analysis
The bets on the stock exchanges that interest rates will be cut soon in the new year are in full swing. But experts warn against excessive expectations. What does this mean for investors, money savers and home buyers?
Prices on the stock market can no longer be stopped at the moment. The DAX storms from record high to record high. The background is investors’ hope that interest rates will fall soon: they will make risky investments such as stocks more attractive. Both the US Federal Reserve today and the European Central Bank (ECB) tomorrow are likely to leave interest rates untouched at their last meetings this year.
But investors are already turning their attention to the new year, and the majority are expecting significant interest rate cuts in 2024: Fed funds futures are pricing in the first easing for May at the latest. By the end of the year, key interest rates in the USA are expected to fall by a full percentage point. In the euro area, the market consensus even assumes interest rate cuts of 1.5 percentage points by December 2024; the monetary authorities led by ECB boss Christine Lagarde are expected to lower interest rates for the first time in March.
Deposit interest rates set the direction for overnight money and mortgages
The interest rate issue is not only important for investors in the stock markets: it would also be good for consumers who park excess capital in current account accounts or have invested it as fixed-term deposits or in bonds to know how long they can still hope for a high interest rate. For (prospective) home builders, the question arises: Can you perhaps still afford a property in the foreseeable future because mortgage interest rates are falling again?
The central factor here is the deposit interest rate, i.e. the interest rate at which commercial banks can park excess money with the ECB. This interest rate is currently 4.0 percent in the Eurozone. It sets the direction for daily and fixed-term deposit interest rates. The deposit interest rate also has an influence on the return on the ten-year federal bond, which in turn largely determines the building interest rates.
Sunken Inflation rates strengthen Interest rate speculation
What is striking is that so far there have been no indications of interest rate cuts from either the ECB or the Fed, as market expert Robert Rethfeld from Wellenreiter-Invest also points out. So why is the market still so convinced that the central bankers will soon initiate a turnaround in interest rates?
Above all, it is the sharp fall in consumer prices that has been increasing interest rate cut speculation for weeks. The inflation rate in the euro area was just 2.4 percent in November – and therefore only just above the ECB target of 2.0 percent. ECB Director Isabel Schnabel described the decline in inflation as “remarkable”.
Which speaks against rapidly falling interest rates
However, experts warn against exaggerated expectations of interest rate cuts. They are particularly worried about the strong rise in wages, as it has the potential to set a wage-price spiral in motion. According to the ECB collective wage indicator, in the third quarter collective wages rose to 4.7 percent compared to the same period last year – the highest value since the start of the time series. According to the ECB, the recently concluded collective agreements even provide for an increase of 6.0 percent.
“The sharp rise in wages suggests that core inflation will ultimately settle at three percent rather than two percent,” point out Commerzbank economists Marco Wagner and Christoph Balz. Ulrike Kastens, European economist at asset manager DWS, also warns against celebrating victory over inflation. “It is still too early to talk about interest rate cuts,” she concluded.
Kastens assumes that ECB President Lagarde will reject calls for very rapid interest rate cuts at tomorrow’s Council meeting. The Helaba economists are also convinced that the ECB will strive to curb market participants’ excessive fantasies of interest rate cuts. And Franck Dixmier, head of bonds at Allianz Global Investors, believes that the ECB should take a cautious stance in the face of the “market hype” and emphasize its vigilance.
And what is the Fed doing?
The situation may be different in the USA: Here, hopes of a rapid turnaround in interest rates in the new year may seem more justified. As in Europe, core inflation has fallen sharply in the United States and is no longer far from the Fed’s target of 2.0 percent. But in contrast to the euro area, wage increases in the USA have recently weakened again.
“This means that the Fed should be convinced earlier than the ECB that inflation has broken,” explain Commerzbank economists Wagner and Balz. In addition, the Fed raised interest rates earlier and more strongly than the ECB, so it is further ahead in the interest rate cycle. At the same time, there have recently been increasing signs that the USA could slip into recession in 2024.
High expectations for Lagarde and Powell
But here too, correct communication will be important: “It must not give the impression that the Fed is fearing a deep recession next year by pretending to want to hastily turn interest rates. That could unsettle investors,” warns Jochen Stanzl, chief analyst at broker CMC Markets.
So it remains exciting to see whether the Fed and ECB will actually meet market expectations at their meetings this week and offer the prospect of interest rate cuts in the near future. If so, investors on the stock markets can look forward to further pre-Christmas price gifts – and property buyers can hope again. However, the potential for disappointment is great – except for savers, who will certainly be happy about long-term high interest rates.