Last week's inflation data provided another boost to the optimism trend that interest rates have peaked. To add further fuel to this fire FOMC continued with a pause and Chairman Powell communicated a dovish stance that has been taken as the policy pivot.
All these events have resulted in Fed rate swap markets reacting with a high probability of the first rate cut in March'24. Even the Fed dot plot indicated three rate cuts during 2024.
This change was swift a couple of weeks before Chairman Powell remained hawkish during his speech at an event. The reason for this change might be unknown but it has caused a high level of optimism as the year end approaches.
The question remains will history repeat itself? Because if it does then peak rates are followed by peak economy and mostly leading to a recession. And if in 2024 the same has to occur then the market's optimism is a good point of exits rather than entries.
To add to this trend, oil markets are already predicting a glut in the first quarter itself that has resulted in the extension of the cuts. But if the pattern does not repeat itself, will inflation reverse as the base impact benefits finish in the first quarter as well?