Markets Wrap (2H February)

The market is finally aligned with the FOMC

Last year after the Fed has paused its rate hike journey, the markets went on a erratic frenzy with aggressive rate cut expectations. This has reached a peak in the middle of January with around 170 bps lower rates for 2024, now the market implied expectations are around half of that at 85 basis points. This is relatively in line with the FOMC dot plot median, which eyes around 75 bps rate cuts. The large deviation between market expectations and policy makers was largely led by year-end indications that inflation has slowed down robustly, and that the economy was not in shape to sustain high rates. Combined with the fact that policy makers misjudged the stickiness of the inflation and the needed policy response, some market participants have had little faith that the FOMC projection and bankers’ guidance would hold. Now with information that inflation may be stickier and that the economy is growing at around 3% the market is postponing the first rate cut for June/July.

Sticky eurozone inflation should keep ECB at bay

Fresh eurozone inflation figures are showing that while price growth is moderating, the market is still a bit too aggressive. Initial data for February show headline inflation at 2,6%, higher than expected 2,5% and core inflation, which is still stubbornly high at 3,1%. While energy prices are lower than a year ago, services and food inflation are fueling inflation. The ECB is convening on the 7th of March and will likely offer cues on how they see the economy and inflation path. No rate cuts are expected to be announced and the market is now hoping for rate cuts from June/July.

NVIDIA fuelled equity frenzy

The company reporting season has ended with a huge bang - NVIDIA has managed to beat sky-high 4Q expectations. While other tech companies also increased in value, NVIDIA's market capitalization has grown 450% in the last 14 months and made it the 3rd largest publicly listed company in the US above Alphabet and Amazon. The rise has been rather warranted, as revenues have more than doubled last year and moving forward the profit is expected to grow at 78%, compared to NASDAQ index's 18%. This has been widely received as a tech resurgence, with the main benefiters being tech heavy US stocks and Japan, with both markets reaching new all-time highs almost every few days.

European natural gas prices bounced up from the bottom

In February European natural gas prices (measured by TTF futures) have reached 2-year lows. In the past week the prices have bounced back up ~9% but are still at very low levels. Mild winter, high gas storage levels and lower output in the European continent have led to a sharp drop in prices. Low European gas prices have so far been supported by steady gas flows from the US, but a widening gas price gap between Europe and Asia could divert shipments to Asian markets. EUA's have largely followed natural gas prices and now have been trading in the 50-55 EUR/mt range.

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