The Cambridge Weekly –5th February 2024

The Cambridge Weekly – 5th February 2024

Central banks challenge Goldilocks assumptions

The first month of the year is behind us and, despite what many expected, returns were positive for most investors (see January’s returns review in a separate article below). Following the initial hangover from last year’s tremendous Santa Rally, risk asset markets continued on their upward trajectory. That was until the last day of the month, when the US central bank (Fed) dampened the mood by repeating the message that rate cuts will begin later than markets anticipate.

January 2024 asset returns review

The hangover from an exceptional Christmas rally led to some downdraft at the start of the month, but after these teething problems, January turned into a half-decent month for investors. Previous optimism was based on expectations for the coveted ‘soft landing’, where central banks can ease financial conditions without causing outright recession and its associated damage to growth and company earnings. Coming into the new year, capital markets were anxious that they had got ahead of themselves, and that interest rates or inflation might indeed remain ‘higher for longer’ as central bankers had suggested in the autumn. These fears dissipated somewhat as the month went on and major central bank meetings coupled with the latest inflation figures seemed to vindicate market confidence. In the end, global stocks gained 0.7% in sterling terms. The table below shows January returns for key assets and indices.

Central banks confirm ‘lower, slower’

Central banks are holding steady. The US Federal Reserve and the Bank of England (BoE) held meetings last week, following the European Central Bank’s (ECB) monetary policy meeting last week. All three left interest rates unchanged, as was widely expected by capital markets. With current policy a near-certainty, investors are more interested in hints at how the future might look.

Inflation and monetary policy expectations are probably the biggest market movers right now. We find ourselves – after years of supply chain congestion and the sharpest cost of capital hike in a generation – at the turn of a new growth cycle. However, the green shoots of global growth can be fostered by easier policy or crushed by overly restrictive financial conditions – and behind all of this is central bankers’ fear that easing too soon would bring back the inflation spectre they worked so hard to excise. The memory of being so recently ‘behind the curve’ – allowing inflation to run rampant while interest rates remained historically low – only heightens the anxiety.