“There is just one thing I need“
Mariah Carey, All I Want For Christmas
Last week, we discussed the ongoing growth moderation and global disinflation themes that we see continuing (despite the continued consensus for stickiness or a ‘tricky last mile’ in the inflation fight) via a number of factors and anecdotes. We also highlighted the point that despite the year end fast approaching, there remains a number of data releases and events that are likely sufficiently important to the global macro evolution to put the mince pies on hold for now. This continues to apply. Indeed, next week
This week has seen a number of themes emerge and evolve but in the Macro space there are two that stand out: the continued repricing of the Eurozone rate profile as the growth / inflation trade-off shows clearer signs of easing and, the repricing of Japanese rate normalisation.
In Europe, while the growth trajectory has been in question for a significant period (not least since the Russia/Ukraine/Energy crisis brought into question the sustainability of the German industrial model in the absence of cheap imported natural gas), it was really the November inflation readings across Europe (missing to the downside across the region) that drove a sharper repricing of the European yield curves and weighed on the EUR. Markets have spent much of this week pricing ECB rate cuts for 2024 earlier and faster than the Fed - this seems less likely to us.
In Japan, the rate repricing has been in the opposite direction as further gradual improvements in the inflation trajectory (not to mention political pressure resulting from the implications of a weaker currency) have led to indications that the Bank of Japan may finally be moving towards the removal of its negative interest rate policy (NIRP).
Next week, sees a further crescendo of data and events that will continue to shape the evolving market narratives and themes with notable global growth data (specifically the global flash PMI’s for December, the suite of November Chinese economic data, and the Quarterly Tankan business confidence report for Japan), all of which will provide an update to the global growth trajectory, activity and sentiment.
However, it is likely that the dominant focus for markets comes from the monetary policy meetings, where the Fed, Bank of England and ECB are all in action.
In the UK, the Bank of England remain caught in the most complicated growth/inflation trade off in DM with further signs of fragility in growth (despite continued relative tightness in the labour market) yet prices remain significantly above target. On this basis it seems unlikely that the Bank will alter policy, and likely that the vote split remains the same of little changed from the 6-3 at the November meeting. The fact that the December MPC meeting is not a MPR (Monetary Policy Report) month, and thus offers no new forecasts or projections, nor a press conference, next week’s meeting is unlikely to hold the focus of markets for long!
In Europe things are certainly a little more interesting. While inflation data for November was clearly and significantly lower than expected, it is not clear to us that markets should at this stage be extrapolating an accelerated decline in either inflation or growth. With inflation coming down more sharply than expected but with labour markets still relatively tight positive real wage growth will likely support domestic demand going forward. Furthermore, while the markets have been very keen to reprice the ECB expected rate cut path in its own right and relative to the US, we are more cautious at these levels. Not only do we feel that the markets are getting ahead of themselves in terms of the ECB’s ability to cut rates sooner and further, but we also note that the November inflation print in the US is not released until next week (and it is not just the eurozone that saw a sharp drop in November, there were similar moves across the globe - If the US follows a similar trajectory it is even less clear to us that markets should price a euro-US rate differential widening).
Essentially, we would expect the ECB to be very hesitant to back or validate market pricing of a potential ECB rate cut as soon as Q1 next year. Indeed, while it is likely that the updated projections from the Governing Council lower growth and inflation projections at the front end, it is unlikely that recent developments were significant enough to change the projections at the forecast horizon. In our view, the market is a little ahead of the ECB.
Perhaps most significantly, next week is the final instalment from the Fed for 2023. Again, it is very unlikely that the December meeting brings policy action, but following the CPI print for November the day before, the statement, press conference and updated Summary of Economic Projections (SEP’s) will be very keenly watched. With a more pronounced disinflation trend, and signs of supply rebalancing driving looser labour markets as demand growth eases.
While the press conference will be keenly watched for the Chair of the Fed’s policy inference it is likely the dots that will be the core focus. The September median dot was 25bps above the current Fed Funds with the 2024 median containing two 25bp cuts. Adjustments to these forecasts will have a material impact on market sentiment and potentially positioning. Furthermore, following a fall in the Unemployment rate to 3.7% in the November payroll the Fed projections for the Unemployment rate throughout the forecast horizon will also be a material indication of the growth expectations of the committee. From our perspective, while we are not significantly negative on the growth prospects in the US or the eurozone, the market pricing bias is to favour weaker growth in Europe and stickier inflation in the US. At the very least we disagree on the stickier inflation part. Further significant US disinflation remains the direction of travel from our perspective, with obvious implications for Bonds, equities and the USD.
So, while the days until the festive period begins continue to countdown, but once more we argue for putting the mince pies to one side with still plenty of Global Macro action to focus on. However, with Central Banks back in focus, we may be reaching for the popcorn!
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