The key Fed release yesterday was summed up by Philip Marey as "minutes of inactivity": in short, the Fed are on hold, the decline in bond yields is due to soft data, and if those data heat up again, it will be yields moving, not the Fed. The FOMC feel they are winning the war against inflation without having to use more ammunition because of the high (rates) ground which they control. Yet they will fire again if needed, and waiting to win is a very different thing from giving up the high ground and beating their swords into ploughshares… or shares of any kind. Markets blind-sided by Covid in 2020, inflation in 2021, war and inflation in 2022, and now more war in 2023, are still failing to grasp that the world has changed even if they haven't, and 2024 is not going to be the 'new normal re-run' they think it is.

ECB President Lagarde also reiterated it's "too early to start declaring victory" vs. inflation, and that she would be prepared to hike rates again if needed; that's despite Europe sliding into recession, and Germany into deeper structural dysfunction as its constitutional court kneecaps its ability to borrow.

Even where higher asset-prices are loved, such as Australia, the war vs. inflation isn't over. The RBA is threatening that if wage inflation stays at 4% and productivity stays much lower, rates will have to rise again. Now apply the same logic to the rest of the West, as everyone grapples with high nominal and, increasingly, real wage growth vs. ultra-low productivity, UK data being the latest awful example.

Moreover, inflation also depends on the geopolitics of a Cold War with hot flashes that encompasses the global role of BRICS11 (10, excluding Argentina) commodities, plus Chinese goods made with them, vs. the financialised world of the US dollar. See the recent EBRD paper underlining the surge in the use of CNY for international settlement for many in the Global South trading with Russia. If Western central banks try to roll out large rate cuts early in 2024, they will be shocked to find that all they will likely get is much weaker FX, a new surge in commodity prices, then with Western firms using their concentrated pricing power to keep margins high, and then higher wage inflation. We just went through that, nothing has changed structurally for the better, and much has got worse, and yet some seem to have already forgotten the painful lessons.