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Inflation Watch, Trouble at Home, Once Bitten: The Week Ahead in Global Markets

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Markets Brace for Rate Cuts as Central Banks Resist

As financial markets eagerly anticipate rate cuts, major central banks are pushing back, setting the stage for a battle over upcoming economic data. Against the backdrop of China’s ongoing struggle with its property market and Italy’s ratings downgrade, investors are closely watching the indicators that will shape monetary policy decisions.

The focus this week is on inflation, with Federal Reserve policymakers, including Chairman Jerome Powell, expressing uncertainty about whether interest rates are at a level sufficient to combat inflation. Traders are anticipating around three quarter-point rate cuts by the Fed next year, and Tuesday’s inflation data will be closely watched to confirm their expectations.

According to a Reuters poll, the October consumer price index is expected to have increased by 0.1% on a monthly basis. In September, CPI rose by 0.4% due to a surprise surge in rental costs, though it also showed a moderation in underlying inflation pressures. A sharper cooling in inflation could fuel discussions about reaching the peak rate. This speculation has been fueled by October’s employment report, which hinted at easing labor markets.

Meanwhile, concerns about governance in the largest economy in the world, the United States, could resurface if lawmakers are unable to pass a measure to fund government operations before the November 17 deadline, raising the possibility of a federal government shutdown.

In China, the question of who will bear the burden of the country’s property market troubles may have been answered. Beijing has reportedly asked insurance giant Ping An to take control of ailing developer Country Garden, China’s largest private developer. Despite Ping An’s denials, the news sent its shares tumbling to one-year lows, highlighting ongoing concerns about the sector.

China’s government has struggled this year to implement effective measures to support the economy, despite the central bank’s insistence that the 5% growth target can be achieved. However, data has consistently shown evidence of slowing factory activity and tepid consumption. October’s retail sales and industrial production data, set to be released on Wednesday, will provide further insight into whether this downward trend continues.

The robustness of the dollar, which saw a recent boost after Powell pushed back on claims that rates have peaked, is now being questioned as market participants grow confident in the likelihood of rate cuts next year. According to a recent Reuters poll, nearly two-thirds of analysts believe the dollar is likely to trade lower by the end of the year. Long dollar positions are decreasing, and some experts predict the dollar/yen exchange rate could fall back to around 145-150, after reaching a one-year high of 151.80 on Monday.

However, the dollar’s vulnerability is also tied to the health of the US economy. While rate-cut speculation may weaken the dollar, a significantly slowing US economy could quickly reignite demand for the safe-haven currency.

In the UK, inflation has proven to be stickier than in most developed economies, presenting challenges for consumers, the Bank of England (BoE), and Prime Minister Rishi Sunak. At the start of 2023, Sunak pledged to halve inflation, which was then above 10%, by the end of the year. October’s CPI data, to be released on Wednesday, will indicate whether Sunak is making progress towards that goal. A slowdown from September’s 6.7% is expected, but the extent of the decrease remains to be seen.

The data will also provide insights into recent remarks made by BoE chief economist Huw Pill, who suggested that rate cuts may be necessary in mid-2024. In addition to CPI data, upcoming figures on British jobs, retail sales, and the producer price index will also be closely monitored.

Eurozone flash third-quarter GDP data, set to be released on Tuesday, is drawing attention due to signs of economic weakness in Germany, the bloc’s largest economy. Germany has been described as the “sick man of Europe” this year. Investors will be looking for indications of whether the economic downturn is persisting.

Italy’s fiscal risks have returned to investors’ worries, causing many to avoid significant exposure to the eurozone’s third-largest economy. Moody’s, which rates Italy just one notch above junk with a negative outlook, will review the sovereign’s rating on November 17. Fitch’s latest review is due after Friday’s market close. A downgrade by Moody’s could cause Italy’s closely watched 10-year bond yield gap over Germany to widen to 250 basis points, with potential consequences for the broader eurozone.

Despite the risks, some analysts see buying opportunities in the Italian equity market due to stronger balance sheets that make banks less susceptible to bond market turmoil. Italian stocks are currently trading at a 50% discount to global equities, the widest gap since 1988.

As central banks and markets engage in a tug of war over rate cuts, the outcome will depend on the upcoming economic data. Investors around the world will be closely watching the indicators and announcements to inform their investment decisions in the coming weeks.

More detail via Investing.com here… ( Image via Investing.com )

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