50% Off! Beat the market in 2025 with InvestingProCLAIM SALE

Marketmind- Disinflation: The gift that keeps on giving

Published 12/22/2023, 12:32 AM
Updated 12/22/2023, 12:35 AM
© Reuters. A trader works at the stock exchange in Frankfurt, Germany, February March 9, 2020. REUTERS/Kai Pfaffenbach/File Photo
UK100
-
US10YT=X
-
DXY
-

A look at the day ahead in European and global markets from Tom Westbrook

Before they head off for the Christmas and year-end break, markets will get one last glimpse of the U.S. inflation picture with Friday's Personal Consumption Expenditure index data.

A low number could validate what's been an astonishing bond market rally over the past two months. A high number could challenge the market's aggressive positioning.

Euphoria in the wake of signals by the Federal Reserve that rate hikes are done - and that cuts will come in for consideration - has interest-rate futures markets pricing 150 basis points of cuts next year.

Traders see an 83% chance of a rate cut in March and a 12% chance it is a super-sized 50 basis points. The 10-year Treasury yield, at 3.9%, is down more than 110 bps from just above 5% in late October.

The wager is that retreating inflation will push the Fed to cut quickly, to prevent real rates from rising. Two-thirds of the 251 participants in the Bank of America's December fund manager survey see a "soft landing" for the U.S. economy and investors are their most bullish on bonds since March 2009.

Thursday's downward revision to the PCE in third-quarter growth data bodes well for a downside surprise when the November number is released later today, although Wednesday's sudden sell-off in U.S. stocks is a reminder that holiday-thinned markets will be volatile when disturbed.

British growth and retail sales data is also due on Friday, but that's already been overshadowed by this week's inflation surprise that sent sterling sliding and the FTSE flying, as sharply slowing inflation paves the way for rate cuts early in 2024.

Trade in Asia was cautious and the dollar index, down 4.6% since the start of November, hovered at 101.86 as investors awaited the PCE number.

With the Fed no longer seen as an outlier that would keep rates high through 2024, the dollar has been under pressure and the euro has found a foothold above $1.10. The yen - the year's worst performing G10 currency - has also found support.

The Bank of Japan disappointed markets by giving no signal of a policy shift at this week's meeting. But there's a growing consensus that it will act in the spring and a record 73% of BofA survey respondents think the yen is undervalued.

Key developments that could influence markets on Friday:

© Reuters. A trader works at the stock exchange in Frankfurt, Germany, February March 9, 2020. REUTERS/Kai Pfaffenbach/File Photo

- British GDP, retail sales

- U.S. core PCE

(By Tom Westbrook; Editing by Edmund Klamann)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.