A subjective market review, 29-Feb-2024

The most important data in the near future that will have the greatest impact on the current cycle are:

- January US PCE inflation (today),

- flash February inflation in France, Germany and Spain (today),

- Euro Area February flash inflation (March 1)

- February US employment situation (March 8)

- February US CPI inflation (March 12)

- FOMC decision (March 20), what will be particularly interesting here is the new median rate projection (dot plot), and what changes (if any) FED members will introduce to the last projection from December 2023, where they showed three rate cuts in 2024.

But before we get the above data, let's take a look at the updates of key charts showing where we are in the cycle (against the background of history).

Figure 1 and 2 show rate cuts in previous deflationary cycles. The current cycle most rhymes with the 2006-2008 cycle (long pause, strong economy). If the length of the pause from 2007 were to repeat, then in the current cycle the first rate cut would be in October 2024 (and the third and fourth cuts, which may already raise market concerns in terms of hard landing, are January and February 2025 - i.e. ideally… just after the US elections.

Figure 3 shows four scenarios for the S&P500 (calculated since the last rate hike): soft landing, two variants of hard landing and crash landing. Currently, we are closest to deflationary hard landings, as shown in Figure 4.

If the closest comparison is to the 2006-2008 cycle, Figure 5 shows the 10-year US Treasury yield.

Figure 6 is the USD Dollar Index. In the current cycle, I would not expect the dollar to weaken until the end of the pause (as was the case, for example, in 2007 - when Emerging Markets and commodities were very strong), because this time the US economy is the strongest.

So the dollar is rather neutral until the end of the pause / or till the 2nd-4th rate cut by the FED. And then, if there were to be a hard landing, I would expect a classic strengthening of the dollar up to the previous peak of 2022 (114 points on the dollar index, or well below parity on the EURUSD rate).