Sive Morten
Special Consultant to the FPA
- Messages
- 18,651
Fundamentals
So, guys we're entering pre-Xmas week, activity gradually will decrease and quiet period, as usually will be in between of Xmas and NY. This week, no doubts, the major event was inflation statistics and central banks statements. Recent J. Powell press conference makes me think on two subjects. First is, he said nothing new, expect possible rate cut in 2024, and today we explain why Fed can't wait any more with this decision. Second is - it seems that they are waiting for some big events, making too careful steps. I do not know, maybe J. Biden impeachment, or something else but really big.
Finally, markets absolutely ignore the Fed position as it was discredited too many times. Just last month we've heard "higher for longer" and saw positive statistics, while now we hear about rate cut. Yes, maybe market overreacted, as Fed's Williams said on Friday that "we aren't really talking about rate cuts right now" at the Fed and it's "premature" to speculate about them. But, the same was with "higher for longer" and other issues - who could guarantee that the Fed will not change rhetoric in January? Thus, market now lives with its own mind. At the same time, it is still a big question what will happen with inflation, if the Fed will start cutting rates, starting new economy stimulus and closing its QT programme.
Market overview
The dollar tumbled against the euro and yen on Wednesday after the Federal Reserve signaled in new economic projections that U.S. interest rate increases have come to an end and lower borrowing costs are coming in 2024. A near unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024, with the median projection showing the rate falling three-quarters of a percentage point from the current 5.25%-5.50% range. No officials see rates higher by the end of next year. The Fed kept interest rates steady for the third meeting in a row, as was widely expected.
Traders are now pricing in a 72% probability of a rate cut in March, up from 49% earlier on Wednesday, and a 94% likelihood by May, according to the CME Group's FedWatch Tool. The Fed's projections implied 75 basis points of cuts next year, from the current level.
Some analysts had expected that Fed Chairman Jerome Powell would push back against market pricing, and indicate that a rate cut would be unlikely in the first half of the year. Powell said the central bank was likely done raising interest rates, but kept open the option to act again if needed, noting that "the economy has surprised forecasters." He also noted that the question of when it will be appropriate to cut rates is coming into view.
With inflation ebbing but still above the Fed's 2% target and a resilient labor market many analysts see the economy remaining solid for months to come. However, the U.S. central bank may also cut rates to maintain the level of restrictive policy it is aiming for. If the Fed holds rates steady as inflation eases the gap between the two rates, known as the real interest rate, can make monetary conditions more restrictive than policymakers intend.
The euro and pound, meanwhile, were supported by the European Central Bank and the Bank of England affirming the need to hold rates higher for longer. The ECB kept rates steady and pushed back against bets on imminent cuts to interest rates on Thursday by reaffirming that borrowing costs would remain at record highs despite lower inflation expectations.
ECB President Christine Lagarde highlighted instead that inflation would soon rebound and price pressures remain strong. That was in stark contrast to the more dovish tone taken by her U.S. Federal Reserve counterpart Jerome Powell on Wednesday.
Inflation in the euro zone stood at 2.4% in November although it was expected to rebound somewhat in the coming months due to some tax changes and a lower basis of comparison a year earlier. While acknowledging that underlying price pressures were also easing, Lagarde said domestic inflation, largely driven by wage costs across the 20 countries that use the euro, was "not budging".
In her only hint at the timing of a possible rate cut, Lagarde said the first half of next year would be particularly "rich" in data, implying that a move was unlikely before June or July.
The rally in bond markets has had a silver lining for the ECB, too, however, as it allowed it to wind down its Pandemic Emergency Purchase Programme, unveiled at the onset of COVID to stabilise markets and fight off the threat of deflation. This was due to run in full until the end of next year but, with no stress in markets, the ECB said it would replace maturing bonds only through June and then phase out reinvestments in the second half of the year.
Economy conditions are keep deteriorating
Brief look on production and manufacturing sector explains why major central banks start hurry up with rate cut. "The Fed is done!" exclaimed Diane Swonk, chief economist at KPMG US, and if economic data continues evolving as it has, with inflation cooling alongside an economy that seems poised to slow but not crash, then "the Fed will be cutting sooner" rather than later in the year. Now all eyes turn on when rate will be cut.
Meantime, economy conditions are deteriorating globally. The downturn in euro zone business activity surprisingly deepened in December, according to closely watched surveys which indicated the bloc's economy is almost certainly in recession. HCOB's preliminary Composite PMI, compiled by S&P Global, fell to 47.0 this month from November's 47.6.
The Messenger: Nearly 40% of US companies say they intend to lay off some employees in 2024 due to the challenging macroeconomic and competitive environment in the US, according to a survey of 906 business leaders conducted by Resume Builder. These are actually the harbingers of recession and rising unemployment.
In Germany the downturn worsened, pointing to a recession in Europe's biggest economy at the end of the year. Meanwhile activity declined faster than expected in France as demand for goods and services in the euro zone's second-biggest economy deteriorated further.
Indicating firms in the euro zone do not see a big improvement anytime soon they reduced staffing for a second month. The composite employment index was at a three-year low of 49.6, just shy of November's 49.7. A PMI for the bloc's dominant services industry fell to 48.1 from 48.7, far short of the Reuters poll prediction of a rise to 49.0.
Demand for services fell again as indebted consumers feeling the pinch from record-high borrowing costs in the 20-country currency union spent less. The new business index dipped to 46.6 from 46.7. Factories in the currency union also had another disappointing month. The manufacturing PMI held steady at November's 44.2 - missing the Reuters poll forecast for 44.6 and chalking up its 18th month sub-50.
The German economy is set to shrink slightly this year and barely grow the next as demand from abroad is weak, government subsidies for the green transition are curbed and high interest rates dampen activity, the central bank said on Friday
World Bank chief economist Indermit Gill on Wednesday said past experience showed that interest rates may stop going up, but they are unlikely to come down "anytime soon," which could have severe negative consequences for developing countries. He told reporters that inflation developments looked promising in advanced economies, but supply shocks - especially in commodities markets - could raise inflation again quickly, which would put pressure on central banks to keep rates high.
Feverish speculation about future interest rate cuts has further loosened global financial conditions, storing up risks for euphoric stock and bond markets if central banks view the easy funding environment as a reason to hold borrowing costs high.
Global financial conditions, viewed as a leading indicator of economic performance, are now at their most accommodative since early August, a widely followed index produced by Goldman Sachs showed on Friday.
Now we need to take a close looks at EU and the US production sector. J. Yellen recently was speaking with enthusiasm on CNBC that J. Biden administration makes huge investments in domestic economy that should move it from the dead point and return production power to domestic companies. But the real picture stands as follows:
The level of industrial production in November 2023 is at the same level as in December 2007 (pre-crisis maximum) and is about 1-2% lower than the local highs formed in December 2014, December 2018 and September 2022.
In fact, industrial activity has been hitting the ceiling for the fifth time and without result. At the same time, growth was noted only in high—tech segments, including those related to the military-industrial complex, for example, Aerospace and transportation equipment - plus 14.8%, but if we compare Jan.- Nov.23 from Jan-Nov.19 It turns out that production is now 2.7% lower. No significant activity has been detected in the military-industrial complex, but in general, these segments are better than the rest. At the same time, data on the IT sector are most distorted by hedonistic indices and active stock speculation, so the real picture may be much worse.
By taking a look at official statistics, EU shows annual 6% contraction pace of industrial sector, while in the US is just -0.4% per year, although we have some doubts on reality of this data. Monthly industrial data (+0.24% mom), in contrast to the annual one, look more optimistic. But taking into account the fact that the data for October were revised down by 0.3%, the final result turned out to be negative.
This suggests that industrial stagnation continues and keeping the high rate may be too costly to the American economy. Especially in a situation where it is necessary to pursue an active, if not aggressive, policy in Southeast Asia in a situation of acute confrontation with China.
In general, it can be noted that the basic problem of the US economy — the inability to transfer investments to the real sector at the expense of the domestic market resource (who will buy products made at new industrial enterprises), has not yet been solved, despite what J. Yellen tells. Statistics is a stubborn thing. This creates big problems, because the industry is not even stagnating, but simply shrinking. Especially if you take into account real data, and not official figures heavily embellished with various statistical tricks.
What surprises could come
A few words about why the “horror without end” not only has not ended, but threatens to become chronic. Here is the public sentiment for now:
A few words about why this is not the fact. Look at what brought inflation down - it was fuel and food (service sector inflation stands stubborn). Which fell in price not least due to the growth of the dollar against other currencies. Now that the dollar is declining, oil has started to rise, and food will soon follow. This will increase inflation and again the Fed will reconsider its policies and again the dollar will move up and the markets down.
In addition, as it was correctly said, inflation is growing mainly on the supply side and not on the demand side, which means that it cannot be strangled by the rate. Therefore, the cycle of increasing inflation will inevitably resume 3-4 months after everyone decides that it has been defeated. Plus, the pre-election budget stimulus will accelerate demand and obviously will also add its own.
Therefore, of course, we should not ignore the rally, but not to expect that the markets will always rise. Rather, there will be a wide “saw” that will saw through the unwary. And high rates in the dollar - in a year they will be higher (definitely not lower) than now. We didn’t expect core dollar inflation to be less than 5% (it’s currently around 4%), but otherwise everything is on track. We'll see what happens in a quarter or two.
It doesn't work that way. There were similar sentiments in financial markets in the early 70s. Then the dollar also began to inflate (while the US economy was much more industrialized), after two post-war decades of “helicopter money”. And in the same way, the Fed began to strangle the economy and immediately release it at the first signs of a decline in inflation. But inflation was returning.
The Fed's battle with dollar depreciation lasted a decade, repeated the cycle three times, and the economy went through three recessions. At the peak of inflation, from 1977 to 1981, the dollar lost 50% of its purchasing power. The main reason for the inflation of the American at that time was government finances: the budget deficit, growing public debt, and distrust of the dollar on the part of investors. Inflation was defeated only when US dollar was backed by cheap Chinese goods and working power by starting the era of "big Chinese relocation" of US production. But, officially the success is associated with P. Volcker policy, which we think as not correct.
If we would consider ultimate scenario, then EU could fall into Middle Ages. Today, the main risk for the European financial system, as in the Middle Ages, is weather. In the event of a cold winter and a long spring, gas storage facilities will begin to empty, and energy resources will become more expensive, accelerating production costs further down the chain.
The second risk for the region comes from the south. In particular, the closure of Suez or Hormuz due to the conflict in the Middle East will lead to an oil famine and a sharp rise in the price of diesel and gasoline. This is a new surge in inflation and tough monetary policy.
The third risk is China. If the Taiwanese case worsens, fuel inflation will seem like flowers against the backdrop of an embargo on thousands of mid- and high-value products that will instantly disappear from the market.
Meantime US macroeconomic statistics demonstrate the phenomenal resilience of the American economy", at least based on official numbers.
– The large-scale collapse of assets in 2022, interest rate squeeze and extreme tightening rates did not lead to negative implementation in the macroeconomic context
– We went from expecting a global collapse in 2022 to the strongest euphoria in a quarter of a century associated with a new narrative - “we escaped recession”
But not the fact. The impact lag imposed on the financial buffer formed over 15 years of monetary frenzy, which determines integral stability; 2) leading indicators and surveys of business and the population are still depressing. 3) the crisis begins not during a period of tightening, but during a period of easing;
Macro analysis generally does not answer the question of finding a trigger for a breakdown. Therefore, the only opportunity to find the breaking point is corporate reporting and searching for vulnerabilities, but even there, problems can appear after the fact. What is the progress on the credit crisis ) among US corporations?
“Rising interest rates and accompanying operational difficulties have led to nearly 600 bankruptcy filings since the beginning of the year.” About lay offs we've said above.
Conclusion:
Based on real facts, it seems that market are dropped out of the reality. First is what we would like to mention is a big disproportion among economy condition and recent market performance. While the EU economy stands significantly worse the the US one, we see dollar weakness against major rivals, as investors overpriced coming rate cut from the Fed, suggesting that ECB will keep it higher for longer. But, in fact, ECB could start cut the rate even earlier than the Fed... As the Fed as the ECB now have no plans to start the rate cut.
With new inputs from the Fed, G. Sachs suggests that Money funds (~ $6Trln) cash will start to flow into stocks and long-term bonds. This could trigger the inflationary rally as well, when stocks start raising because it is too much cash while companies' fundamentals remain the same. Tightening loan conditions, raising of delinquencies, bankruptcies are not disappeared. Liquidity is drying, as this week Reverse Repo value has dropped below 800 Bln, hasn't seen since July 2021:
Besides, it is rhetoric question - how US Treasury will attract new buyers for its debt, by cutting the rate and finance budget deficit and government spending. It is interesting to see PCE numbers and consumer confidence next week.
Thus, we suggest that this is huge risk for the Fed, but it seems they have no choice. Second - market is overpriced the speed of rate cut, expecting too much and too fast policy easing, as in the EU as in the US. It means that current rally is relatively short-term, and market fluctuations might become nervousness and sharp, with the drastic changing of the direction. I suspect that 2024 will be extremely difficult for trading.
Still, as we've got solid upside impulse this week, it makes sense to follow it, until we get the opposite signal. The inflation struggle can't be over so easily - just by announcement of the turning point in rate cycle. I suspect that there are a lot of surprises ahead...
So, guys we're entering pre-Xmas week, activity gradually will decrease and quiet period, as usually will be in between of Xmas and NY. This week, no doubts, the major event was inflation statistics and central banks statements. Recent J. Powell press conference makes me think on two subjects. First is, he said nothing new, expect possible rate cut in 2024, and today we explain why Fed can't wait any more with this decision. Second is - it seems that they are waiting for some big events, making too careful steps. I do not know, maybe J. Biden impeachment, or something else but really big.
Finally, markets absolutely ignore the Fed position as it was discredited too many times. Just last month we've heard "higher for longer" and saw positive statistics, while now we hear about rate cut. Yes, maybe market overreacted, as Fed's Williams said on Friday that "we aren't really talking about rate cuts right now" at the Fed and it's "premature" to speculate about them. But, the same was with "higher for longer" and other issues - who could guarantee that the Fed will not change rhetoric in January? Thus, market now lives with its own mind. At the same time, it is still a big question what will happen with inflation, if the Fed will start cutting rates, starting new economy stimulus and closing its QT programme.
Market overview
The dollar tumbled against the euro and yen on Wednesday after the Federal Reserve signaled in new economic projections that U.S. interest rate increases have come to an end and lower borrowing costs are coming in 2024. A near unanimous 17 of 19 Fed officials project that the policy rate will be lower by the end of 2024, with the median projection showing the rate falling three-quarters of a percentage point from the current 5.25%-5.50% range. No officials see rates higher by the end of next year. The Fed kept interest rates steady for the third meeting in a row, as was widely expected.
Traders are now pricing in a 72% probability of a rate cut in March, up from 49% earlier on Wednesday, and a 94% likelihood by May, according to the CME Group's FedWatch Tool. The Fed's projections implied 75 basis points of cuts next year, from the current level.
Some analysts had expected that Fed Chairman Jerome Powell would push back against market pricing, and indicate that a rate cut would be unlikely in the first half of the year. Powell said the central bank was likely done raising interest rates, but kept open the option to act again if needed, noting that "the economy has surprised forecasters." He also noted that the question of when it will be appropriate to cut rates is coming into view.
With inflation ebbing but still above the Fed's 2% target and a resilient labor market many analysts see the economy remaining solid for months to come. However, the U.S. central bank may also cut rates to maintain the level of restrictive policy it is aiming for. If the Fed holds rates steady as inflation eases the gap between the two rates, known as the real interest rate, can make monetary conditions more restrictive than policymakers intend.
The euro and pound, meanwhile, were supported by the European Central Bank and the Bank of England affirming the need to hold rates higher for longer. The ECB kept rates steady and pushed back against bets on imminent cuts to interest rates on Thursday by reaffirming that borrowing costs would remain at record highs despite lower inflation expectations.
ECB President Christine Lagarde highlighted instead that inflation would soon rebound and price pressures remain strong. That was in stark contrast to the more dovish tone taken by her U.S. Federal Reserve counterpart Jerome Powell on Wednesday.
Inflation in the euro zone stood at 2.4% in November although it was expected to rebound somewhat in the coming months due to some tax changes and a lower basis of comparison a year earlier. While acknowledging that underlying price pressures were also easing, Lagarde said domestic inflation, largely driven by wage costs across the 20 countries that use the euro, was "not budging".
In her only hint at the timing of a possible rate cut, Lagarde said the first half of next year would be particularly "rich" in data, implying that a move was unlikely before June or July.
The rally in bond markets has had a silver lining for the ECB, too, however, as it allowed it to wind down its Pandemic Emergency Purchase Programme, unveiled at the onset of COVID to stabilise markets and fight off the threat of deflation. This was due to run in full until the end of next year but, with no stress in markets, the ECB said it would replace maturing bonds only through June and then phase out reinvestments in the second half of the year.
Economy conditions are keep deteriorating
Brief look on production and manufacturing sector explains why major central banks start hurry up with rate cut. "The Fed is done!" exclaimed Diane Swonk, chief economist at KPMG US, and if economic data continues evolving as it has, with inflation cooling alongside an economy that seems poised to slow but not crash, then "the Fed will be cutting sooner" rather than later in the year. Now all eyes turn on when rate will be cut.
Meantime, economy conditions are deteriorating globally. The downturn in euro zone business activity surprisingly deepened in December, according to closely watched surveys which indicated the bloc's economy is almost certainly in recession. HCOB's preliminary Composite PMI, compiled by S&P Global, fell to 47.0 this month from November's 47.6.
The Messenger: Nearly 40% of US companies say they intend to lay off some employees in 2024 due to the challenging macroeconomic and competitive environment in the US, according to a survey of 906 business leaders conducted by Resume Builder. These are actually the harbingers of recession and rising unemployment.
In Germany the downturn worsened, pointing to a recession in Europe's biggest economy at the end of the year. Meanwhile activity declined faster than expected in France as demand for goods and services in the euro zone's second-biggest economy deteriorated further.
Indicating firms in the euro zone do not see a big improvement anytime soon they reduced staffing for a second month. The composite employment index was at a three-year low of 49.6, just shy of November's 49.7. A PMI for the bloc's dominant services industry fell to 48.1 from 48.7, far short of the Reuters poll prediction of a rise to 49.0.
Demand for services fell again as indebted consumers feeling the pinch from record-high borrowing costs in the 20-country currency union spent less. The new business index dipped to 46.6 from 46.7. Factories in the currency union also had another disappointing month. The manufacturing PMI held steady at November's 44.2 - missing the Reuters poll forecast for 44.6 and chalking up its 18th month sub-50.
The German economy is set to shrink slightly this year and barely grow the next as demand from abroad is weak, government subsidies for the green transition are curbed and high interest rates dampen activity, the central bank said on Friday
World Bank chief economist Indermit Gill on Wednesday said past experience showed that interest rates may stop going up, but they are unlikely to come down "anytime soon," which could have severe negative consequences for developing countries. He told reporters that inflation developments looked promising in advanced economies, but supply shocks - especially in commodities markets - could raise inflation again quickly, which would put pressure on central banks to keep rates high.
Feverish speculation about future interest rate cuts has further loosened global financial conditions, storing up risks for euphoric stock and bond markets if central banks view the easy funding environment as a reason to hold borrowing costs high.
Global financial conditions, viewed as a leading indicator of economic performance, are now at their most accommodative since early August, a widely followed index produced by Goldman Sachs showed on Friday.
Now we need to take a close looks at EU and the US production sector. J. Yellen recently was speaking with enthusiasm on CNBC that J. Biden administration makes huge investments in domestic economy that should move it from the dead point and return production power to domestic companies. But the real picture stands as follows:
The level of industrial production in November 2023 is at the same level as in December 2007 (pre-crisis maximum) and is about 1-2% lower than the local highs formed in December 2014, December 2018 and September 2022.
In fact, industrial activity has been hitting the ceiling for the fifth time and without result. At the same time, growth was noted only in high—tech segments, including those related to the military-industrial complex, for example, Aerospace and transportation equipment - plus 14.8%, but if we compare Jan.- Nov.23 from Jan-Nov.19 It turns out that production is now 2.7% lower. No significant activity has been detected in the military-industrial complex, but in general, these segments are better than the rest. At the same time, data on the IT sector are most distorted by hedonistic indices and active stock speculation, so the real picture may be much worse.
By taking a look at official statistics, EU shows annual 6% contraction pace of industrial sector, while in the US is just -0.4% per year, although we have some doubts on reality of this data. Monthly industrial data (+0.24% mom), in contrast to the annual one, look more optimistic. But taking into account the fact that the data for October were revised down by 0.3%, the final result turned out to be negative.
This suggests that industrial stagnation continues and keeping the high rate may be too costly to the American economy. Especially in a situation where it is necessary to pursue an active, if not aggressive, policy in Southeast Asia in a situation of acute confrontation with China.
In general, it can be noted that the basic problem of the US economy — the inability to transfer investments to the real sector at the expense of the domestic market resource (who will buy products made at new industrial enterprises), has not yet been solved, despite what J. Yellen tells. Statistics is a stubborn thing. This creates big problems, because the industry is not even stagnating, but simply shrinking. Especially if you take into account real data, and not official figures heavily embellished with various statistical tricks.
What surprises could come
A few words about why the “horror without end” not only has not ended, but threatens to become chronic. Here is the public sentiment for now:
A few words about why this is not the fact. Look at what brought inflation down - it was fuel and food (service sector inflation stands stubborn). Which fell in price not least due to the growth of the dollar against other currencies. Now that the dollar is declining, oil has started to rise, and food will soon follow. This will increase inflation and again the Fed will reconsider its policies and again the dollar will move up and the markets down.
In addition, as it was correctly said, inflation is growing mainly on the supply side and not on the demand side, which means that it cannot be strangled by the rate. Therefore, the cycle of increasing inflation will inevitably resume 3-4 months after everyone decides that it has been defeated. Plus, the pre-election budget stimulus will accelerate demand and obviously will also add its own.
Therefore, of course, we should not ignore the rally, but not to expect that the markets will always rise. Rather, there will be a wide “saw” that will saw through the unwary. And high rates in the dollar - in a year they will be higher (definitely not lower) than now. We didn’t expect core dollar inflation to be less than 5% (it’s currently around 4%), but otherwise everything is on track. We'll see what happens in a quarter or two.
It doesn't work that way. There were similar sentiments in financial markets in the early 70s. Then the dollar also began to inflate (while the US economy was much more industrialized), after two post-war decades of “helicopter money”. And in the same way, the Fed began to strangle the economy and immediately release it at the first signs of a decline in inflation. But inflation was returning.
The Fed's battle with dollar depreciation lasted a decade, repeated the cycle three times, and the economy went through three recessions. At the peak of inflation, from 1977 to 1981, the dollar lost 50% of its purchasing power. The main reason for the inflation of the American at that time was government finances: the budget deficit, growing public debt, and distrust of the dollar on the part of investors. Inflation was defeated only when US dollar was backed by cheap Chinese goods and working power by starting the era of "big Chinese relocation" of US production. But, officially the success is associated with P. Volcker policy, which we think as not correct.
If we would consider ultimate scenario, then EU could fall into Middle Ages. Today, the main risk for the European financial system, as in the Middle Ages, is weather. In the event of a cold winter and a long spring, gas storage facilities will begin to empty, and energy resources will become more expensive, accelerating production costs further down the chain.
The second risk for the region comes from the south. In particular, the closure of Suez or Hormuz due to the conflict in the Middle East will lead to an oil famine and a sharp rise in the price of diesel and gasoline. This is a new surge in inflation and tough monetary policy.
The third risk is China. If the Taiwanese case worsens, fuel inflation will seem like flowers against the backdrop of an embargo on thousands of mid- and high-value products that will instantly disappear from the market.
Meantime US macroeconomic statistics demonstrate the phenomenal resilience of the American economy", at least based on official numbers.
– The large-scale collapse of assets in 2022, interest rate squeeze and extreme tightening rates did not lead to negative implementation in the macroeconomic context
– We went from expecting a global collapse in 2022 to the strongest euphoria in a quarter of a century associated with a new narrative - “we escaped recession”
But not the fact. The impact lag imposed on the financial buffer formed over 15 years of monetary frenzy, which determines integral stability; 2) leading indicators and surveys of business and the population are still depressing. 3) the crisis begins not during a period of tightening, but during a period of easing;
Macro analysis generally does not answer the question of finding a trigger for a breakdown. Therefore, the only opportunity to find the breaking point is corporate reporting and searching for vulnerabilities, but even there, problems can appear after the fact. What is the progress on the credit crisis ) among US corporations?
“Rising interest rates and accompanying operational difficulties have led to nearly 600 bankruptcy filings since the beginning of the year.” About lay offs we've said above.
Conclusion:
Based on real facts, it seems that market are dropped out of the reality. First is what we would like to mention is a big disproportion among economy condition and recent market performance. While the EU economy stands significantly worse the the US one, we see dollar weakness against major rivals, as investors overpriced coming rate cut from the Fed, suggesting that ECB will keep it higher for longer. But, in fact, ECB could start cut the rate even earlier than the Fed... As the Fed as the ECB now have no plans to start the rate cut.
With new inputs from the Fed, G. Sachs suggests that Money funds (~ $6Trln) cash will start to flow into stocks and long-term bonds. This could trigger the inflationary rally as well, when stocks start raising because it is too much cash while companies' fundamentals remain the same. Tightening loan conditions, raising of delinquencies, bankruptcies are not disappeared. Liquidity is drying, as this week Reverse Repo value has dropped below 800 Bln, hasn't seen since July 2021:
Besides, it is rhetoric question - how US Treasury will attract new buyers for its debt, by cutting the rate and finance budget deficit and government spending. It is interesting to see PCE numbers and consumer confidence next week.
Thus, we suggest that this is huge risk for the Fed, but it seems they have no choice. Second - market is overpriced the speed of rate cut, expecting too much and too fast policy easing, as in the EU as in the US. It means that current rally is relatively short-term, and market fluctuations might become nervousness and sharp, with the drastic changing of the direction. I suspect that 2024 will be extremely difficult for trading.
Still, as we've got solid upside impulse this week, it makes sense to follow it, until we get the opposite signal. The inflation struggle can't be over so easily - just by announcement of the turning point in rate cycle. I suspect that there are a lot of surprises ahead...
