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The central bank week did not bring any surprises as the ECB, Fed, and BoE kept interest rates unchanged, giving investors hope about the end of monetary policy tightening.
The good news is that although the rhetoric of the chairmen of the regulators remains hardline, the data suggest that inflation is finally receding as the economy slows.
In that sense, there is no point in raising rates further. So, one could say that the only questions now are when and by how much the central bank will lower the price of credit.
Starting with the US, most FOMC members, six out of 19, believe that by the end of 2024, the rate will drop to 4.5-4.75%. Five others believe the rate will be between 4.75% and 5%.
Only two expect the rate to remain at current levels, and one foresees a decline to 3.75-4%. However, the reality will depend on incoming macroeconomic data.
The only certainty for now is that at the meeting on 30-31 January 2024, with a probability of 92.2%, the regulator will again maintain the rate at its current level.
What does the year ahead hold for markets?
Given the prospects for a change in monetary policy, one might think that the risk boom will continue next year, pushing indices to new records and the US dollar index further down.
But there are several problems here:
- The exhaustion of reverse repurchase operations could lead to a decline in bank reserves, negatively affecting the financial system’s liquidity level.
- The full effect of strict fiscal policy has not yet been fully manifested, and a rate cut will not solve all the negative aspects at once.
- Pressure on households and businesses will persist, given high prices and falling savings, which is the basis for further disruptions.
In short, while all indications are that the era of tight monetary policy is over, what will happen to the economy and, more importantly, to markets remains to be seen.
Speaking of Asia, the outlook also remains bleak. In addition to the numerous geopolitical risks, what will happen to the centre of the region’s economy – China- is still unclear.
The fact that Country Garden Holdings has paid an 800 million yuan ($111 million) bond in full does not mean that the sector’s problems have been solved.
On the contrary, the situation remains very worrying, which is why Moody’s has downgraded Country Garden’s credit rating outlook from “stable” to “negative”.
In summary, despite the current market optimism, the future remains uncertain, with many headwinds that could ultimately affect the direction of the economy. In this regard, the XAUUSD is worth following.
