Central banks – Cut it deep but not that soon
The central theme of 2024 is the amount and timing of central banks cuts. Global curves are pricing 5-6 cuts in 2024, and a deep 2-year cycle, ending with policy rates 2% lower than current levels in US and Europe. The overall amount of cuts priced by markets look reasonable to us, but we find the timing on the early side. Core inflation will stabilise below 3% in summer, making a Fed (or ECB) March cut premature. The frequency of cuts currently priced could be justified by a deep recession, at odds with current macro data, pointing to growth trailing 0-2% in most developed markets. Slow (but not tanking) growth and falling inflation mean 2024 will be a year of normalisation in rates, rather than insurance cuts. We expect 3-4 cuts in both Europe and US, starting in 2Q.
ECB – Placeholder meeting
The ECB will likely hold rates this week, but market focus is on guidance for the timing and magnitude of forthcoming cuts. The meeting offers no new projections, but questions will focus on the committees current assessment of recent data, which saw inflation and gas prices falling further. Tuesday’s Bank Lending Survey and Wednesdays’ PMIs will give key insights into the direction of travel. Going into this week, markets only see 16% odds for a March cut.
Red Sea – Escalation threatens supply chains
US and UK attacks on Houthi militants did little to stop attacks on cargo freighters, resulting in further declines in shipping rates and spreading fears for global supply chains. Ships transporting food and energy face higher insurance cost and longer travel times, affecting almost €70bn of European food imports and exports. UK supermarkets have already warned that disruptions can lead to higher food prices. Estimates for the impact on inflation are moderate for now, in the order of 0.3 pp per quarter. Estimates could change dramatically where persisting blockades are going to affect physical supply of oil and gas, driving commodity prices up. The impact on oil and gas prices remain the key risk to future developments in the region.
Algebris Investments’ Global Credit Team
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