It is, on the face of it, a paradox. Markets in October were mired in pessimism as inflation remained stubbornly high and investors feared that central banks would keep policy interest rates higher for longer.
By December, those same markets were gripped by euphoria thanks to seemingly dovish statements on interest rates by Federal Reserve chair Jay Powell that appeared to promise earlier rate cuts than previously expected. And now in January, equity markets have made a rocky start to the year.
The key to understanding these extreme swings in sentiment is to be found in the mechanics of data dependent monetary policy. This causes investors to revise and re-revise endlessly their trading strategies based on intense parsing of central banking rhetoric and on expectations of how ageing incoming data of variable quality will influence central bankers’ rate setting.