stood at 2.6%, easing from 2.9% in October. Excluding the volatile food and energy components, the so-called core PCE price index advanced 3.2% year-on-year in November, the smallest rise since April 2021.
The chief executive of Swiss banking giant UBS Sergio Ermotti, is not convinced central banks have got inflation under control, he said in a newspaper interview published on Sunday.
Heading into 2024, analysts say the U.S. recession they'd been forecasting for two years isn't coming anymore. Everyone else, from companies to investors, is still bracing for a slowdown caused by tepid consumer demand. Consensus forecasts from major banks, including Goldman Sachs, Morgan Stanley, UBS and Barclays, are for global growth to be constrained in 2024 by elevated interest rates, pricier oil and a weakened China, but with low odds for a recession. A year ago, many banks were forecasting a U.S. recession.
Businesses are sounding more grim than they did last year. In its collection of management commentary from 150 earnings calls in the third-quarter reporting season, Deutsche Bank last month said companies broadly characterized demand as being somewhat weak, but not alarmingly so. Companies have continued to cut inventories as they adjust to sluggish demand for goods.
Several companies are already feeling the slowdown. "The consumer is starting to slow down a little bit and the consumer-based companies, which really are almost all the big companies at this point, are starting to talk about that," said PGIM's McDonough. The global asset manager has $1.27 trillion in assets. Consumer spending has indeed been cooling, as per surveys from the Institute for Supply Management (ISM)
Reuters polls conducted through 2022 and until mid-2023 consistently showed economists' median probability for a U.S. recession within a year were above 60%. That probability is now closer to 45%.
Speaking about overall situation in EU, Chinese and the US economy - it remains depressed and worsen gradually. Things are getting worse and worse in the European Union. Or maybe the authorities of this entity are simply forced to reveal information that they have been hiding from the public for some time.
INTEREST RATE CUT RUN. WHO WILL BE THE FIRST ON THE FINISH LINE
Now it is widely anticipated that the Fed should stand in a head of rate cut cycle, while other central banks will follow later. And this idea is commonly accepted by the markets. Banks start making forecasts already on EUR appreciation, based on this idea. But, we're not sure that everything will go precisely in this way. I would say, we think that it will go different and the US as real gentlemen let woman (EU) to go in front of them. We consider this scenario as a primary one by few reasons. First is, in general - because all sanctions and global crisis are under control of the US and they decide what steps, measures and limitations have to be taken but their satellites. Puppets in Germany and Brussels will do everything as they will be ordered to. And the US will do everything to prevent any capital flows back to EU.
Second is, statistics shows that situation in EU is deteriorating faster. We already have mentioned that inflation is dropping ahead of forecasts, Impact on EU periphery and core countries of high rates is different. It means that starting of the crisis could come unexpectedly and right from so called PIIGS group. Despite strong demand for their bonds, the fundamental data remains poor as it was. Finally, we could see significant increase of default spread over risky (High Yields) rates in EU compares to the US. This indirectly hints on recession concerns in EU.
In the nine months to September, corporate insolvency in the EU rose 13% year on year and reached its highest level in eight years. The increase in bankruptcies comes as high rates and the end of the Covid relief program hit businesses hard. Germany, the EU's largest economy, reported that the number of bankruptcies increased by 25% from January to September. The US has similar situation, but they have wider tools of support.
As we've mentioned above, ECB demands higher capital coverage ratios for 20 banks, simultaneously drying liquidity out of the market, cutting its own balance. New cases of troubles of major EU banks start appearing with scaring regularity. Now it is Julius Baer. All the “centuries-old traditions of reliability” were safely flushed down the toilet. It’s always like this in finance - the biggest troubles happen to those you wouldn’t even think about. Finally, the Red Sea turmoil and Yemen forces attacks on major transition seaway will hurt EU economy even stronger as it increases all expenses, including insurance, shipping expenses and LNG costs. EU is a pure looser of this situation.
That's being said, throughout 2023, we have seen a macroeconomic horror show in the European Union and, in particular, Germany. In fact, the EU has been teetering on the brink of recession since the end of last year, and the largest economies (Germany, France, the Netherlands) are already stagnating or contracting. The results in the industrial sector are indicative: industrial production is in a tailspin in Germany, followed by Italy, France and Spain.
German cars were forced out of world markets by the Chinese, energy-intensive production was killed in favor of a crazy abandonment of Russian gas, and global demand for durable consumer goods and capital goods fell due to rising interest rates.
And some investors already start understand this.
Now speaking on the US. They have a lot of tools to extend the term of higher rates. First is, as we already mentioned previously, drop of the US inflation stands due only two components - food and energy, while other goods and services keep inflation relatively high and stable. With new reality is coming, dynamic of oil price could change the direction, as well as food because of raising shipping costs.
Market optimism over the potential for interest rate cuts next year is dangerously overdone, according to former FDIC Chair Sheila Bair. A developed economy should not have both low unemployment and high public debt. The theory suggests that low unemployment is evidence of a healthy economy, which helps reduce budget deficits and debt through rising incomes and reducing social benefits.
However, the current situation in the United States is different. Historically, with unemployment less than 6%, the budget deficit averaged 1.9% of GDP from 1970 to 2022, and now in 2023, with unemployment of 3.6%, the deficit has reached 6.3% of GDP, which is abnormal. This situation is due to a number of factors, including an aging population, increasing health care and social assistance costs, rising interest rates on the national debt, one-time factors of declining income and bankruptcies of US banks.
People no longer want to travel to the USA en masse, no matter how surprising it may seem to someone. The American Dream doesn't sell anymore. And the cost of real estate, medicine and education is such that “it’s cheaper not to work / not to go.” The United States has achieved zero population growth for the first time in more than 120 years. Hence the low unemployment with such a budget policy as if there is a recession and a war going on at the same time.
Under these conditions, any significant injection of liquidity into the economy from the Fed will lead to a sharp and rapid increase in wage inflation. The Fed's dovish turn does not mean that the problem of inflation has been solved. In 2024, there are risks of rising inflation (due to a rebound in the housing market and easing financial conditions) and risks of lower growth (due to the lag impact of Fed rate hikes on consumers, firms and banks). They may have changed their communication, but the Fed is not out of the woods yet, and the risks of rising inflation and downside risks remain significant. Also it’s worth emphasizing an important point once again - the fact that they are constantly revising forecasts means that they are not in control of the situation.
Since the last QE and the end of the lockdowns, it took a little more than a year for the CPI to rise above 9%. There is a feeling that the Fed will overdo it this time too. And there will be something to overdo. As already mentioned, now with a state budget deficit of 8% of GDP, the latter shows growth of only 4-5%, which means a drop in GDP by more (!) than 3-4% if the incentives are canceled. And this is still some positive for both investors and consumers. Look, everyone is waiting for rates to be lowered.
Moreover, if unemployment rises to the region of 10%+, as it usually happens, then there will be no other methods other than handing out money again. Moreover, why come up with something new if there is such a convenient and politically very beautiful tool?
The yield of short-term treasuries is driven by the rate, but the yield of long-term treasuries is driven primarily by inflation expectations. The oil painting is a financial crisis, and yields on the long end are rising and rising because everyone has stopped believing in the Fed's ability to fight inflation.
Making forecasts is a thankless task, especially if they do not come true, the authority of the expert falls. But for now, the onset of the crisis, or rather the acute phase of the crisis, which is already underway, is expected by the end of March next year, that is, somewhere in the second quarter. It's all too much to do with it. And the drying up of reverse repo, and the termination of BTFP, and the general trends for 3-6 months look like they are exclusively getting worse. Supposedly inflation to rise until the end of 2025.
But, 2024 should be relatively quiet. Although not everything is under the US control, but they will try to do the best to keep election year without big shakes. For instance, now some analysts suggest that they US Treasury could start buying of short-term debt while the Fed will keep reducing its balance of long-term Treasuries that could let to postpone QE for few months.
The growth of borrowings through BTFP under such conditions means that the banking system, along with a drop in yields on long-term bonds, began to experience a shortage of liquidity. The repo market probably clogged up and banks ran to the Fed for liquidity, since what the Fed offers through BTFP is quite favorable conditions.
In general, it won't be long until March 11, let's see how many people will be employed through BTFP by this point. But the problem, apparently, will only grow.
It turns out that financial institutions took advantage of the market difference (as much as 52 basis points) in interest rates: annual overnight rates fell on expectations of a reduction in the Fed's key rate in 2024. At the same time, the interest rates on reserve balances (IORB rate) on Fed accounts, where private banks can park funds, now amount to 5.4% — that's profit. So they borrow ~ 4.88$ by BTFP and put them on reserve accounts in the Fed for 5.4%...
All this stuff together point that the US has significantly wider amount of tools for keeping rates higher, while EU has no choice but to follow the reality. External geopolitical factors could speed up these processes which should show that EU has weaker position more evidently. This makes us doubt on EUR upside perspectives and think that euphoria on EUR/USD hardly will last for too long and somewhere in Feb-March we should get signs of exhausting. Fundamental picture points that upside EUR tendency is temporal and mostly is a retracement of longer term downside trend.
