A November to Remember!

For the week ending 1 December 2023

As of midday Friday, global equities were modestly firmer on the week, while the yield on the US 10-year Treasury note extended its decline to 4.26% from 4.39% just before Thanksgiving. The price of a barrel of West Texas Intermediate crude oil rose about $2 from last week to $76.50 while volatility, as measured by the Cboe Volatility Index (VIX), held steady at 12.9.

MACRO NEWS

Assets rallied broadly in November

Moderating inflation, decelerating economic growth and growing signs that the US economy may stick a soft landing helped send global equity prices higher in November, led by a 13% rise in Germany’s DAX. The S&P 500 rose a bit over 9% on the month while the Bloomberg US aggregate bond index rose just over 4.5%, its best month since May 1985. Commodities were the only asset class to lose ground in November, led by a 6% decline in West Texas Intermediate crude. The combination of strong equity and fixed income performance lifted the Bloomberg 60/40 index by 7.5% last month. 

Powell pushes back against dovish pivot 

At an event at Atlanta’s Spelman College, US Federal Reserve Chair Jerome Powell said on Friday that it is premature to speculate on when the Fed may ease policy, adding that the central bank is prepared to tighten more if it becomes appropriate and that policy is now well into restrictive territory. The Fed chair said it would be premature to conclude with confidence that rate increases are over, though he noted that the economy has not yet felt the full impact of past rate hikes. With the Fed’s blackout period about to begin ahead of its 13 December meeting, Powell appears to be using this opportunity to cool market speculation that rate cuts are in the cards next year. 

Fed hawk hints at a dovish turn

Fed Governor Christopher Waller, one of the more reliably hawkish voices on the Fed’s Board of Governors, said Tuesday that if inflation continues to decline over the next three to five months, that the Fed could start lowering its policy rate. Most other Fed officials have stopped short of discussing rate cuts, though most suggest that policy rates have likely peaked. Waller also noted that he is increasingly confident the US economy can achieve a soft landing, saying policy is well positioned. Wednesday’s Beige Book showed that economic activity had slowed since the last report and that discretionary spending had declined as consumers showed more price sensitivity. 

Markets price in multiple 2024 rate cuts

Despite most central bankers pushing back against the notion that they will begin cutting rates if disinflation continues, investors continue to price in multiple cuts from the Fed and the European Central Bank next year. Futures markets are now fully pricing in a quarter-point Fed cut no later than 1 May and a total of five 0.25% cuts by January 2025. The ECB is now seen cutting as early as March, with four cuts fully priced in during 2024. Anticipation of those rate cuts has helped propel the risk-on rally that has been underway for the past six weeks.

QUICK HITS

The Fed’s preferred inflation measure, the core personal consumption expenditures price index rose 0.2% month over month and 3.5% year over year in October, down from 0.3% and 3.7% in September, respectively.

Inflation in the eurozone fell faster than expected in November, dipping to 2.4% year over year, down from 2.9% in October.

The Institute for Supply Management’s November manufacturing index was unchanged at 46.7, well short of estimates for a rebound to 47.8. The eurozone manufacturing PMI bounced back to 44.2 last month from 43.8.

The US economy grew even more quickly than expected in the third quarter, revised data showed this week. Gross domestic product rose 5.2%, up from the initial 4.9% reading. There were upward revisions to capital spending, residential investment and government outlays and downward revisions to consumer spending.

ECB President Christine Lagarde told European lawmakers that the eurozone economy is likely to remain weak for the rest of the year and that job growth may be losing momentum. However, it is too early declare victory on inflation, she said. The central bank may reassess its reinvestments of a pandemic-era asset purchase program earlier than the planned end of 2024, Lagarde said.

US holiday sales appear to be off to a good start with Americans expected to spend $37.2 billion in online shopping during Cyber Week, the five days from Thanksgiving to Cyber Monday, according to Adobe Analytics, about 5.4% higher than last year.

China's central bank on Monday said it would fend off systemic risks to its economy and use forceful and targeted monetary policy to better support domestic demand.

US personal spending rose 0.2% in October, its slowest pace since May.

India’s economy continued to grow strongly in the third quarter as gross domestic product rose 7.6% from a year earlier, according to data issued Thursday. 

The Case Shiller US home price index rose 3.9% year over year in September, up from 2.5% in August. US pending home sales fell 1.5% in October, a less dramatic decline than expected, and new home sales fell 5.6%. The price of a new home fell 17% in October from a year ago.

Argentina’s president elect, Javier Milei, appointed Luis Caputo as economy minister. Caputo served as finance minister in the country’s previous center-right government and is seen as market friendly. Caputo visited Washington this week for talks with the International Monetary Fund and the US Treasury.

OPEC+ agreed to one million barrels a day of new oil production cuts for 2024. The cartel also announced that Brazil will join the group in 2024.

China’s manufacturing sector fell short of expectations in November as the government’s purchasing managers’ index slipped to 49.4 from 49.5.

Eurozone M3 money growth contracted 1% year over year in October, the fourth-straight monthly decline.

Bank of Mexico Governor Victoria Rodríguez Ceja expects the central bank to begin debating rate cuts in early 2024.

Retail sales in Japan rose 4.2% year over year in October.

US Secretary of the Treasury Janet Yellen said Thursday that she sees the US unemployment rate stabilizing around current levels and says there is a very good chance that the US will achieve a soft landing. The Fed need not trigger a recession to quell inflation, the former Fed chair said.

Canada’s economy unexpectedly contracted at a 1.1% annualized rate in Q3, though Q2 data was revised sharply higher, more than offsetting the Q3 downturn. Canada added nearly 25,000 jobs in November though the unemployment rate edged up 0.1% to 5.8% amid a rapid expansion in the labor force due to immigration.