The release of the Core PCE data, together with Jerome Powell’s conference, has once again focused the stock market’s attention on the Fed’s future monetary policy decisions.
When will the Fed start cutting interest rates? This question concerns investors and affects the entire financial market. “The economy is resilient” - and this consideration strangely worries the market, leading some experts to exclude the possibility of imminent reductions in rate levels.
However, not everyone is convinced by this. The futures market expresses a very low possibility (equal to 1%) that the Fed will keep rates in the current range at the end of 2024. Even Powell himself does not exclude the possibility of cuts during the year, and the latest data regarding the Core PCE Price Index seem to indicate a stabilization of the inflation rate in the United States, just as the recent data from France highlight a linear decline in consumer prices even in some regions of Europe. Faced with these considerations, what makes sense to expect from the monetary policy of Western countries, and, consequently, how could the stock markets react to this choice?
Core PCE in line with expectations, what to expect from the Fed and the ECB?
The recent data shared by the various international statistical agencies provide a particularly difficult economic picture to interpret. According to estimates from the S&P Global Rating, US GDP is expected to be +2.5% in 2024, and the data linked to inflation until yesterday suggested an unsuitable scenario for lowering rates. And it is based on these considerations that the stock markets have moved, discounting a slight, but emotionally significant, growth in the yields of debt securities.
A reality which, however, only after a few weeks, seems to have been questioned again by one of the data most evaluated by central banks to set their monetary policy strategies, the Core PCE, shared on March 29, in contraction compared to the previous 0.5%, and in line with the analysts’ forecast, equal to 0.3%. This fuels the stock market public’s hope of being able to witness the first interest rate cuts as early as 2024. Evidence, the latter also shared by data from European statistical agencies, with France proposing a contracting inflation rate - returning to the minimum levels of 2021 - and which could stimulate the ECB to consider, also in the next press conferences, to put the topic of "rate cuts" on the table.
The same Powell, president of the US Fed, has, on the occasion of the latest meetings, left some clues to journalists regarding possible cuts in 2024, unlike the president of the ECB, Christine Lagarde, who has also always appeared more reluctant to divulge certain expectations, highlighting a certain discrepancy between the statements of the two central bankers.
What emerges from Powell’s recent statement?
During Jerome Powell’s conference on March 29, some interesting references emerged, also regarding recent economic data. The president outlined two lines of thought: reducing rates too soon would be harmful, but at the same time, waiting too long could damage the economy and the job market. In essence, he did not rule out a cut, but he did not show any particular rush in doing so either, expressing a strong interest in making the right decision anyway, but above all in doing so at the right time.
Where does this market confidence come from?
Attention will be paid to the consumer price index for March, which will be published on 10 April, but in the meantime, the stock markets seem to have chosen to continue their push towards rise, showing a lot of confidence in the monetary policy decisions of central banks.
It is not yet clear what the next move of the Fed and the ECB will be, but it is clear that the stock markets are of little interest, at least until a possible "rate increase" is once again questioned, given that companies so far they have demonstrated that they can maintain a solid and profitable financial structure even at current interest rates, probably thanks to the boost that came with the popularity of artificial intelligence. This is until the next mass debt maturities, scheduled for 2025 and 2026. In essence, the risk could arise with the establishment of two scenarios: the hypothesis of a rate increase returns, or it consolidates the idea of a "higher for longer", at least until the end of 2025.
However, greater attention seems to need to be paid to the bond sector, a section also linked mathematically to the size and expectations on the size of interest rates.
However, futures markets have no doubts about the underlying direction: the probability that rates will end in 2024 in the current range is less than 1%; despite recent bond depreciations, the market expects at least one pullback this year. If this were the case, with the progressive realization of the idea of a lowering of rates over the year, the bonds could return to appreciate, against a natural decrease in their rate of return.
Original article published on Money.it Italy 2024-04-01 12:39:34. Original title: Cosa succede alle borse se la Fed non abbassa i tassi nel 2024?
