Fed – Goldilocks unlocked
The Fed surprised markets dovishly last Wednesday, by indicating more cuts in the dot-plot and acknowledging that cuts may occur next year before inflation hits the 2% target. Their projections pointed to 75bps of cuts to 4.6% in 2024, more than the 50bp from September but still well below market pricing of 150bp. Growth and unemployment for the years ahead were barely changed and are seen at 1.4% and 4.1% respectively for 2024. The outcome sparked a strong rally in US treasuries and risk assets, whereby US-10Y finished the week 30bp lower, below 4%, and the S&P 500 rose 3% above 4700.
ECB – Not giving up
The ECB pushed back against dovish market expectations, despite acknowledging slowing inflation and the weaker growth outlook. 2024 inflation projections were lowered from before, but core at 2.7% and 2.3% in 2024/25 respectively were at the hawkish end of expectations. In the press conference, Lagarde signalled no urgency to cut rates and that the decision would remain data dependent. A preliminary selloff in rates and rally in the Euro was quickly reversed on Friday, when PMIs emphasized the negative sentiment in the Eurozone: Composite PMIs fell from 47.6 to 47, and undershot consensus expectations by a full point. The market prices 50% odds for a cut in March, and 150bp total cuts for 2024.
Global Central Banks – Divergence Continues
Policy makers delivered hawkish and dovish decisions in a very busy week: Norway’s Norges delivered a 25bp surprise insurance-hike while softening their guidance, meaning this was likely their last hike. The Bank of England held rates unchanged but signalled with a more hawkish 6-3 voting split that the level of inflation is still too high. Mexico’s Banxico held rates and delivered higher projections for headline and core inflation in 2024, thereby pushing back the likelihood of a cut in February. Brazil’s BCB delivered another 50bp cut to 11.75%, and maintained their dovish guidance for similar cuts going forward.
Algebris Investments’ Global Credit Team
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