What if there will be no rate cuts in 2024? Bank of America warns.

A major Wall Street bank is raising the possibility of an extreme scenario in which no Group of 10 central banks cut interest rates this year due to persistent inflation, strong economic growth, or unforeseen shocks that drive up prices. 

Athanasios Vamvakidis, a UK-based FX strategist at Bank of America, suggests that investors should consider the implications of such an unrealistic scenario in which central banks refrain from rate cuts. 

Currently, markets are anticipating approximately six interest rate cuts from the Federal Reserve and the European Central Bank starting in March and April, five cuts from the Bank of England, and two cuts from the Reserve Bank of Australia. However, Bank of America predicts that there will be fewer cuts across the board due to ongoing inflation, resilient economies, and tight labor markets. 

Comments from policymakers in the US and abroad lend support to Bank of America's views. Members of the European Central Bank's governing council, Robert Holzmann and François Villeroy de Galhau, attempted to temper market expectations for rate cuts. Similarly, Federal Reserve Governor Christopher Waller stated that there is no need to rush with rate cuts. As a result of these remarks, there was a sell-off in the US bond market with the 10-year yield climbing by 11.5 basis points to 4.064%. This led traders to scale back their expectations for the extent of rate cuts anticipated by December. 

The most important discussion in the market as the new year has started is not if, but when and how fast G-10 central banks will start to cut policy rates, Vamvakidis stated. He emphasized the need to consider the market implications of a scenario where central banks refrain from rate cuts, calling it an extreme scenario that seems unrealistic to many. 

In Bank of America's discussions with investors, Vamvakidis revealed that nobody had considered a scenario wherein no central bank cuts rates this year. He argues that in this extreme scenario, the dollar, euro, and Swiss franc would likely outperform the Norwegian krone, Australian dollar, and Japanese yen. 

Furthermore, there are two current factors that contribute to concerns about persistent inflation.

 First, developments in the Middle East, including US-led strikes on Yemen's Houthi rebels, have disrupted oil shipments through the Red Sea, prompting British oil company Shell PLC to suspend its shipments. These events caused oil futures to initially rise before ending lower. 

Second, US wage growth exceeded expectations with a strong 0.4% increase in December and a 4.1% increase year-over-year. Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management, warned that wage growth could reignite inflation. 

Despite these factors, Treasury yields experienced significant upward movements on Tuesday, registering the largest one-day jumps in recent months. This is unexpected given that traders anticipate at least six quarter-percentage-point rate cuts by December, which would lower the main US policy rate to 4%, 3.75%, or even lower. US stocks closed lower, while the ICE US Dollar Index saw a 1% increase. 

It is important to note that the current anticipated rate cuts in the US are considered maintenance moves designed to prevent interest rates from becoming too restrictive as inflation subsides.