It has been a wild ride for inflation forecasters over the last 12 months as predictions pivot from the left to the right. From the aggressive rate hikes that happened in 2022 that will most certainly bring the world to a recession to inflation being tamed and coming off, to new stock market highs, and then to this week’s forecast of possible rate cuts in 2024.
In my past blogs, I mentioned that the earliest expectation of cuts should be only in 2024. The 15 years of low to negative rates resulted, thanks to the 2008 GFC abnormality. Historically, long-term rates should be around 3 to 5%. We had seen an overshoot of rates as a result of the Fed’s more than 500 bps hikes as they wanted to pre-empt inflationary pressures caused by the ending of COVID-19.
The world had a 1 in 100 years epidemic event which caused the world to shut down for more than a year as demand collapsed. When the vaccines arrived, markets that were shut down started to function again. Supply chains were unable to handle the huge surge in demand and as a result, all prices started to rise. This resulted in massive inflation for all products and services.
We now see a trend of inflation moderating to slowing down. The Fed had successfully killed the inflation monster without having to disable the economy. Markets cheered and pushed stock prices to new highs. Dizzy advances in AI, since ChatGPT was introduced in Nov 2022 were one of the main factors. We are now in a new paradigm change of AI tools that can literally solve any potential problems and even strive for new medical breakthroughs.
Futures have now priced in 75 bps of rate cuts into 2024. I believe we can easily see at least 150 given that the Fed had hiked 500+. It depends now on how rapidly inflation will decline from here. The wild cards are Ukraine and Gaza which could escalate matters. But oil prices are behaving themselves as China has not seen a rev-up of its economy yet.
The bullish trend for stocks remains as long as AI can surprise with newer innovations that would astound us. Else it is steady as she goes until we reached a long term level of interest rates stability.
I will be taking a break now as we are going to HK for a Christmas and year end break to meet up with our older son who has started working there. It will give me more time to review my 2023 KPIs and formulate the new list for next year. Here’s wishing all of you a Merry Christmas and a Happy New Year!
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