Markets Brace for Rate Cuts as Central Banks Push Back
As markets eagerly await potential rate cuts, major central banks are expressing hesitation, setting the stage for a battle over upcoming economic data. This week, attention will be focused on Tuesday’s inflation data, which traders will use to confirm their outlook on the economy and inform their expectations of roughly three quarter-point rate cuts by the Federal Reserve next year.
According to a Reuters poll, the consumer price index (CPI) for October is expected to have risen by 0.1% on a monthly basis. September’s CPI saw a 0.4% increase, driven by an unexpected surge in rental costs, although it also indicated a moderation in underlying inflation pressures. If the CPI shows a sharper cooling, there may be further speculation about the peak rate, particularly in light of October’s employment report, which suggested a slowdown in labor markets.
In addition to the economic data, there is growing concern about the possibility of a federal government shutdown in the United States. Lawmakers in Washington have until November 17 to pass a measure to temporarily fund operations, and failure to do so could raise fresh concerns about governance in the world’s largest economy.
Meanwhile, China’s ongoing battle with its property market is capturing attention. In a surprising move, Beijing has asked insurance giant Ping An to take control of troubled developer Country Garden, the country’s largest private developer. This development has caused Ping An’s shares to plummet to one-year lows, despite the company’s denials. Worries about the sector continue to weigh on investor sentiment, as government attempts to stabilize the economy have repeatedly fallen short. China’s central bank, however, remains optimistic that its 5% growth target can be achieved, a viewpoint shared by the International Monetary Fund (IMF). Wednesday’s retail sales and industrial production data will provide further insight into the country’s economic performance.
The US dollar, which has been strong in recent months, is now vulnerable to fluctuations in market expectations of rate cuts by the Federal Reserve. While comments from Fed chief Jerome Powell suggesting that rates have not yet peaked initially gave the dollar a boost, many anticipate that rate cuts are likely to occur next year, leading to a decrease in long dollar positions. However, if the US economy were to significantly slow down, there could be renewed demand for the safe-haven currency.
In the United Kingdom, inflation has remained higher than in other developed economies, posing challenges for consumers, the Bank of England, and Prime Minister Rishi Sunak. At the beginning of 2023, Sunak pledged to halve inflation, which was then over 10%, by the end of the year. Wednesday’s release of October CPI data will indicate whether Sunak is making progress towards this goal, with a decrease expected from September’s 6.7%. The data will also help determine the validity of recent statements from Bank of England chief economist Huw Pill, who suggested that rate cuts could be implemented by mid-2024. Additionally, the latest British jobs figures, retail sales data, and producer price index will be closely watched.
Investors are closely monitoring the euro zone, particularly Germany, the bloc’s largest economy, which has shown signs of economic weakness. Italy, the euro zone’s third-largest economy, is also causing concern due to growing fiscal risks. Moody’s, which rates Italy just one notch above junk with a negative outlook, will be reviewing the sovereign on November 17, while Fitch’s latest review is due after Friday’s market close. The possibility of a downgrade by Moody’s poses a significant risk, as it could lead to a widening of the closely-watched 10-year bond yield gap over Germany and have broader implications for the entire periphery. Despite the potential risks, some investors see opportunities in the heavily discounted Italian equity market due to stronger balance sheets in the banking sector.
In summary, this week will be critical for markets as they analyze key economic data and central bank statements to determine the outlook for interest rates. Traders will closely monitor inflation figures in the US and the UK, and keep a close eye on China’s property market. Concerns about a US government shutdown and Italy’s fiscal risks are also weighing on investor sentiment. As central banks and markets engage in a tug of war, investors are preparing for potential rate cuts while major central banks express caution.
More detail via Reuters here… ( Image via Reuters )