“The U.S. inflation data should throw cold water on the expectation of rate cuts”

Monetary policy decisions have been the main market drivers for almost two years now, even though these same markets had anticipated up to six or seven interest rate cuts in 2024 at the beginning of the year, barely six weeks ago. However, the strength of the U.S. economy has now led to a reduction in the number of expected cuts - the latest U.S. inflation data shows that prices rose by 3.1% in January, three tenths below the figure for December, but above the 2.9% expected by analysts.

“In principle, these data should throw cold water on the expectation of rate cuts,” explained Alberto Matellán, chief economist at MAPFRE Inversión. “It looks like inflation isn’t falling as much as expected and will remain around its current level, which is higher than expected by consensus.”

All of this data points to an extension of the higher-for-longer scenario, even though the market remains in position and expects several drops. "For some reason, it looks like a real effort is being made to reduce the significance of these latest data. Investors remain highly positioned, and when this position reveals itself to be incorrect, we can expect a fairly violent movement in the markets," says Matellán.

However, for the economist, the general trend takes importance over the individual monthly data. He also noted that volatility is fairly typical at this time of year, when the data for the previous year are published, given that this is when investors reposition their scenarios.

Turning to corporate earnings, Matellán insists that they are still better than the macroeconomic environment, as was the case last year, and that earnings “show business strength.” “European companies rely heavily on the outside world, so they do show a certain solidity in terms of being focused on growth,” he said.

European banking enjoys better coverage than in the past

The ghosts of the banking crisis returned a few weeks ago after New York Bank Corporation (NYBC) recorded losses of $252 million in the fourth quarter due to its exposure to commercial real estate, in addition to announcing that it was hiking its loan-loss provision by a whopping 790%, to $552 million, which the market interpreted as a sign that higher levels of default were on the way.

Matellán insists that European banking is much better prepared than in the past: real estate portfolios are more critically valued now than prior to the financial crisis and balance sheets are more sound.

“Investing needs to be boring”

In recent days, there’s been a lot of noise in the market caused by the latest macroeconomic data and how they can influence expectations of rate cuts by central banks. “One idea that really needs to be driven home over and over again to the client is that investing needs to be boring, especially for those of us who do this for a living,” Matellán points out. “The better you sleep, the better the investment will turn out.”

In addition, the chief economist at MAPFRE Inversión recommends that individual investors put themselves in the hands of an adviser to help them make decisions that best fit their objectives.