| USA The Consumer Price Index (CPI) rose just 0.1% in November, amounting to a 3.1% year-to-year upswing. The headline print was muted by a downdraft in gasoline prices and ongoing moderation in food costs. In contrast, firmer services prices continue to prop up core inflation. A 0.3% monthly uptick in core prices translated to a 4.0% annual gain in November, unchanged from October’s rate. Despite core CPI seemingly stuck at double the Fed’s inflation target, there are encouraging signs of more progress to come. A recent streak of softer prints brought the three-month annualized core rate to 3.4% through November, suggesting that disinflation has more room to run in the coming months. Gradually cooling labor costs should also help to keep a lid on services inflation, while stalling wholesale prices reduce the risk of price reacceleration. That said, price pressures have not completely abated The latest NFIB Small Business Economic Trends Survey. In November, the net share of small businesses expecting to raise prices in the coming months reached its highest reading in one year (34%), consistent with a bump in plans to raise compensation Retail sales rose 0.3% in November, outshining expectations of a slight decline. Sales mounted a more impressive 0.9% increase on an inflation-adjusted basis, the fastest pace since last January. In addition to demonstrating enduring consumer resilience, November’s print also signals a solid holiday shopping season this year. Holiday sales are now on track to grow just under 5.0% on an annual basis. If realized, this spending pace would be a downshift from post-pandemic norms while still remaining above the longer-term average. Finally, a 0.9% real increase in control group sales in November set up GDP to advance a touch faster than expected The Federal Reserve kept its policy rate unchanged at the 5.25-5.5 percent range for the third consecutive meeting, as anticipated by economists and fully priced in by the markets. Inflation progress is “welcome”, said Fed Chair Jerome Powell. But Powell also explained the inflation remains too high, that continued progress is not assured, and that “further evidence needed to build confidence” on the FOMC. Powell acknowledged that the FOMC thinks that the policy rate is “at, or near, its peak”. Any additional hike is “not likely, but we don’t take that possibility off the table”. And the meeting discussion started about when it’s time to start “dialling back” the policy restrictiveness. “This [the timing of coming rate cuts] will be a topic for us, looking ahead”, said Powell The overview of FOMC participants’ individual assessments of appropriate future policy instantly gave off the dovish signal, which Powell later added to during his press conference. The median FOMC member tilted down the 2024 forecast, seeing a total of 75bp of rate cuts. Powell did remind that “the dot plot is not a plan” and that the FOMC do not discuss it, they just report their own individual view for reporting it the tables that get published. But this is typical pushback against reading too much into the “dot plot”, and did not pack the punch that would have been needed to alter the dovish signal The S&P 500 Index, Nasdaq Composite, and Dow Jones Industrial Average recorded their seventh consecutive week of gains—the longest streak for the S&P 500 since 2017, according to Reuters. The gains lifted the first two benchmarks to 52-week highs and the Dow to an all-time record. Continuing a recent pattern, the week’s gains were also broadly based. An equally weighted index of S&P 500 stocks outpaced its market-weighted counterpart by 131 basis points. Small-caps also outperformed, and the 5.55% surge in the Russell 2000 Index lifted it out of bear market territory (down 20% or more) for the first time in over 20 months In terms of data release, Existing Home Sales is out on Wednesday. The resale market took another step back in October as sales fell 4.1% over the month. Existing home sales are down roughly 15% over the year as high mortgage rates stemming from the Fed’s policy tightening campaign has worsened affordability. On top of high financing costs, a dearth of resale inventory has placed upward pressure on prices. Although buying conditions remain largely unfavorable, prospective buyers have gotten some relief on the mortgage rate front. Since peaking at 7.8% in October, the 30-year average mortgage rate has fallen for seven straight weeks, and this week fell below 7% for the first time since August The Leading Economic Index (LEI) is out on Thursday. It has signaled recession for more than a year and a half, even as the broader economy continues to impress. The composite fell 0.8% in October, weighed down by weakness in interest rate-sensitive manufacturing and financial components. The ongoing slide in LEI is at odds with the prevailing strength of the economy, particularly when measured against resilient consumer spending and steady labor market gains. In addition, the uptick in continuing jobless claims is indicative of a cooling labor market, which may weigh further on the index Personal Income & Spending is out on Friday. The October income and spending report reflected a moderation in consumer outlays, suggesting a more budget-conscious mindset is taking hold even as income growth continues to improve. Real income growth has helped to sustain spending so far this year, but a softening jobs market hailed a slowdown for consumer income. Indeed, real disposable income growth appeared to be weakening before unexpectedly rising in October. On top of that, Q3 data were revised higher, suggesting consumers have more dry powder leading into the holidays than previously thought. To add to the pile, average hourly earnings surprised to the upside in November. UK GDP MoM saw a contraction in October, falling by 0.3% compared to market expectations of a more modest drop of just 0.1%. All three main sectors saw a drop in activity: services output was down by 0.2%, production by 0.8% and construction by 0.5%. Given the UK economy is dominated by the services sector, the 0.2% fall in this sector ended up being the largest contributor to the fall in monthly GDP. While monthly figures are in negative territory, when you compare the three months to October to the three months to July, UK GDP growth effectively flatlined at 0%. is notable that October 2023 saw exceptionally wet weather, with the Met Office reporting that it was the equal-sixth wettest October on record since 1836. This will no doubt have affected the GDP figures for October. The wet period was cited as a negative factor from businesses in the construction, retail, pub and tourism sectors. Consumer-facing services continue to struggle following the pandemic, with the sector overall remaining 5% below its pre-pandemic level By a vote of 6-3 the Bank of England’s Monetary Policy Committee voted to leave interest rates at 5.25%. The three dissenters all voted for a further 25bp increase in interest rates. This is notable in that investors’ expectations have been firmly focused on when interest rates are likely to fall in 2024. The hawkish MPC comments note that “Monetary policy would need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term, in line with the Committee’s remit… the Committee continued to judge that monetary policy was likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.” The next meeting of the MPC is set for Feb 1, a reduction in UK interest rates before May is unlikely, with a 25bp reduction occurring every other meeting over the course of 2024, so ending the year with interest rates at 4.5%. EU ECB did not discuss rate cuts at all. The decision to leave the policy rate unchanged at 4.0 percent hardly got anyone’s attention. The main question before the meeting was to what extent the ECB would try to push back against market expectations of early and steep rate cuts. The press release noted that inflation has dropped in recent months but also stated that it is likely to pick up again temporarily in the near term and that domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs. Overall, this gives the press release a hawkish flavour. During the press conference, Lagarde continued the hawkish tone and stated the there had been no discussions about rate cuts at all. She also again underlined the importance of domestic inflation, wage pressures and unit profits, arguing that the data is not yet supporting a decline on this front and that more data would be available during the first half of 2024. The ECB decided to advance the normalisation of the Eurosystem’s balance sheet. The current plan is to reduce the PEPP portfolio by EUR 7.5bn per month over the second half of 2024 and to discontinue reinvestments under the PEPP at the end of 2024. In September, the communication implied that PEPP would be reinvested until at least the end of 2024. The announcement was followed by a sentence clarifying that interest rates are the primary tool for setting the monetary policy stance, and this was also underlined by Lagarde at the press conference Business activity in the eurozone shrank in December, according to S&P Global. An early estimate of the Purchasing Managers’ Index (PMI) based on the combined output of the manufacturing and services sectors fell to 47.0 from 47.6 in November, a two-month low and a seventh consecutive month below 50, the level that indicates contraction In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.92% higher as financial markets appeared to increasingly expect key central banks to cut interest rates in 2024. Major stock indexes were mixed. France’s CAC 40 Index gained 0.93%, but Germany’s DAX and Italy’s FTSE MIB were modestly lower. CHINA China’s consumer price index fell 0.5% in November from the prior-year period, accelerating from October’s 0.2% contraction and marking the steepest drop since November 2020 as lower pork prices weighed on food prices. Meanwhile, the producer price index dropped a bigger-than-expected 3% from a year ago, marking the 14th monthly decline. Deflation is concerning for China since economists worry it could unleash a downward spiral of economic activity. Other November data continued to paint a mixed picture of China’s economy. Industrial production grew a better-than-expected 6.6% last month from a year earlier, while retail sales surged 10.1% but missed expectations. Fixed asset investment rose a weaker-than-forecast 2.9% in the first 11 months of the year as declines in infrastructure growth and real estate investment deepened. The urban unemployment rate remained steady from October at 5%. In monetary policy news, the People’s Bank of China (PBOC) injected RMB 1,450 billion into the banking system via its medium-term lending facility compared with RMB 650 billion in maturing loans. The medium-term lending facility rate was left unchanged as expected. Liquidity injections are seen as a part of the central bank’s continuing efforts to counter economic headwinds. Analysts predict that the PBOC will step up policy support in 2024 as the government ramps up measures to boost China’s economy. Senior officials drafted the agenda for China’s economy in 2024 during the Central Economic Work Conference, an annual meeting that sets economic policy for the coming year. Officials reportedly set out guidelines aimed at boosting domestic consumption and investment to drive growth as weak consumer confidence and a property sector downturn remain key risks for the economy Chinese equities declined as persistent deflationary pressures weighed on the economic outlook. The Shanghai Composite Index fell 0.91% while the blue-chip CSI 300 gave up 1.7%. In Hong Kong, the benchmark Hang Seng Index rose 2.8% amid a global stock rally after the Fed kept interest rates steady on Wednesday and signaled it may start cutting them next year. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, M. cassar Derjavets. |
