Eddy's Weekly Market Update

As anticipated, the markets have recently been on the wrong track. The prevailing expectation until recently was that the economy and inflation would quickly moderate due to the sharply rising interest rates. Not a recession, but a soft landing. While this has largely occurred in Europe, in the US, economic growth is slowing only gradually, and inflation remains stubbornly high. This is because short-term interest rates have risen significantly due to the actions of the Fed, while at the same time monetary conditions have been significantly loosened. These include factors such as real interest rates, the dollar exchange rate, asset prices, credit spreads, and the availability of credit. These factors determine to a much greater extent the degree to which an economy is stimulated or restrained than the level of short-term interest rates. Looking back over the past year, short-term interest rates have risen significantly, but monetary conditions have been quite loosened. This abnormal behavior is likely due to the central banks having created a considerable amount of liquidity in recent years. Furthermore, there has been and continues to be significant fiscal stimulus in the US.

In Europe, the situation is different. There is much less of this happening there. It is therefore understandable that the European economy is growing by only about 1%, while the American economy is now growing by about 2.5%. European growth is slightly below potential, while American growth is above it. This means that inflation in the US is under upward pressure and in Europe under downward pressure. This automatically translates into upward pressure on US rates and downward pressure on European rates. Therefore, it is essential for the further course of market prices to assess how this will develop further.

Regarding Europe, we expect the ECB to start lowering rates by 0.25% in June and to do so 3 more times throughout 2024. Subsequently, we also expect 4 further reductions of 0.25% in the first half of 2025.

In the US, the situation is more complicated. There, monetary conditions will first need to be tightened. And probably quite substantially, as we expect higher oil prices in the second half of the year, which means the battle to keep bring inflation under control is not over. It remains to be seen whether much higher rates are necessary for this. Keeping rates unchanged for a while longer or only slightly reducing them will probably be sufficient to tighten monetary conditions enough to reduce US economic growth to around 1% and gradually lower inflation.

In this context, we expect the EUR/USD to further decline towards 1.00 in the coming months, and longer-term rates, especially those in the US, to remain under upward pressure for some time. This could prompt a significant correction in gold prices and stock prices.

If you would like to receive the full analysis on this topic, with more background, feel free to reply in a DM with simply your email address. I will then send you ECR's full Global Financial Markets Report, for an impression - happy to be in touch.

I wish you a pleasant week ahead.

Kind regards,

Eddy