I markets today they are focused on 2 big key themes for finance and the world economy, which represent as many risks for stability.
The commercial chaos in Red Sea not Fed policieswith growing but uncertain expectations for rate cuts starting in 2024, may upset stock markets, assets and investment plans in these last trading days of 2023.
The Asian session is about to close with the upward push of the Japanese Nikkei, after the country’s central bank left its ultra-expansionary monetary policy unchanged in the final meeting of this year.
In Chinese, however, the indices travel in red. The People’s Bank of China kept its one-year prime lending rate – the anchor for most household and business loans in the country – at 3.45%. The five-year benchmark lending rate – the anchor for most mortgages – remained unchanged at 4.2%. Market watchers continue to expect Beijing to provide further monetary easing in the new year to support a faltering economic recovery, as deflationary pressure pushes up real borrowing costs.
A Wall Street, overnight, Wall Street’s benchmark S&P 500 index rose, approaching its all-time high. In this context, with Europe poised between a still aggressive ECB monetary policy (even without further rate increases in sight) and a Stability Pact to be agreed, 2 risks can upset the markets.
1. Commercial chaos
The global shipping industry is preparing for the prospect of living for weeks without its most important trade route, the Red Sea.
Even as the United States works to put together a task force to prevent Houthi militants in Yemen from attacking commercial ships, shippers are still waiting for details and have worried about implementation. Shipping giants are sending vessels on the route around Africa, adding $1 million in costs – and seven to 10 days – to each voyage. Also oil prices are slowly increasing and the gas price suffered a first shock in the tense climate last Monday.
The risk is that the blockade of the Red Sea, through which goods transit in significant volumes and destined for the whole world, could push the raw material prices and essential goods. Thus causing inflation to surge.
2. Fed rate cuts: is there too much euphoria?
Betting for a early rate cut on the part of the Federal Reserve continue to rise, with Richmond Fed President Thomas Barkin’s observation that “we are making good progress on inflation” seen as further evidence that the cost of money is at a record high and can only go lower. The soft landing is considered realistic and this sent the Dow and Nasdaq to all-time highs, with the S&P 500 not far behind.
Traders now see a better than 3-in-4 chance for a quarter-point rate cut by March, according to the CME’s FedWatch tool.
However, the risk is of excessive market enthusiasm for the decrease in the cost of money. In an analysis on Bloomberg, it is noted that while the Fed has outlined a soft landing scenario that will allow them to slowly reduce rates, markets have quickly priced in rate cuts more consistent with a hard landing.
This gap led Bloomberg Opinion columnist Mohamed El-Erian to note that the central bank has a problem with communication, a sentiment likely not lost on members of the rate-setting committee. They will probably continue to reject the excessive bets on rate cuts also in the next year, in particular if the economic data continue to support the thesis of a slight, and not rapid, slowdown.
2023-12-21 08:34:03
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