Keeping The Tussle Going Between Rate Cuts

Week Ending, 9th February, 2024

It was another difficult week for bonds as caution was sounded by Central bankers over persistent inflation and, therefore, rate cuts. Perhaps the best and clearest example was by the Australian Central bank governor, Michele Bullock, who said the inflation challenge is not over despite signs of moderation. She said, “An inflation rate with a “4” in front of it is not good enough and still some way from the midpoint of our target”. She noted services inflation still needs to come down “quite a bit lower”.

Following on from last week’s commentary around the NYCB (New York Community Bancorp)’s big decline in share price due to its property (specifically commercial real estate, CRE) exposure, Janet Yellen admitted she sees more bank stress & financial losses due to weaknesses in commercial real estate. She even acknowledged the possibility a non-bank mortgage lender could fail - but does not believe it will pose systemic risk to the banking system. It’s not just an American phenomenon. In Germany, Barclays gave a warning to several banks (Deutsche Pfandbriefbank and Landesbank Baden-Wuerttemberg) that they may need to rely mostly on covered bonds and deposits for funding as unsecured borrowing costs rise. No surprise their AT1 (Additional Tier 1) debt has been falling in value as these instruments rank as the lowest form of debt in the debt stack.

On a (slightly more) positive note, US December inflation rose at a slower +0.2% m/m pace rather than the initial, reported +0.3% m/m. Additionally (see below), overall economic news points to a slow but steady economic pickup. All this keeps the tussle going between rate cuts to come sooner rather than later (bullish) vs later rather than sooner(bearish).