Yesterday Europe’s inflation rate came in at the expected 2.4%. Year-on-year inflation for November contracted by -0.6%. Indicating that everything remains in line with expectations, European inflation risks seem to dissipate.
UK inflation has come in much lower than expected for November and markets are now pricing a whopping 140bp of cuts next year. That’s maybe pushing it, but investors are right to be thinking about several cuts next year, despite the Bank of England’s recent pushback.
Bank had argued, as recently as last week, that this downtrend isn’t entirely linked to economic factors – the implication being that some of the move is just statistical noise.
In Japan, following a two-day meeting, yesterday, the Bank of Japan (BOJ) maintained its short-term rate at -0.1% and, as was largely anticipated, the yield on the 10-year government bond remained close to 0%.
Additionally, the board decided to keep the 1.0% loose upper band for the long-term government yield.
Due to the significant level of uncertainty around the economy and price movement, a decision was made.
With this action and salary rises, the BoJ hopes to sustainably reach its 2% price stability target. The committee reaffirmed that if more easing measures are required, it will not think twice about taking them.
Before the meeting, speculation that the central bank may change course increased following Governor Kazuo Ueda’s remarks earlier in the month regarding some normalisation of monetary policy. He also forewarned that 2024 would be “even more challenging.”
In the US, building permits released yesterday came out lower than expected. Atlanta released its GDPnow indicator of 2.7% growth for the US economy in Q4. This would confirm the Fed’s view that the US economy is slowing as expected.
In the US, the CPI rate was released and came in at 3.9%, lower than the expected 4.3%.
Today, Germany and the UK have presented their PPI indices, in both cases with negative results and in the case of Germany worse than expected, which confirms again the contraction of the economic activity. If only a year ago the biggest fear of all was uncontrolled inflation, now the risk seems to be rather a possible deflation in the coming months if the figures continue like this.
This is why the market, far from fearing this scenario, considers it to be transitory again, as the general idea is to easily fill it with monetary stimulus, i.e. rate cuts, as already anticipated in the Fed chairman’s last speech.
This could be a mistake; raising interest rates did not solve the inflation problem for months, and lowering them may do little to revive the economy as expected.
Regarding the market, we have exceptionally strong equities in the US, with the SP500 breaking record highs and the NASDAQ at record highs. In Europe, after five weeks of gains, the market has paused since last week, but indices such as the DAX are also at record highs.
WTI crude oil has rebounded from a low of $68 to almost $75 a barrel. The dollar remains weak, although it has slowed its declines and remains above 102 points on the DXY index. In response, gold remains above $2,000 per ounce, and the EURUSD close to the $1.10 area.
Finally, bitcoin continues to show unusual strength relative to other financial assets, holding at strong levels near $43,000.