European markets got off to a solid start to the month on Friday, building on the strong gains seen in November, with the Dax closing within touching distance of its summer record highs, with the FTSE 100 also posting its best daily close since mid-August.
US markets also saw a strong finish to the week, with the S&P 500 posting its highest daily close since March 2022, while the Nasdaq 100 closed to within touching distance of 16k, despite Fed chairman Jay Powell pushing back strongly on the idea that rate cuts were only a matter of months away.
This positive trend looks set to continue this morning although the FTSE 100 is set to lag due to a late sell-off in oil markets at the end of last week, which came about over scepticism that OPEC+ new production cuts will hold.
Bond yields tumbled last week on the back of flickering signs of sharply slowing inflation and comments from Federal Reserve board governor Christoper Waller who said that monetary policy was currently well positioned to slow the economy and get inflation back to target. He went on to say that if disinflation starts to become a concern, then rates could be cut in response, in a sign that the ground is now shifting, and that rates have peaked. Waller’s comments are particularly notable given that he has been one of the more hawkish members of the FOMC over the past few months.
Waller’s candour however now presents a problem for the Fed in that having set this hare loose financial conditions could now loosen to the extent that inflation might start to rebound, and Powell’s attempts to remedy that on Friday fell on deaf ears.
The resultant moves in yields last week saw markets start to price in rate cuts for the middle of next year for the US central bank, with 125bps by the end of next year. This presents a problem for the Fed given that the FOMC dots have the central bank pricing a Fed funds rate of 5.1% by the end of next year, a mismatch of 100bps.
It wasn’t just US yields that tumbled last week, but European ones as well with the German 2-year yield falling to a 6-month low on the back of another set of poor manufacturing PMIs, and a sharp slowdown in German and EU inflation numbers.
Comments from French ECB governing council member Villeroy also signalled that some on the ECB governing council were acknowledging the shifts in economic data, saying that rate hikes are now over, with current data supporting the view that inflation is course to return to 2%.
That certainly appears to be the case given that EU CPI for November slowed to 2.4%, its lowest level since July 2021, and putting it within touching distance of the ECB’s target.
Villeroy went on to say the ECB could then look at rate cuts when the time comes in 2024, with some suggesting that could come as soon as the beginning of Q2, given last week’s data showed little sign of sticky inflation and that we could see an overshoot to the downside.
The slide in yields along with the weakness in the US dollar has also seen gold prices surge, as the yellow metal pushed to a new record high above $2,100 an ounce in Asia trading this morning, while bitcoin surged through the $40,000 level for the first time since April 2022.
As we head into the final month of 2023 it’s hard to see what will puncture this renewed enthusiasm for the idea that central banks are about to pivot when it comes to rate policy, with this week’s services data expected to point to further weakness in Europe.
The catalyst could be a set of strong US jobs data, with the likes of October JOLTs job openings tomorrow, the November ADP payrolls report on Wednesday or Friday’s non-farm payrolls report. Strong numbers from any, or all three could prompt a modest rebound in US yields in the absence of any hawkish Fed commentary ahead of next week’s final meeting of 2023.
EUR/USD – slipped back towards the 200-day SMA and the 1.0830 area which is holding for now. A fall below 1.0800 could signal a return to the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week’s highs at 1.1015/20.
GBP/USD – tried and failed to break above the 1.2720/30 area last week, with support currently back at the 1.2590 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.
EUR/GBP – fell below the 0.8615/20 area, and looks set to move towards the 0.8540 area, and potentially further towards the August lows at 0.8490. Pullbacks likely to find resistance at the 0.8620 area.
USD/JPY – slid back to the 146.65 area last week, prompting a rebound to the 148.50 area. Looks vulnerable to further losses on a move below 146.50 with the next support at the 144.50 area.
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