Markets target second quarter of 2024 for the first rate cut

In the last weeks the US and EUR rates repriced sensibly the future economic scenario, the inflation trend and the monetary policies. It’s quite clear now that central banks have finished the hiking cycle and the focus is around the timing of the first cut. Market is anticipating this timing, pointing that the second quarter of the next year should be the start of the easing cycle.  

But the overall scenario is very mixed: macro-economic data are weaker but no so weak to expect a recession, the clear disinflation trend was supported, for a large portion, by the base effects, the Central bank members speeches are mixed, but a common denominator is the need to avoid an early cut that could undermine the disinflation trend. Without forgetting that market will see a large flows of issuances to finance the expansionary fiscal policies. 

At the current level, rates seem to price more the positive news than not. It’s unlikely to see another movement for lower yields in the final weeks of the year. And we are seeing that during the last rates rally the yield curves moved with a flattening trend, that is not the typical movement when an easing cycle is ready to start.