Last week, we discussed the recent market reaction to the recent CPI miss in the US (from the October data) and our suggestion that this was an example of our rising view that the burden of proof has switched from the absence of slower growth and inflation needed to prevent yields and the USD moving higher, to the absence of higher growth and inflation needed to prevent yields and the USD moving lower - subtle but important.

We argued that this is especially true while the growth backdrop continues to normalise. Indeed, commentary from Fed speakers this week has continued to shift to a more balanced narrative, with increased frequency of anecdotal evidence or expectation of areas of economic weakness ahead… “Fed attuned to the risk of a sharp drop-in activity” [Cook]... “We have seen a strong rebound of labour supply” [Goolsbee]... and a number of speakers who are increasingly referencing the housing market and house prices as the most policy-relevant data point for the Fed in the near term.

Lastly, we re-emphasised our position on inflation, increasingly on the other side of the dominant market commentary - that a series of factors (deglobalisation, the green transition, continued higher fiscal trajectories, tight labour market, and high worker wage expectations and, even an increasing prevalence of geopolitical crises) will keep inflation, and thus monetary policy rates higher for longer. We are more inclined to see any of these individual factors as limited to one-off shocks and not as a sustained mismatch - especially against a backdrop of weakening growth and still improving supply. Ultimately, we see a significant chance that headline inflation rates turn negative in many DM countries (just as we are currently seeing in the Netherlands). Again, this has significant implications for market sentiment and market pricing.

This week, against the slightly slower pace of the Thanksgiving holiday in the US, these themes have continued to evolve in our view. The most important of which is the renormalisation of global growth, or the correction of the trend of Q3 - often attributed to US exceptionalism - where US growth accelerated to close to 5% and fragilities in global demand led to more acute concurrent weakness in the Eurozone and China.

This focus (renormalisation or correcting the divergence) is likely exemplified by the market pricing of rate cuts next year.

If we take the Dec’23-Dec’24 spread in SOFR (US), SONIA (UK), and Eurodollar (Europe) as a gauge of market pricing for the period, there have been some interesting moves in recent weeks. Through the end of October, the spread between rate cuts priced in the US and Europe narrowed (with both widening - or pricing more rate cuts). From that point we have seen a rewidening (or fewer rate cuts priced into Europe than the US).

Similarly, this week’s release of the global PMI data has shown further signs of consolidation in the European data (admittedly with Europe still in the contractionary territory), and a full stabilisation in the UK data (alongside some signs of price buoyancy that have led to a more pronounced rewidening of ‘24 rate cut expectations between UK and US - fewer UK hikes). Essentially, we see this as an (albeit nascent) sign that the renormalization is in train - Europe stabilising and the US slowing.

While we have to wait until next week for the China PMI data, there have been further encouraging signs from the incremental or step-by-step, targeted economic measures. After the significant fiscal expansion a few weeks ago, this week has seen plans emerge for a ‘whitelist’ of property sector companies and subsequently the suggestion of unsecured loans into the sector. This should facilitate the completion of projects and go some way towards restoring confidence. There have also been further regional measures such as the reduction of initial deposit rates for second homes in some provinces. Overall, we continue to see encouraging signs for economic stabilisation in China and, by extension, see this stabilisation reinforcing or underpinning global trade. Europe, and Germany in particular, will feel the benefit of a China stabilisation / rebound, and we expect this to further reinforce the recent theme of renormalisation.

Lastly, we wanted to mention the Riksbank. This week, the Swedish Central Bank left rates unchanged at 4.00% (against a marginal expectation for a 25bp rate hike) and acknowledged that inflation is moving in the right direction. Interest rate markets continue to price a significant chance of a further rate hike (as does the Riksbank rate path) however, the more acute growth weakness and faster than expected rise in the unemployment rate suggest otherwise. From our perspective Sweden is a very interesting barometer (or canary in the coalmine) for the global policy. The higher prevalence of variable rate mortgages has led to a faster monetary transmission and more significant reaction function of domestic demand. Other countries, even the US (with perhaps some not so obvious adjustments or caveats for fiscal stimulus) will slow and Sweden may offer some clues as to the extent and duration of the hit to domestic demand from the recent unprecedented demand and supply shocks.

Last week, we argued that there was still plenty to play for in 2023. Set against what has been a very quiet Thanksgiving week, the undercurrent continues to support this view, from our perspective. We continue to see a macro backdrop where further growth moderation and continued disinflation support risk assets (at least for now) and, from a cyclical perspective, after the dominance and outperformance over recent years, the USD looks increasingly likely to give way to the new kids on the block in 2024 (EUR, JPY), step by step!