January 27, 2023

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The market is holding its breath ahead of the inflation figures: - It is too early to think about interest rate cuts

The market is holding its breath ahead of the inflation figures: – It is too early to think about interest rate cuts

After falling last week, the three major US stock indices opened higher on Monday. When the trading day halfway ended, the rally picked up and the stock exchange sent the three indices down 0.3 to 0.9 percent.

Then it increased even more and when the market closed it looked like this:

  • The Dow Jones Industrial Average, which consists of 30 handpicked stocks believed to be important, rose 1.58 percent.
  • The Nasdaq Composite Index, dominated by technology companies, rose 1.26 percent.
  • The S&P 500 index, which consists of the 500 largest companies listed in the United States, rose 1.43 percent.

Tesla’s share was one of the strongest outperforming Monday, then by a negative sign. The share decreased by 6.2 percent, while the rest of the markets and other technology giants, such as Apple, rose.

Again this week, inflation and interest rates play the major roles in the stock market. On Tuesday, consumer price numbers for November will be released in the US. The market expects overall inflation to decline to 7.3 percent from 7.7 percent in October. Any number lower or higher than this can have a significant impact on the markets.

The US central bank (Fed) will make a new interest rate decision on Wednesday, with the market already pricing in a “double hike” of 0.5 percentage point to an interest range of 4.25 to 4.5 percent.

Olaf Chen, Head of Global Interest Rates and Tactical Allocation at Storebrand, believes that an increase of 0.5 percentage points this week is consistent, and that there is still uncertainty associated with the next meeting in February.

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– I think there could be one 0.25 percentage point increase in February if inflation is low tomorrow. But if tomorrow’s inflation rate is high, it’s likely to be double digits, Chen says.

Some late work

In the face of accelerating inflation, the Fed and other central banks raised interest rates this year at the fastest rate seen in decades. The last four interest rate hikes by the Fed were “triple hikes” of 0.75 percentage points, which was out of the question at the beginning of the year.

Although some talk about a certain possibility of another triple hike, Chen doesn’t think it’s relevant, referring to the fact that the central bank itself has been guided by smaller interest rate increases in the future.

– The interest rate increases from work with a certain lag, which means that the next inflation figure tomorrow will not significantly affect the interest rate decision this week. This week’s rate hike will not affect the economy and inflation until next year. Chen says the Fed would prefer to wait and see the effects of the triple-digit increases.

In terms of the interest rate decision, the Fed will introduce a new “point chart”, where you can see where different Fed members think the key rate should be at different points in time. This is similar to the interest rate path given by the Bank of Norway.

The market is currently pricing in a rate peak of just over five percent next year, but it’s also pricing in a high probability of a rate cut next year.

It is too early to consider interest rate cuts. That won’t happen, unless you have a recession with a sharp increase in unemployment, Chen says.

– dangerous

Chen’s Tactical Customization division and Storebrand have a neutral view of the US stock market, which means they believe it’s neither expensive nor cheap.

Chen’s argument for buying is that he believes market interest rates will not rise above current levels. The argument against this is that macroeconomic data indicates that corporate profits will decline significantly.

– Central banks will adopt a “wait and see” attitude in the first half of 2023 after normalizing interest rates, because things happen so quickly. Not only in terms of inflation, but also in terms of economic growth. We think it’s dangerous to become a pessimist too soon, because I don’t see a recession in the US during the first half of 2023, Chen says.

Later this week, the European Central Bank and Bank of England will also make interest rate decisions.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For additional terms look here.