The investors’ hopes for a quick start to interest rate cuts in both the US and EU is quickly vanishing. We are still in the narrative “good news for the economy is bad news for the markets” and the latest news was quite good, with strong job creation and GDP growth, especially in the United States, according to eToro analyst for Romania, Bogdan Maioreanu.
However, inflation was higher than expected after decelerating over the last year. The central banks and the investors are both looking toward inflation, the former to assess when to start cutting the interest rates and the latter trying to anticipate the move.
Europe is showing a complex picture now. The January data puts Romania at the top of the charts, with the largest yearly inflation in the EU and the second largest on the continent after Turkey. At 7.41% we are slightly above Russia (7%), all the other European countries having inflation rates below 6.7%. We had the fourth largest increase in yearly inflation of 0.8%, when compared with the December 2023 value, after the Netherlands (2%), Sweden (1%), and Portugal (0.88%). In contrast, the largest drops in yearly inflation were in Czechia with -4.6%, Poland (-2.3%) and Slovakia (-2%). The Euro Area showed only a -0.1% decrease, reaching 2.8%.
In Romania it is very clear that we are not expecting an interest rate cut until the inflation induced by the Government decisions last year will enter again in its decreasing trend. However the disinflation rhythm is to significantly slow down, says the National Bank of Romania. But for the ECB, forecasters are expecting the interest rate to remain at 4.5% in the first quarter of 2024 before easing from the second quarter of 2024, reaching 3.75% by the fourth quarter of 2024 and falling further to 3.0% in 2025 and 2.75% in 2026.
Across the Pond, the latest US data is showing that overall, inflation is still trending in the right direction, but some of the stickier components — like rent — are proving to be difficult hurdles. The fact is, this latest report showed inflation – though decreasing – was higher than investors were expecting. Also other good news from the economy shows that the struggle to keep it contained is real.
45% of the American investors believe that inflation is slowing but not enough and 41% believe that it is returning to a more acceptable pace. Only 12% believe that it still rises too quickly, according to a poll by the AAII – American Association of Individual Investors. Also the sentiment of the investors is evolving, as last week 42% of investors were bullish, a 7% decrease from 49% in the first week of February.
Probabilities that the Fed will start cutting interest rates in March are below 9% and for May are around 34%. The markets are in fact anticipating now that the first interest cut will occur on June 12th according to the CME FedWatch Tool, with a probability of almost 53%.
Meanwhile, S&P 500 index rose from the lows of October 2022 to an all time high of 5048, an almost 45% increase. In a similar way the EURO STOXX 50 index rose almost 48% in the same period. While waiting for the Central Banks to relax the current restrictive interest levels during 2024, 26% of Romanian individual investors believe that the next bull market will start in the first half of this year while 16% believe that it already started or it will start in the second half of this year, according to the latest eToro Retail Investor Beat survey. Meanwhile the ones that are already invested are riding the market tide.
Upside surprise in Romanian inflation complicates the easing cycle
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