After the December 2023 market rally, there has been some correction during the last few weeks. Given the global uncertainties with war and disruptions to supply chain, maybe this is understood.
Lets see where the market heads in coming months –
During 2024, rate cuts are now on the horizon thanks to inflation easing back to the Fed’s target. This was based on their projection of core inflation, as measured by the personal consumption expenditures index (PCE), easing to 2.4% by the end of 2024. Since then, we’ve gotten December inflation data for the consumer price index and the producer price index – which tell us that core PE is likely to rise less than 0.2% month over month in December. That translates to an annual rate of 1.9% over the last six months, and 1.6% over the last three months.
In short, the inflation problem is over. At least, for now. And therein lies two burning questions that investors are currently asking of the Fed:
- How soon will they start cutting rates?
- How much will they cut in 2024?
Fed members see just 0.75%-points of cuts this year, based on a core PCE projection of 2.4%. But core PCE is clearly running well below that, but Fed wants to make sure that lower inflation is sustainable. As a result, the Fed doesn’t want to be rushed into cuts.
In the meantime, don’t be surprised if markets swing back and forth wildly on the back of hopes for more rate cuts on the back of data and pushback from wary Fed officials.
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