An important week begins for the financial markets

First of all, to see if the Fed opens the door to a rate cut in March, because after the meeting in January, we will have to wait until March 20 for the next monetary policy decision.

And the tension is high because expectations for interest rate cuts measured via Futures on Fed Funds are very balanced: At the time of writing, Futures expect a 49.6% chance of a rate cut in March and 50.4% for a status quo.

It should be remembered that in the days following Jerome Powell’s last press conference in December, the probability of a first rate cut in March exceeded 90%…before falling back to almost 40% during January to the numerous speeches by members of the Fed or the ECB indicating that markets were moving too quickly in their expectations, that the battle against inflation was not yet won and that more economic data was needed to decide on a rate cut.

If we trust the words of Raphael Bostic, the usual “dove” of the Federal Reserve, he did not foresee a rate cut until the third quarter, before slightly revising his horizon, explaining that if the economic data allowed, this first reduction could happen earlier .

We can rightly think that if he initially started with a rate cut in the third quarter and revised his position, he would therefore probably target the second quarter for a first downward move, but not the first quarter. We remind you that Raphael Bostic is a “dove”, so talking about the third quarter just a few days ago only to end up with a rate cut at the end of the first quarter would be a bit … surprising.

But the overall slightly less aggressive tone from Christine Lagarde last week as well as other “speakers” from the ECB, but also from the Fed in recent days, have revived hopes for a first interest rate cut in March, on both sides, others from the Atlantic.

The Fed’s preferred inflation measure, core PCE inflation, fell below 3%, fueling market hopes for a rate cut in March. But other elements, such as “core CPI” inflation, which mainly represents inflation in services, is still at 3.9% and has made little progress in recent months, only going from 4.1% to 3.9% in 4 months time.

US employment numbers remain solid, as does consumer spending data, which again speaks more for a rate cut in the second quarter…

The coming week will also be the richest in terms of publications, with results from many US tech giants: Amazon, Alphabet, Apple, Microsoft and Meta. And there will be no room for error, because the earnings season is currently quite average: a few months ago, analysts were expecting an 8% increase in SP500 profit in the fourth quarter … or for the moment before the releases of the tech giants this week, not only there is no increase in profits, but they have even decreased by…1.4%.

This creates an expensive environment where the SP500 is now “paid” for 20 times the forward P/E ratio, despite an environment where prices remain high. Any below-expectations release from a tech giant this week is likely to lead to rapid gains in US indices, to ease valuation multiples a bit.

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