Unit 2 · Level 3 · Rates → assets
The pivot obsession
Markets don't wait for central banks to act. They trade the future. If traders expect cuts next year, today's prices already contain them; the mere word 'pivot' can move trillions before a single rate changes. That's why markets sometimes rally on BAD economic news: weakness today hints at cuts tomorrow, and cuts mean smaller discount rates.
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What you get asked
Why can BAD economic news sometimes lift stock prices?
The market weighs two forces: what data means for profits, and what it means for rates. When the rate effect wins, bad news becomes good news.
You're promised €121 in two years. With a 10% discount rate, what is that promise worth today, in €?
€121 ÷ 1.10 ÷ 1.10 = €121 ÷ 1.21 = €100. Now imagine the rate falling to 5%: the same promise is suddenly worth about €110: no new cash, just a new discount rate.
Order the chain of a classic 'pivot rally'
The rally happens on EXPECTATIONS, often months before the first cut, and sometimes on cuts that never come. Markets front-run; that's their job.
Markets move on rate ___, not just rate decisions.
By decision day the move has usually happened. The surprise, the gap between expectation and reality, is what's left to trade.
The central bank cuts rates exactly as everyone expected. Most likely market reaction:
An expected move is old news the moment it arrives; prices absorbed it weeks ago. Only surprises move markets, a theme we'll meet again on CPI day. 🐜
The rest of this unit
Interest rates are financial gravity. Trace how one number reaches every asset you own.