Pro Perspectives 2/2/23

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February 2, 2023

The central banks in the UK and euro zone did as expected this morning, raising rates another half a point, respectively.

With the Fed’s move yesterday, we now have the Fed at 4.75%, the Bank of England at 4% and the European Central Bank at 3%.

As we discussed yesterday, Jerome Powell gave plenty of signals that the Fed has finished the job on the inflation fight. After all, the Fed has now successfully raised rates ABOVE the rate of inflation (above core PCE).

On that front, the BOE and ECB still have a ways to go.

But both have this chart working in their favor …

Gas prices in Europe have collapsed since August, down more than 80%! With that, we've seen three consecutive months of falling prices (month-to-month) in the euro zone. It's a matter of time until that feeds into the year-over-year inflation number.

With perhaps a sense of deflationary forces lurking, market-determined interest rates (10-year government bond yields) are signaling that these three central banks won't be able to follow through with their pledge to hold rates "higher for longer."

Yields moved lower, not higher, in each respective government bond market, following the central bank rate hikes of the past two days.

That signal from the bond market, is a welcome one for stocks …

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