Policy talk is cheap & we need more power
Monetary policymakers have been scrambling in the past week to push back against the dramatic shift in market expectations for rate cuts next year. This is true for Fed officials—despite the clear dovish pivot in the December meeting—and particularly so for the ECB, where Ms. Lagarde and her colleagues have been hard at work to disabuse investors of the notion that the central bank will start cutting rates in the first half of next year. Are central banks right to lean into the prevailing market winds here? It’s all in the eye of the beholder. The chart below plots futures-implied policy rates for the Fed and ECB through 2027. The focus at the moment is on 2024, where markets see 150bp and 120bp worth of cuts from the Fed and ECB, respectively. That sounds like a lot, but then again, inflation is now falling rapidly. The question we need to ask is whether markets will be fed information over the next few months that will drive a shift in pricing. I am not sure, and if they aren’t, talk from policymakers will be cheap.
WE need more power!
I’ve finally managed to secure access to ChatGPT 4. It is a very powerful tool. I will present some of the economics and research work I’ve been doing with GPT 4 later on the blog. One thing that immediately strikes me is that if people at large are going to be using this, and similar tools, at their full capabilities, we’re going to need more centralised computing power, lots more. This suggests that the rip-roaring rally in NVIDIA and other chipmakers is pretty rational, but it also implies that data centre stocks—some of which form part of generally beaten down commercial real estate REITS—could be winners in 2024. Please don’t bet the farm on this, but I for one am getting interested. There is of course an ETF too, whose price, as it turns out is currently breaking out of range.