Weekly house view | Shake it off

Taylor Swift is Time magazine’s Person of the Year and, on inflation, the US economy is certainly dancing to her tune “Shake It Off”. The Federal Reserve’s favoured measure of price pressures, the core personal consumption expenditures price index (PCE), fell to 3.5% in October, below the Fed’s projection of 3.7%, and the latest University of Michigan survey showed lower inflation expectations from consumers. Job openings fell 617,000 to 8.73 million in October, showing the post-pandemic hiring frenzy has slowed. Slower wage growth should follow. Running counter to this weaker data were unemployment figures showing a drop in the jobless rate to 3.7% in November from 3.9% in October. This surprisingly strong readout pushed up the yield on 2-year Treasuries by 18 bps, while the 10-year remained flat. Overall, the figures lay the ground for Fed Chair Jay Powell this week to recognize that data are improving while keeping rates unchanged for several more months.

In Latin America, Venezuelans voted for plans to annex disputed territory in Guyana, which includes offshore oilfields. Caracas has asked foreign companies to withdraw. The move should have been positive for oil prices, however, Angola, Africa’s second-largest crude producer, has vowed to break an OPEC quota and US production is up, leaving benchmark prices down on the week on lingering oversupply concerns. Elsewhere in commodities markets, gold futures touched record highs last week. We believe gold offers good protection against geopolitical risk and fiscal tensions. In Europe, a property giant’s insolvency filing underlines our theme of more accidents in a challenging economic environment.

In addition to the Fed, the European Central Bank, the Bank of England and the Swiss National Bank meet this and they should all keep rates on hold while pushing back against rate cuts expectations to various degrees. Comments from ECB board member Isabel Schnabel, who spoke of a “remarkable” fall in inflation, showed one the bank’s most hawkish members is gradually turning dovish. We nonetheless expect President Christine Lagarde to emphasise that rate cuts are not on the immediate horizon and that the bank’s strategy remains reliant on data analysis. With the SNB, a key focus will be the language about FX interventions, as most Swiss inflation now comes from domestic sources. In Asia, the yen appreciated strongly against the dollar last week as investors anticipate faster monetary policy tightening amid stronger wage growth. We believe the Bank of Japan will tread carefully over coming months but we stay underweight Japanese government bonds as pressures keep building on the central bank to exit yield curve control and negative rates policy later in 2024. Moody’s lowered its outlook on China to “negative”, reflecting concerns about local government debt and the property crisis. We prefer to invest in broader Asian equities.