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🧵 Big thread on INTEREST RATES around the Western economies & their future projections & implications on the markets
Everyone's focus is on the FED funds rate but by understanding all of them we get a much clearer picture of where the FED is heading 💡
Let's dive in 👇
1/22

As you can see from the picture, central banks in Western economies tend to move the interest rates on average in a similar trend
We could even call it a consensus
However, some are frontrunners & some laggards and by comparing them all, we can get a general idea of the trend

Each economy has its own factors & issues that come to play in each country of course, which is the reason why we see some deviations here & there on a lower quarterly or yearly scale. But the general trend stays
So why is it that they all move together on average? 👇

My explanation is mainly due to the fact that all these economies are nowadays so connected to each other in trade that what affects one, affects the others too
However, it is always some big event that causes a major shift across all of them like the 08 crisis, Covid & so on

Everyone's focus is on the FED funds rate & maybe ECB, however, if we understand that they all move in a similar trend & compare them, then put in a bit of context + understand some are lagging, we can get a good idea of where FED might be headed

As you can see, all CBs started to raise the rates post covid sooner or later. Some higher some lower (not that important)
Right now I wanna focus on the one that started to raise the first, and surprisingly, it was from my own country the Czech Republic & it was on June 21

Now let's compare US & CZE and notice four important dates
June 21 - CZE starts to raise the rates
June 22 - CZE pauses
March 22 - US starts to raise the rates
July 23 - US pauses?
We raised the first and quickest, then stopped. The US moves similarly with a 1 year lag

As we explained, some are frontrunners some are laggards but in general move the same
Other frontrunners were Poland & Romania. All part of Eastern Europe that started to raise the first
Now all are paused & all at around 7%. Closer the trade, the closer the rates. Coincidence?

If we look at the apx 1-year lag the US has behind us, we can expect them to pause now as well
And voila, the market is predicting the same 👀
The highest probabilities say rates pause till March 2024 & then rate cuts (think could be a bit longer)

And while there can surely be one last rate hike or the pause may be a bit longer we should try to get a general idea of the overall trend
The other laggards behind the US are GB & EU as the "dumbest kid". All around 5%. Coincidence?
Remember, closer the trade, close the rates

With that said, all laggards are yet to pause
The US was the 1st of the laggards, EU was the last
I expect the EU to keep raising up to ~5%, then pause the last
GB & Australia are following suit. Expect them to pause till the Fall/End of 2024, then rate cuts going into 25

Back to CZE as the frontrunner vs the US
We have been paused since June 22 at 7% & are expected to start dropping the rates by the end of the year & then slowly through the whole next year down to 4% (ČNB)
So what is the forecast we can make based on that for the US economy? 👇

If we take in the 1-year lag and assume that this was the last rate hike in July, FED probably keeps the funds rate the same for the next year at 5.5% just like CZE
That is approximately till July/August 24, then starts rates cuts going into the end of the year

Interestingly that nicely aligns with US presidential elections 🤔 Coincidence?
My personal opinion is that we cannot exactly tell the month but we can get an idea of the trend very well
The moment we start seeing rate cuts in frontrunning countries is the time to pay attention

This is my personal projection of interest rates in the Western economies
Keep in mind that rate cuts are usually due to problems within the economies like rising unemployment, economic slowdown & so on and the intention is to support these economies

My estimate is however that we don't go back to 0 with interest rates anytime soon
Laugh all you want but if apply a bit of TA on it we just broken MS & downtrend with an impulsive shock swing higher
Those always lead to a higher low followed by another leg higher in the future

What we cannot say exactly is when & how low we go with the rates
What we can say is the general trend
I expect some troubles to come to the US around the end of 24, or early 25 which will cause the rate cuts. How deep we shall see but not back to 0. My estimate is 2-3%

It will probably be followed by some QE as well to support the economies, which will possibly lead a to new waves of CPI rise in the future, which will then cause secular leg of rate hikes
But that's too far in the future now and we gotta go from "level to level"

Here is also my estimate of how it affects the markets if you wanna see more👇
While I'm heavily confident in the levels, the timing is the hardest to predict and can be a bit off. Still think I did a pretty decent job of giving good estimates

I also think we see some credit failures in 24/25 due to the highest interest rates in 20 years which causes higher unemployment which will force the FED to cut the rates which will cause the yield curve to go back above 0 which leads to a major drop in stocks

Then FED comes to the rescue with QE and other programs & the market stabilizes and we are ready to start the new trend...
Hope you guys enjoyed this thread & learned something new, something helpful... to YOU 🤝

Lastly, these threads take me many hours to put together & write them down. I do it for free & receive nothing in return
Please consider the least you can do & engage with them in any way possible. It does help the algo, which then helps me, which then helps you again, thq u 🙏

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