Rate cut expectations get a hair cut [Video]

Investors continue to come back to their senses and the latter involves trimming the interest rate cut expectations that went ahead of themselves over the past few months. Yesterday, the Federal Reserve’s (Fed) Beige Book survey suggested that resilient consumer spending during the holiday season helped propel the US economy, and another solid rise in the US retail sales confirmed that spending in the US didn’t slow by the end of last year. The probability of a March cut fell to around 60% from around 80% at the start of the year.

The market and the central bankers have started to move toward each other, even though the time gap between when investors price in the first cuts and when central bankers contemplate rate reductions should continue narrowing to find an optimal balance and that should involve a deeper downside correction in stock and bonds, and a further recovery in the US dollar.

The euro gives back field, sterling is cautiously bid following surprise jump in UK inflation last month while the Aussie falls of the bed on soft China, soft domestic data and strong dollar.

In energy, crude oil is better bid and the barrel of American crude is testing the $73pb – again this morning on the Red Sea tensions and on OPEC forecast that global oil demand will grow by a robust 1.8 mio barrels per day next year, exceed growth in supplies and keep the market in deficit. Solid floor is seen at $70bp.