Markets are very thin skinned. A sentence by Christine Lagarde delivered yesterday at the Economic Forum in Davos dyed the stock markets red. That’s how sensitive investors are, who for weeks have been counting on a drop in the price of money with the bloom of spring.
The president of the European Central Bank (ECB) assured yesterday that it is likely that the monetary institution she directs will reach a consensus to lower interest rates, but only in the summer. “I would say it’s also likely…” he said when asked.
“I know that some people argue that maybe we are overdoing it, maybe we are taking risks”, said Lagarde. “But the biggest risk would be to let inflation be unleashed again and have to launch rate increases again”, he explained. The institution’s chief economist, Philip Lane, was even more explicit. “Cutting interest rates too soon could threaten Europe’s progress in the fight against inflation that has devastated the economy,” he told Bloomberg.
In the same vein, “investors’ bets on a cut in ECB interest rates are excessive and possibly counterproductive, as they could actually slow down monetary easing,” the head of the Dutch central bank told CNBC. Klaas Knot.
This cross of declarations (or rather a chorus) meant a cold shower for the stock markets, which in the latter part of 2023 dreamed of a relaxation of the price of money when the first quarter ended. A temporal horizon that now seems to be receding.
Indeed, investors speculated that the ECB would not dare to cause a recession in the Eurozone, since the current inflation is more a problem of supply restriction than of excess demand. However, all indications are that Frankfurt will hold firm before releasing the monetary brake.
Jesús Sánchez Quiñones, CEO of Renta4Banco, in a column to be published this week in the Money supplement, acknowledges that “the market is excessively optimistic about the amount of interest rate cuts and the timing of the cuts”. write “In the case of Europe, it seems too optimistic to think of six interest rate cuts this year. Inflation will hardly allow it. Proof of this is the current disruption in supply chains due to the situation in the Red Sea”, he warns.
The same downward trend is experienced on Wall Street. The Fed may let its guard down before the ECB, but it won’t be too soon, either, because markets are now forecasting 150 basis points of cuts in the US this year, up from 166 basis points last week. The probability of a rate cut in March, once considered certain, is now just over 50%.
The Ibex 35 ended yesterday with a significant drop of 1.26%, which caused it to lose the level of 9,900 points. The United States stock market also opened its sessions with slight losses and the euro traded lower.
To end the day, the World Trade Organization (WTO) said yesterday that it was “less optimistic” about world trade this year, according to its secretary general, Ngozi Okonjo-Iweala, citing in particular “the worsening geopolitical tensions, the disturbances we are seeing in the Red Sea, the Suez Canal and the Panama Canal”.
