Markets Wrap (1H January)

December inflation rose in most Western countries

After many months of consistently falling inflation, price growth in the Western countries accelerated in December. While a slight uptick was expected, inflation was still higher than consensus forecasts – UK at 4.0% (3.8% consensus), US 3.4% (3.2% consensus). Eurozone has met inflation expectations at 2.9% but has risen from 2.4% reported for November. However, no alarms set just yet - most of the increase in YoY prices is attributed to non-core items and core inflation stayed on course.

Central banks reluctant to signal rate cuts

Investors around the world are eager of any indications of interest rate cuts from the main central banks. With the Fed maintaining its policy rates in the last 3 policy meetings, markets are confident the top has been reached and it’s time to go down. At least based on the FOMC dot plot, the Fed is indicating 75 bps cuts in 2024. But it seems both the market consensus and economists are disregarding the fedspeakand instead eyeing a decreased of 150 bps. So far, the consensus is that the cuts should start this spring.

The ECB has maintained its rates unchanged in its December meeting, with the deposit facility standing at 4%. At least so far, ECB has been very wary to talk about early rate cuts. Just before the ECB’s quiet period President Ch. Lagarde and several other officials signaled that cuts could be expected mid-year. This rather conflicts with the prevailing market view – 60% chance of a cut in April and a certainty of a cut until June’s meeting.

Both Fed and ECB are scheduled to have policy meetings at the end of January. No changes in policy are expected, however, more concrete details on the policy path and when will the first cuts come are expected.

Stocks in seesaw after the New Year 

After the broad year-end stock market rally, that coincided with the falling policy rates, the market has lost its direction and has traded sideways year-to-date. Last year's AI boom has not ended yet - NVIDIA has boosted investors' confidence with new product lauches and so fasr is up ~13% YTD. On the back of its AI investments Microsoft took over the crown from Apple as the most valuable company in the world.

Disruptions in the Red sea are not blowing up gas prices

Natural gas prices in Europe have fallen around 50% from October high levels. Europe has prepared well for winter - gas storage levels are at ~80% and combined with a decline in gas-powered output the demand for additional gas has been limited.

At least so far, the market has largely disregarded the Houthi attacks in the Red sea that have diverted many ships to forget the Suez canal and take the long way around Africa. While LNG ship flows have not seen the clear drop-off that container vessels did, no LNG ships have crossed the canal for 6 days, the longest streak since the 2021 Suez Canal "Ever Given" blockage.

Oil prices have traded in a narrow range the past few months. Middle East risks and OPEC+ cuts have been rather balanced out by high interest rates and a weaker industry demand globally.

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