Investors have high expectations for 2024. They expect a major shift in the macroeconomic landscape, which may lead to tremendous opportunities.
It feels similar to what we saw in 2002 and 2010. These years kicked off growth cycles that delivered solid investment returns.
History may not repeat itself, but it serves as a guide. Hence, investors are looking forward to the most anticipated set of decisions this year. They expect central banks to start lowering interest rates.
But there could be a problem. Inflation rates, which central banks use to make their decisions, may not go down as quickly as investors want.
Is there something central banks still need to wrestle with, or is the high inflation cycle over?
Accessing the macro picture will help us to find the answer here.
The latest data from the world’s leading countries show that inflation has been stabilizing.
Most of the developed world aims for a 2% annual inflation rate. In other words, the US, eurozone, UK, and others will be comfortable with a 2% annual price growth.
Once this number is in sight, they can begin to lower their interest rates.
Here is the latest data. The annualized rate for consumer price inflation from May to November 2023 was 0.6% in the UK, 2.7% in the eurozone, and 2% in the US. However, the Federal Reserve prefers to use personal consumption expenditures (PCE) here.
These figures account for the last six months (up to November) and are not the same as a full-year growth rate would be. But the trajectory is clear.
Inflation is heading down from the highs reached in 2022.
Moreover, it’s getting closer to central banks’ targets.
No More Raises?
First and foremost, this means we are unlikely to see any more interest rate hikes this cycle.
Policymakers don’t need further interest rate increases if the economy doesn’t overheat.
An easing policy sounds imminent at this point. The only question remains: when and at what pace will the central banks begin to cut interest rates?
It largely depends on the labor market strength and overall economic growth (gross domestic product or GDP).
The former remains strong with nearly all-time low unemployment rates.
The latter is also solid in the US. The UK and eurozone are lagging with GDP growth rates, but the outlook remains positive.
Even if we see a technical recession, defined as two quarters of negative GDP growth, it is unlikely to last long.
As a result, the central banks are still data-dependent, but the markets have high expectations for this year.
Interest Rates Cuts Schedule
It will be rational to assume that the Fed will begin this easing cycle soon.
Its first interest rate decision will be announced later this month. Some investors expect a cut. However, analysts have higher conviction for the March meeting. They assign over 60% probability for the first 25-basis-point interest rate cut.
Other developed nations should follow the Fed. All in all, analysts expect a number of cuts with a total of up to 150 basis points from the current levels.
This is what investors are the most excited about now. Lower interest rates will translate into cheaper loans and lower cost of capital in general, which would be welcome news for businesses and consumers.
We hope to see a return to steady and predictable economic growth. If interest rates remain neutral without the central bank’s involvement, it will be a massive support for economic growth—and stock markets.
Thank you for your loyal readership,
The Financial Star team