The last two months of the year have featured some aggressive moves by traders in pricing in rate cuts for major central banks going into next year. The narrative is one that says traders are convinced by the disinflation trend and that policymakers can start to lower rates as the battle is already won.
Whether or not that will be the case remains to be seen but markets are led by the data and so far, there is not much reason to turn the other cheek. So, what’s priced in now for major central banks that are leaning towards interest rate cuts next year?
- Federal Reserve: -156 bps (first -25 bps in March)
- European Central Bank: -161 bps (first -25 bps in April)
- Bank of England: -141 bps (first -25 bps in May)
- Swiss National Bank: -86 bps (first -25 bps in June)
- Bank of Canada: -120 bps (first -25 bps in April)
- Reserve Bank of Australia: -53 bps (first -25 bps in June)
- Reserve Bank of New Zealand: -93 bps (first -25 bps in May)
That is some rather heavy posturing, especially when it comes to the Fed, ECB, and BOE in particular.
It is important to understand what is priced in as per the above as that sets out the market expectations at the moment going into next year. And therein lies the risk of any potential correction/retracement in pricing if inflation data does not corroborate with what traders are seeing in the first few months of 2024.