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March 11, 2024 - "When doves cry (out)".

With our reference to the famous 1984 song by Prince, we wish to highlight the dose of dovishness we received last week by the the world's major central banks, the ECB and the FED. The message was loud and clear: rates have peaked and discussions about rate cuts have been initiated. At the same time the two banks seem to be following a very similar path of adjusting their monetary policy to a less restrictive stance not before the second half of this year. Equity and bond markets have already celebrated this message, but now we will have to see in the coming months whether the "buy the rumor / sell the fact" will hold again true. The new information we received has been already priced in, with the rally of the previous month and no new catalyst is ahead of us for the next one or two months, until we receive the next corporate results or more information on inflation.

The ECB meeting revealed that rate cuts started to be discussed. It also shed some light on the timing of the first rate cut, which is in-line with our own view we held sine December. Although not explicitly mentioned, the ECB gave signs that the first rate cut should be coming in June. Back in late December we said that we do not share the market's view of aggressive rate cuts, starting in March. We based this view on the fact that they have to remain cautious ahead of the inflation data between January and March. Then we also argued that the ECB is very unlikely to act before it has more data on the expected wage growth in the Eurozone which is still running close to 6%. The period March to April is the period where the major trade negotiations will take place and more data will surface. In President Lagarde's own words "it is unlikely to be sufficiently confident by the time of the April meeting that disinflation has made enough progress to justify a rate cut".

Once the ECB starts cutting rates in June, the market is coming to the view that it will deliver a gradual sequence of 25bp cuts per quarter. This means a cumulative 75bps of rate cuts in 2024 and 100bps in 2025, bringing the deposit rate to 3.25% by end-2024 and 2.25% by end-2025. Mrs. Lagarde did not want to commit on the pace of rate cuts, saying that the "pace, rhythm and magnitude of cuts would be data-dependent". The ECB also lowered its inflation forecast for 2024 and 2025 by more than the market had anticipated (to 2.3% and 2.0%, respectively), but it stressed that domestic price pressures remain high.

The FED Chairman, Mr. Powell continued along the lines of the ECB. In his bi-annual testimony to Congress he chose to reiterate that the central bank wanted to wait in order to gain more confidence that inflation is headed sustainably to 2.0% before dialing back monetary policy restrictiveness. But he also emphasized the risk of the US economy falling into recession if they waited too long to cut rates. In his prepared remarks he said, "Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment." He said the risks are moving into better balance again and that the policy rate is likely at its peak for this tightening cycle. He continued by adding that "it would likely be appropriate to begin dialing back policy restraint at some point this year."

The US February labor market data were again volatile, but confirmed the slowing down. For our readers without a strong memory, we remind them that in January we had the blowout non-farm payrolls number of 353k, but this was revised downward to "just" 229k. Another 50k jobs were taken out of the December number, bringing the total downward revision close to 170k in total for the two months. Under this premise, the February number of a strong 275K increase vs 200k expected does not look like a big positive surprise. The new report continues the pattern we saw last year, where the initial January release of payrolls looks amazing, but it is subsequently revised down later, showing somewhat less outsized strength. Hence, unemployment rose to 3.9% from 3.7%. Still however, the average jobs growth of 200-250k per month is a solid number and does not "cry out" recession.

Donald Trump seems to have won the Republican nomination, after his main competitor Mrs. Haley dropped out of the race. This took place after the "Super Tuesday" results which showed that Mr. Trump is the undisputed leader that the party voters want and it would be an embarrassment for Mrs. Haley to continue fighting to win states. Initial polls show that a Biden-Trump fight will be a very close call.

Equities had a mixed picture after the initial celebration of the central banks' news. US equities succumbed to profit taking towards the end of the week, with Nasdaq posting a 0.8% loss. Europe, on the contrary, continued its march higher, with the main indices posting gains of about 0.8% and the Swiss SMI finally outperforming with a 1.5% gain. A significant rotation took place last week, with the so-called Value sectors posting strong gains (Staples +1.1%, Financials +1.5%, Energy +1.8%), while Tech-related stocks finished negative.

Bonds cheered the fact that rate cuts are finally coming, at the admission of the central banks. The US 10-year yield fell to a low of 4.05%, down almost 30bp from the recent high of a couple of weeks ago. The German equivalent is trading at 2.25%, down about 15bp from its own recent high. The recent price action confirmed our view that the correction of the bond market in the first two months of the year was (a) inevitable as too many rate cuts had been discounted for 2024 and (b) created opportunities to buy again high quality paper at attractive yields., especially in the longer duration space.

Gold has found itself at a new record high, trading at 2180 $. This was the result of the drop in bond yields and the lower USD, as well as the rally of Bitcoin to which (surprisingly or not) the yellow metal is positively correlated to. The EURUSD approached again the 1.10 level.

Chart of the Week : Has the bottom been reached for defensives' huge underperformance ?

The above chart, generated by Kepler Cheuvreux, shows the relative performance of European Defensives (staples, healthcare, telecoms, utilities etc.) vs the Cyclicals (Technology, Industrials, Discretionary etc.) for the last 10 years. The more this line drops the worst is the relative performance of defensives compared to cyclicals and the opposite. We have now reached the point that several times in the last ten years, this huge under-performance stopped and a relative out-performance followed. As always we remind our leaders that for this line to move higher it is not necessary that defensives will rally more than cyclicals. The result will be the same if in case of a correction, defensives drop much less than cyclicals. Our view remains that after the recent rally, defensive positions should be increased in equity portfolios, as history could repeat itself, and rather soon. Valuations in those sectors remain very attractive and cyclicals have discounted a lot of good news.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Kepler Cheuvreux , Photo: cover of Prince's 1984 maxi-single "When doves cry"


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