Rate Cuts? Who Needs Rate Cuts?

Good Day,

In the ever-evolving dance of global financial markets, a curious phenomenon has taken center stage - the enigma of rate cuts. Despite denials from European Central Bank President Lagarde and Federal Reserve Chair Powell, markets continue to swirl with speculation. The Stoxx Europe 600 Index even made history by crossing the 500 level for the first time, leaving us to ponder: Who needs rate cuts, anyway?

As we embarked on this new year, optimism was fueled by the expectation of central banks launching an aggressive rate-cutting spree. However, the reality seems to be drifting away from those initial projections. The Federal Reserve signaled three rate cuts, yet none has materialized. Similar echoes resonate in Europe, where initial expectations have dwindled from four to three cuts.

Central bankers leave the door ajar, hinting at potential cuts later in the year. Commentators are quick to predict a June cut, with markets pricing in a staggering 93% probability for such an event. The Federal Open Market Committee (FOMC) meeting looms, and the probability for a June cut hovers at 95%. Yet, amidst this speculative fervor, the question arises: Are rate cuts even necessary?

Consider the robust state of the US economy - GDP comfortably hovering around 3%, nonfarm productivity matching estimates, and unit labor costs showing resilience. Pre-market futures rally, seemingly unaffected by the Federal Reserve's quantitative tightening efforts. Equities remain unfazed by the shrinkage in the Fed's balance sheet.

One can't help but wonder: Why cut rates when the economy is thriving, productivity is high, and employment levels are strong? Is the prospect of rate cuts being dangled like a carrot in front of Investors, or do central banks see something we don't?

A compelling argument emerges for the counterintuitive benefits of higher rates. As interest rates rise, so does income for baby boomers and retirees, injecting a disguised form of economic stimulus. Picture a retiree earning 5% interest on $1 million compared to a meager 2%. This increase in income may well be contributing to sustained consumer spending, a lifeline for the US GDP.

And as we explore this complex financial terrain, let's not forget the real estate market, a realm held hostage by high rates. Discouraging homeowners from selling and relinquishing their low-rate mortgages, the real estate market supply is artificially kept low, effectively establishing a price floor beneath values. The reduction in rates in the foreseeable future might unveil the true value of the possibly overinflated real estate market. Brace yourselves, for it might not be a pretty sight when homebuyers' loan payment abilities meet sellers' price expectations.

In the intricate dance of global markets, the story of rate cuts unfolds as a captivating mystery. Are they a necessity or a tantalizing allure for investors? As we navigate these uncertain waters, one thing becomes clear: The financial world is a stage, and the drama of rate cuts, coupled with the real estate market's secrets, adds another layer of intrigue to the script.

Stay tuned, dear readers, for the unfolding chapters in the captivating saga of global finance.

Wishing you all an enlightend weekend!

Warm regards,

Alexander

P.S.

DID YOU KNOW? California is the most populous US state, home to Hollywood, Silicon Valley and a real estate market worth more than $9 trillion.... (Bloomberg)

DID YOU KNOW? 120,000 of the world’s millionaires moved to a new country in 2023, up from 84,000 in 2022 and expected to rise to 128,000 in 2024. The top 5 destinations for high-net-worth individual migration were Australia, the United Arab Emirates, Singapore, the U.S. and Switzerland. China, India, the U.K., Russia and Brazil lead the ranking of countries with the most people leaving. (Henley)

DID YOU KNOW? Chicago is proceeding with a revamp of empty downtown office buildings initially estimated at $1 billion in an effort to counter a commercial real estate crisis that’s cut office sale prices by more than 50%. Adding new home inventory via conversions is part of the great rebalancing in all things real estate. (Bloomberg)

DID YOU KNOW? Since COVID, Doctors have been charging for emails, up to $35 per email, and rightfully so. Their time is valuable. Thankfully I have been reimbursed for the many hours I have waited past my appointment time. Oh, just kidding! Thankfully real estate agents often don't get paid for emails. Or texts. Or calls. Or tours, or......?

DID YOU KNOW? In 2014, the total net worth of US households was $82.6 TRILLION: today it has nearly doubled to $151 Trillion, up from $117 trillion at the end of 2019 prior to COVID. By the end of 2020, the first year of the COVID surge, net worth had escalated to $131 trillion, up almost 12% in one year! Much of that has to do with rising home values and equity gains.

“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,”

— Jerome Powell. The FED was late to act as inflation rose; expecting them to act quickly as it comes down may be wishful thinking.

DID YOU KNOW? New tax policies in the UK: they will abolish the non-domiciled tax status. Non-dom status enables someone who lives in the U.K. but is not settled in the country permanently to only pay U.K. tax on money made in the country, and to avoid paying it on foreign income. National Insurance, a tax on payrolled workers, will be cut from 10% to 8%, furthering the previous cut in November from 12% to 10%. The average earner in the U.K. now has the lowest effective tax rate since 1975, now lower than in America, France, Germany or any G7 country, according to government officials.... (CNBC)

DID YOU KNOW? Annual Ozempic in the US costs about 10 times what it does in Britain, Australia or France. In Denmark - the home country of Ozempic producer Novo Nordisk - the cost of the drug is under $3,500 a year, roughly 25% of the US..... THIN-flation??

DID YOU KNOW? Can you even believe that before 1974, women often were not permitted to obtain a mortgage without a male cosigner. The Equal Credit Opportunity Act (ECOA) of 1974 was a turning point for women in America and their financial futures. Before the ECOA, women generally could not take out loans without a male co-signer, and lenders often saddled female borrowers with higher interest rates and larger down payment requirements. We have come a long way! Today, women actually outpace men in homeownership. (Bankrate)

DID YOU KNOW? J P Morgan private banking thinks there are going to be bumps along the way, but that central bankers have the ammunition needed to win the fight against inflation. The labor market continues to rebalance alongside still-solid growth. More foreign born workers and women are re-entering the labor force, alongside the allure of work-from-home postings. (almost 50% of new jobs added last year were remote or hybrid) This has helped wage growth cool with minimal economic pain to date. Without rate cuts, though, further disinflation means real rates would continue to push higher and run the risk of overtightening. While rate cuts may be less urgent than previously thought, they’re still on the way.