Markets Wrap (2H January)
Central banks are all signaling to ease on rate cut expectations in the short term
Investors have begun to hope for a rate cut for this March from the start of November, reaching the peak of expectations around Christmas. However, it seems it was more wishful thinking - no presents were brought as both ECB and Fed signaled March is too soon to lower rates and investors have dialed back their expectations accordingly.
In the last week both central banks have been playing the same game. Policy rates were left untouched, however, both J. Powell and Ch. Lagarde tried to moderate the markets. The bankers commented that until there will be concrete proof of inflation under wraps, there will be no indications of lower rates in the short term. For the rate cuts to materialize inflation and employment prints will be studied extensively, as they are most likely used to measure the health of the economy and the viability of an early cut.
Market still eying many cuts in 2024
On the other hand, expectations for the whole 2024 have not changed materially. Investors have mostly delayed the short-term expectations a bit, but market implied rates still suggest rates to decrease by ~1,5% until year-end 2024. However, this may be too excessive, as the median economist forecasts are for ~1% of rate cuts and the copper/gold indicator is signaling an overly optimistic rate outlook (graph 3).
Bank of England has also made no changes to its policy rate in its Feb 1 meeting. However, 2 out of 9 BoE decision makers have voted for a rate hike, indicating rate cuts for the BoE are still distant. As of now, inflation is higher in the UK compared to US and Europe - appropriately the interest rates are expected to be lowered slower in the island country.
Gas prices rose from 6 month-lows
After several months of persistent decline, European natural gas prices have finally met resistance and bounced back to 30-levels. This was in part induced by lower-than-usual forecasted February temperatures, which should lead to higher gas demand for heating. However, gas storage fulness in Europe have remained higher than historical levels (70% vs 58% 5y avg.) and is thus moderating demand. Still relatively low gas prices have led to EUA prices tumbling down to low 60's. This is mainly due to higher usage of comparatively cleaner gas instead of more polluting coal.
In the last update we have noted that no LNG vessels have crossed the Suez for the longest streak of 6 days, now the streak has extended to almost 3 weeks. While the journey to Europe for LNG ships from Asia is now taking the long way round Africa, traffic from the North America has stayed plentiful and thus had little impact on prices.
US and eurozone economies growing at different speeds
In 4Q23, US economy managed to grow by 3,3% on a QoQ basis, far surpassing expectations of around 2%. On the flipside, eurozone has narrowly avoided a recession as the economy has remained flat in 4Q23.
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