Monex Europe: A less benign year than markets are pricing

Monex Europe: A less benign year than markets are pricing

10 januari 2024

Vooruitzichten
Outlook vooruitzicht (12) crisis storm op komst

Highly unlikely that the Fed will cut rates as fast as money markets are pricing.

‘The end of 2023 saw markets price an aggressive easing cycle for the Fed in 2024, leading to a sell-off in Treasuries and a stock-market rally. However, we think the current cross-asset environment is in an unstable equilibrium,’ reports Monex Europe today. ‘Specifically, we see it as highly unlikely that the Fed will cut rates as fast as money markets are pricing under our expectation of an acceleration in the US economy. If realised, this should see global capital flow back into US assets, enabling the dollar to retrace losses experienced towards the end of 2023. On the contrary, should the US economy continue to slow and endorse the market’s implied path for rate cuts or even amplify the pace of cuts, we think the path that the macro data needs to traverse to continue being US dollar negative will remain narrow. Any sign that the economy is cooling quicker than suggested under a soft landing is likely to spark a US dollar haven bid given weak growth conditions in the rest of the world.

Over the medium-term, the overall environment of weaker growth and cooler inflation should, however, result in rate compression as central banks pivot from synchronised tightening to easing. The determinants of each easing cycle are likely to be varied, with faster easing cycles motivated by recession and financial stability risk and more moderate easing driven by concerns over inflation persistence, largely from the labour market. Differentiation in the sequencing of easing cycles should offer relative value opportunities across both DM and EM spaces respectively, both against the dollar and on crosses. Furthermore, with rates spreads now compressing, we expect markets to become more sensitive to a broader array of fundamentals, such as valuations, growth rates, and prospective capital returns as opposed to largely focusing on interest rate pickup. Alongside the re-emergence of election risks, growing tensions between the US and China, and other factors, we expect most currencies to trade in wider ranges and experience heightened levels of implied and realised volatility on average.’

 

 

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