”Slow disinflation and moderate softening in the US labour market support our view that the FED will cut in Q2 rather than in Q1.”
- Amid a large consensus that the rate hike cycle has ended, markets are now trying to assess the timing of the next rate cuts.
- Together with inflation numbers, labour market developments will be key to the next Fed decisions
- Inflation figures this week surprised on the upside, signaling that the disinflation process is slower than expected by the market.
Like in 2023, inflation figures will remain, in 2024, an important driver of market’s expectations regarding Fed rates decisions. Inflation has come down by a lot, but it is still above 2% and the latest reading shows a slowdown in the disinflationary trend.
Also, given the Fed’s dual mandate (inflation+ unemployment), the pace at which the job market loses steam is also relevant. Recent data was mixed, despite a strong (216,000 new US jobs) headline figure. Weaker details included, among other, downward revisions of the previous months’ numbers (an almost continuous trend in recent months), weak job creation in cyclical sectors and a double decline in labour force and employment in the accompanying household survey. In our view, this is not enough to point to a rate cut as soon as Q1, but most likely in Q2. With markets reassessing the Fed future path, Treasury yields have reversed in the first weeks of 2024 their downward trend.
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