Rate cuts are coming in 2024
The US Federal Reserve has opened the door today to rate cuts in 2024. This is a big pivot point in the market, and what happens in the United States always has flow on effects into other global markets around the world.
Not only did they leave rates on hold, but the market was taken by the following statement line: “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.”
That basically means that they are planning to cut in 2024 and the market is starting to price in around 2-3 rate cuts. Here are US 2 year rates over the past few months, now in free-fall after flirting with 5% back in October.
The economic squeeze is taking place and higher rates are working to bring down inflation. I’m still of the view that Australia is around 3-4 months behind the US and we will start to see inflation and economic activity fall around March/April next year.
I’m already seeing signs that retail activity is falling in the ANZ Black Friday Sales numbers, which showed sales were up 1.0%, but when adjusting for population growth and price inflation, suggests that volumes were down on last year.
Australia’s GDP per capita (adjusting for increased population) is also negative. The UK’s GDP print yesterday was worse than expected, even without adjusting for per capita and population.
The global economy is slow, and oil prices have been a strong indication of that slowdown in the past six months, as I have written (Commodity prices painting a mixed picture).
My bottom line is that interest rates have peaked and 2024 will see a reversal of that peak. Everything that benefits from lower interest rates has already started to move. Bitcoin above US$40,000, residential real estate and risk currencies like the Aussie dollar have all moved off their bottom.
The first half of 2024 will see economy slowdown, the second half will see the monetary policy response and it looks like that starts in the US leading the world once again.
Last week, I called for Aussie rate cuts to occur mid-late next year (The next big move in Aussie interest rates) and I still hold that view.
It’s a great time to be buying residential real estate, my favourite asset class, as rate sensitive markets will see this as an opportunity to rise again. I recently held an online event on my top Australian cities to invest in earlier this week. If you missed the event, you can register below for a recording.
Peter Esho is an economist and Founder of Esho Group. He has 20 years of experience in investments and markets.