CPI fuels Fed’s bets: Will there be rate cuts this year?

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European markets in green -Ibex 35, CAC 40, DAX…-, after a data of CPI in the United States that has given wings to the experts in the face of bets on the next Rate hike of the US Federal Reserve (Fed).

“The figures do not provide the expected visibility on whether the Fed will choose to increase its benchmark interest rates by 25 basis points, as the market mostly discounts, or if it will do so again, as in December, by 50 basis points. In that sense, note that we believe that these positive figures were already more than discounted by the markets, hence the doubts and the ‘disenchantment’ shown by a part of investors, who had been betting on a positive ‘surprise’, which did not occur, “they explain in Link Securities.

According to Bankinter, after the CPI data released yesterday “decreases the pressure on the Fed that could reduce, again, the pace of rate hikes (in Dec-22 it rose +50bp after four consecutive increases of +75bp and a total of +425bp in the year). From our point of view, to glimpse declines we will have to wait longer, especially on the services side.”

“After the data, the market remains virtually unchanged its expectations of rate hikes at the next meeting (February 1) of +25bp, as well as an arrival level for the Fed Funds rate of 5% in Jun-2023 and cuts of -50 bps in the final part of the year, contrary to the Fed’s statements and dot plot that expect rates to remain around 5% during a good season”, Renta 4 (BME) analysts venture:RTA4).

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“It must be borne in mind that prices related to services remain tight, and a further slowdown in the labor market and wages will be necessary to declare victory over inflation,” they add.

“The markets are still betting clearly because central banks will end their process of rate hikes in the coming months, while the most ‘optimistic’ investors are betting that they will even begin to reverse this process during the second half of 2023,” they point out in Link Securities.

“We are less optimistic in this regard, since we believe that inflation, although it has probably already reached its cycle ceiling and will moderate in the coming months, favored by the base effects and by the fall in the prices of goods (raw materials and energy), will take a long time to approach the 2% target set by the main central banks,” these analysts add.

“In addition, in the second half of 2023, if China’s economy begins to recover after the wave of Covid-19 in which the country is currently mired, the prices of many raw materials, of the petroleum and gas can rebound with some intensity, “they conclude in Link Securities.

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