The main story in markets coming into this year is that of central banks. To be more specific, it is about rate cuts and when we might get them. Traders were quite optimistic on that front and aggressively priced in rate cuts in the final two months of last year. Now, how has that played out so far this year?
The long story short is that major central banks are still not convinced enough to confirm a policy pivot just yet. They are happy with the inflation trajectory but not with the levels it is at right now. The same is said for the Fed, ECB, and BOE as they continue to preach patience and data-dependency. And the RBA has also joined in on the chorus today as well here.
If we look to the end of December, this was the snapshot of central banks' rate cuts pricing for 2024:
- Federal Reserve: -156 bps (first -25 bps in March)
- European Central Bank: -161 bps (first -25 bps in April)
- Bank of England: -141 bps (first -25 bps in May)
- Swiss National Bank: -66 bps (first -25 bps in June)
- Bank of Canada: -120 bps (first -25 bps in April)
- Reserve Bank of Australia: -53 bps (first -25 bps in June)
- Reserve Bank of New Zealand: -93 bps (first -25 bps in May)
As of today, here is how things are shaping up to be:
- Federal Reserve: -117 bps (first -25 bps in June)
- European Central Bank: -125 bps (first -25 bps in June)
- Bank of England: -78 bps (first -25 bps in August)
- Swiss National Bank: -51 bps (first -25 bps in June)
- Bank of Canada: -80 bps (first -25 bps in July)
- Reserve Bank of Australia: -42 bps (first -25 bps in September)
- Reserve Bank of New Zealand: -86 bps (first -25 bps in July)
As you can see, nearly all of the timing of the first rate cuts have been pushed back to a later date. And overall, there is a distinct pullback in the aggressive pricing of rate cuts for the entirety of the year.
While the above picture might suggest that traders are starting to heed the warnings by policymakers, it isn't quite a done deal just yet.
In the case of the Fed, the odds of a May rate cut are still at ~78% currently. As for the ECB, the odds of an April rate cut are still at ~64%. For the BOE, the odds of a June rate cut are at ~72% and for the RBA, the odds of an August rate cut are still at ~84% after today's policy decision.
In other words, there is still scope for a further squeeze that we have in rates and in broader markets. We've already gotten a taste of that in the last few weeks and that might continue if the central bank pushback stays the course. But as we look towards the months ahead, it is all about what the data will say. So, remember. Stay nimble and adapt to how the narrative might change with that.
