RFEU - February 2024 Monthly

2024-01-27 09:15:00 ET

Summary

• The coming weeks will likely continue the correction of the trends that began last month.
• Official comments and some high-frequency economic data have encouraged participants to rein in their expectations, reducing the odds of a rate cuts in Q1 and paring back the extent of the cuts this year.
• The reversal of the November and December trends in the dollar and interest rates in January was seen in emerging markets too.
• We think that markets are still too ambitious in pricing the timing and extent of Fed rate cuts, and until it adjusts more, there is still upside risk for the dollar, especially as the economic impulses from Europe remain weak.

The coming weeks will likely continue the correction of the trends that began last month. The markets recognize that the tightening cycle is over. However, they swung hard, pricing in aggressive easing by most of the G10 central banks, including the Federal Reserve and the European Central Bank. Official comments and some high-frequency economic data have encouraged participants to rein in their expectations, reducing the odds of a rate cut in Q1 and paring back the extent of the cuts this year.

The pendulum of market expectations reached an extreme. In the first part of January, pricing of the Fed funds futures strip implied a rate cut at each of the remaining seven FOMC meetings. While this is possible, it is not the most likely scenario, especially given what we know about the national labor market and in the context of still elevated price pressures and above trend growth in Q4 23....

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