Yield curves steepened as hopes of an earlier start to the cutting cycle pulled front-end yields sharply lower, despite pushback from policymakers and little in the second-tier economic data to suggest a significant slowdown. Equities closed little changed and the real action was in precious metals, as gold broke higher on a further decline for the dollar.
More BoE backtracking
BoE Deputy Governor Dave Ramsden followed in his boss’s footsteps yesterday, walking back earlier dovish guidance and saying policy would need to stay “restrictive for an extended period of time”. He said that “home-grown” inflation that will be “challenging to squeeze out of the system” and noted that services inflation – which comprises 45% of the CPI basket – was 6.6% and “actually much stickier and higher” than the Bank expected, driven by wage growth which “remains above 7%”.
EU sentiment no longer sinking
There were few European economic releases other than sentiment surveys which suggested the consumer despondency of the past few months is beginning to lift. The INSEE survey of French consumer confidence jumped 3 points in November to 87 - its highest since April 2022- although it remains below the long-term average of 100.
Germany’s GfK survey for December climbed half a point to -27.8, showing sentiment stabilising at a low level after three months of declines. GfK spokesman Rolf Bürkl stressed the importance of “bringing inflation back to a reasonable level”, and that currently he sees “no signs of a sustainable recovery in the coming months”.
Bundesbank President Joachim Nagel joined the chorus of central bank officials pushing back on market pricing of rate cuts, saying “It would be premature to lower interest rates soon or to speculate about such steps” while inflation is still “a considerable distance away from our target level”.
“Something appears to be giving” – but not much
Fed Governors Michelle Bowman and Christopher Waller gave hawkish but slightly different views on the outlook for policy, but nothing seemed to stand in the way of the market’s conviction to lower rates next year. Bowman said that her baseline outlook for bringing inflation down to the 2% target in a timely manner requires the Fed to “increase the federal funds rate further to keep policy sufficiently restrictive”. She would be “willing to support raising the federal funds rate at a future meeting” if progress on inflation stalls, although she will be closely watching the incoming data.
Waller said he is "increasingly confident" that policy is tight enough to “slow the economy and get inflation back to 2%”, as “something appears to be giving, and it’s the pace of the economy”. However, he said the Fed can “wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate” and that it is currently “too soon to tell” whether real economic activity slows or “whether prices, the nominal side of the economy, heat up”.
House prices show little impact from rate hikes
Annual home price appreciation measured by the CoreLogic and FHFA indices accelerated in September, but the two measures are lagging indicators, capturing the average prices of contracts closed over the three months to September on sales that were agreed as far back as April. The S&P CoreLogic nationwide house price index showed a 3.9% annual gain in September, accelerating from the 2.5% gain registered in August, while the FHFA index was a massive 6.1% higher than a year earlier, leaving both indices at record highs. The more volatile 20-City CoreLogic index showed a similar year over year increase to the nationwide measure of 3.9%, but the rate of monthly gains slowed from a downward revised .8% in August to .67% in September.
Confidence stable in a tight labour market
The Conference Board’s measure of US consumer confidence climbed in November for the first time in four months to 102, from a downward revised 99.1 in October. The increase was driven by a 5-point rebound in the Expectations component to 77.8 while the Present Situation component was little changed at 138.2. Consumers’ fears of an impending recession fell to the lowest levels of the year, although two-thirds of those surveyed still perceive a recession to be “somewhat” or “very likely” in the next 12 months.
Views on the employment situation were on balance little changed from October, with the percentage saying jobs were “plentiful” increasing by roughly the same amount as those saying jobs were “hard to get”. The net difference between the two – the labour differential – was a fraction higher at 23.9%, signalling continued labour market tightness.
Portfolio update
Monday’s sharp reversal in Schatz futures led us to scale back the size of the short position. We paid 105.11 to cut a third of the trade, representing the additional size that was added when things seemed to be going our way.
Markets
Fixed income
The Treasury auction of $39bn 7-year notes cleared with a 2 basis-points tail and a bid to cover ratio of 2.44, the lowest since April. Yields briefly headed higher afterwards before closing at their lows of the day, with the two-year 12bps lower at 4.74% while the thirty-year closed just 3bps lower at 4.51%.
Equities
Commodities
Gold closed just off its May high at $2040.97/oz (+1.3%) with silver at $24.03/oz (+1.5%).
Today’s macro agenda
Germany CPI November, eurozone and Italy consumer and business sentiment November
UK mortgage approvals October
US Q3 GDP revisions, advance trade balance October, MBA weekly mortgage applications, Fed Beige Book
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