None of the day’s US economic data suggested the need for deep rate cuts next year, but a dovish
economic outlook in the Fed’s latest projections sent treasury yields plunging, equities to new highs and
the dollar sharply lower. Powell did little to push back on rate cut expectations, allowing the market to
really run with the ball and fully price six rate cuts of 25bps by the end of 2024.
The Fed statement noted that inflation had “eased over the past year but remains elevated” and the
comments on “additional policy firming that may be appropriate” were left unchanged, but the dovish
signals were clearly in the Summary of Economic Projections. The core PCE inflation projections were
lowered for this year and next and the median expected fed funds rate was lowered for 2024 and 2025,
with three 25bps cuts now projected for next year, while the growth rate and unemployment rate
estimates were left little changed.
By the close of play, the move in the Dec 23/Dec 24 futures spread reflected the dramatic increase in rate
cuts priced for next year, while some of the additional easing was pulled from the following year, with the
Dec 24/Dec 25 spread widening a little.
Japan’s economy gathering momentum
Early yesterday morning Japan’s Q4 Tankan report was better than expected, with the indices for large
manufacturers and non-manufacturing companies each rising 3 points to 12 and 30 respectively. The nonmanufacturing index is now at a thirty-year high, pointing to respectable nominal GDP growth in Q4 and
suggesting no continued need for negative rates.
Disappointing UK output data pulls gilt yields lower again
UK GDP was flat in the three months to October compared with the prior three-month period after a worse
than expected .3% contraction in October according to the ONS. Each major sector underperformed
estimates in the month, with services output falling .2% after expanding .2% in September, industrial
production dropping .8% and construction falling .5%, while the trade balance was also wider than
forecast.
Despite the volatility of the monthly GDP readings, the data follow Tuesday’s signs of weaker labour
demand, reinforcing the perception of an economy losing momentum in the final quarter and pulling gilt
yields sharply lower. Over the two days since Monday’s close, expectations of deeper rate cuts next year
pulled the yield on the two-year gilt 23bps lower to 4.38%, while the ten-year yield has fallen 25bps to
3.83%.
Eurozone industrial slump hit new low in October
Industrial production fell in each of Europe’s big four economies in October, led by a .5% monthly decline
in Spain, while across the whole eurozone output contracted by a worse than expected .7% on the month.
Year over year industrial output contracted 6.6% to the lowest level since 2020, leaving the economy on a
weak footing at the start of Q4 and increasing the odds of a second consecutive quarter of contracting
GDP. Recent survey data have been showing mild improvements and the worst of the industrial
contraction is probably now over, but the ECB doves have some extra ammunition ahead of today’s
Governing Council meeting.
US housing market stabilising
Mortgage applications for home purchase climbed another 3.5% last week and were almost 20% above the low reached in October, as the average rate on a 30-year loan fell 10bps to 7.07%. The turning point has probably been reached after the index of pending home sales in October hit the lowest in the 22-year NAR history, and with Powell’s performance yesterday driving bond yields sharply lower, a further pickup in mortgage applications next week is almost guaranteed.
US wholesale price inflation subdued
The Producer Price Index for final demand was unchanged in November at the headline and core levels as the price indices for both final demand goods and services were both flat on the month. The unchanged level of the core index excluding food and energy was below estimates, while at the headline level, a 1.2% decline in the price of energy was offset by higher food and other good prices to leave the index flat on the month.
Year over year PPI inflation slowed to .9% at the headline level and 2% at the core; an encouraging result and better than expected, but the services component remains sticky, with PPI services inflation excluding transport and warehousing at 3.7%.
Markets
Fixed income
The yield on the two-year treasury note plunged 30bps – the most since the collapse of SVB – to 4.32% while the ten-year closed 18bps lower at 4.02%. Gilts yields closed with steep declines but will fall further today ahead of the BoE meeting, along with European government bonds ahead of the ECB meeting.
Equities
If the Fed had intended loosening financial conditions it can pat itself on the back, with the Dow Jones index closing at a new record high while ethe S&P 500 put on a solid 1.4% to close at 4707.09. European equities should be off to flying start first thing this morning.
Commodities
Bitcoin and precious metals responded accordingly.
Today’s macro agenda
Japan core machinery orders October
UK RICS house price balance November, BoE rate decision
ECB Governing Council meeting and rate decision
US retail sales November, weekly initial and continuing claims
Disclaimers
Author:
This communication is by Mariana UFP LLP external contractors, under the responsibility of Rajvinder Minhas, senior manager of Mariana UFP LLP. Mariana UFP LLP is authorised in the UK by the FCA (FRN 551170).
Please find here the methodology used to produce the above-mentioned communication.
Conflict of Interest: None.
Mariana UFP LLP doesn’t hold positions in any entity external to the MUFP group. Mariana UFP LLP is a regulated inter-dealer broker, and therefore might be engaged in agency transactions linked with the above-mentioned financial instruments.
Disclaimer
In accordance with Delegated Regulation 2016/958 article 8, this communication has been prepared by Mirada Asset Management Limited, incorporated in 71-73 Shelton Street London, WC2H 9JQ United Kingdom, disseminated for the first time on (see title). Mariana UFP LLP (“MUFP”) is regulated is authorised & regulated by the FCA (FRN 551170).