The Feds Are Now Calling for Higher Rates for Longer!💲

🐺 Hi pack-mates,

This is Howling Markets, the calming guide that guides you through the financial markets’ maze!

Today we will be covering:

• Education: Why Is Communication So Important? 🗣️

• Inflation Picks Up in The Eurozone 📈

• The Feds are Now Calling for Higher Rates for Longer 💲

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

Why is Communication So Important?

During the study of textbook monetary policies, it is always reserved a portion of the course to analyze the transmission channels, which are those causal links through which monetary policy impacts our economy. Classical economists have identified 8 main transmission channels, varying in complexity and nature.

For example, the exchange rate channel states that when the central bank increase the interest rates, the money markets of that country become more desirable, driving up the exchange rate, causing exports to decrease (because now domestic goods are more expensive relative to foreign ones), triggering a reduction in GDP.

However, we are not here for the technicalities, but it is worth noting that one of these eight transmission channels is called is the expectation channel, basically stating that also what people think has an extremely important impact on the monetary policy efficacy.

As a matter of fact, in recent years the role of communication became so important for the central banks around the world that started defining it as an additional monetary policy tool.

This is the main reason why both the Federal Reserve and the European Central Bank publish a document a few weeks after the previous meeting to rediscuss and correct aspects on which they believed weren’t too clear. If the central banks lose control of what people expect, they will also lose control of their monetary policy.

Inflation Picks Up in The Eurozone

As opposed to the Federal Reserve, the European Central Bank has always remained extremely neutral when discussing the latest inflation developments.

During the December meeting the Feds stated that they had started looking at potential rate cuts in 2024, while instead, the ECB did not even mention them due to the widespread fear that inflation could pick up again.

Right on schedule, on Thursday have been released the December inflation readings of France and Germany, two of the major economies in the Euro area.

Between November and December, German inflation jumped from 3.2% to 3.7% while French inflation increased from 3.5% to 3.7%.

In both countries the increase in inflation was expected by the consensus due to the end of governments’ aid against rising gas, electricity, and food prices.

The average Eurozone inflation is going to be released on Friday at 11:00 a.m. UTC +1, however the forecasts are already showing that inflation is projected to increase from 2.4% to 3%.

Because of this some analysts believe the first rate cut in the Eurozone will only appear after June and that inflation will continue to hover around 3% throughout 2024. How do you think the European economy will evolve?

Today’s Howling Question

And now, it is time for our howling question!

We have talked about inflation expectations in the Eurozone, but do you know what American investors have priced in for January? What is the expected Year on Year (YoY) US inflation rate?

a)  2.4%

b)  2.6%

c)  2.8%

d)  3.0%

e)  3.2%

Hint: the YoY inflation rate in the US measured in December was 3.1%

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

The Feds Are Now Calling for High Rates for Longer!

As we previously touched upon, both the Federal Reserve and the European Central Bank publish a more in-depth document of what was discussed in the previous meeting. More specifically, in the United States this document is called Minutes, and it is published 3 weeks after the previous FOMC meeting.

During the last meeting the Feds had announced that the rates were close or already at their peak and that they were expecting 3 rate cuts in 2024.

Such an announcement, much more dovish than what the markets and already priced in, sent the stock market much higher and in a matter of days the government bond yields dropped below 4%.

But do you know when something seems too good to be true? Well, on Wednesday, just an hour before market closure, the latest Fed Minutes was released, and it told a slightly different story.

In the Minutes it was clear that among the dovishness there was an unusually high degree of uncertainty and the willingness to make sure that inflation in really under control before fully committing to cutting policy rates.

Soon after the Minutes were released, the market dropped -0.8%, which is quite a substantial amount considering the exceptional bull run that the American stock market has participated in since the end of October.

Do you believe that this change of pace has only the function of taming expectations, or do you believe that the Feds are really unsure about 2024?

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

And now, our daily markets update!

Thursday was an extremely interesting day in the for the financial markets. Starting from the S&P500, the stocks had a great initial portion of the trading session, retracing the previous day’s negative performance, seemingly having already fully priced in the possibility of higher rates for longer.

However, during the last couple of trading hours, the price dropped, and the SPX closed down -0.34% with a pretty long upward candlestick wick. This candle shape signifies that the stocks do not currently have enough demand to keep moving higher. So, after testing the green resistance zone in the chart, they are likely to head towards the $4600 level before moving any higher.

On the other hand, bond yields moved higher throughout the day closing with an exceptionally high gain of +2.07%. Despite the initially undecisive SPX’s performance, bonds are undoubtedly starting to price in the possibility of less than 6 rate cuts in 2024, as opposed to what they previously believed.

Answer

The correct answer is d) 3.0%.

According to trading economics, the forecasted YoY inflation reading in January is 3.0%, implying a slight decrease from the previous month.

Howl-Worthy Memes 😂

🐺 See you next time!

Enjoy reading this newsletter? Forward it to a friend.

Was this newsletter forwarded to you? Sign up here.

Want to get your product or job listing for business-related readers? Please email us.