US stocks experienced weekly gains, fuelled by cooling inflation and hopes that interest rates have peaked, with attention turning to when the Federal Reserve may cut rates in 2024. On Thursday the core personal consumption expenditures price index, the Fed’s preferred inflation gauge, eased to 3.5% year-on-year in October, still above target but the lowest level since April 2021. Earlier in the week, stocks reacted positively to comments from Fed governor Christopher Waller that he was “increasingly confident” current policy would get inflation back to the 2% target. On Friday there was further cheer as chair Jerome Powell said that the policy was “well into restrictive territory”.
Powell’s comments pushed the yield on the 10-year Treasury note lower to end the week down at 4.22%. For November, the Bloomberg US Aggregate bond index rose 4.5% in its best month since 1985, while the global index experienced its strongest month since December 2008. The declining bond yields have helped push up equities. For the week, the Dow Jones Industrial Average rose 2.4% in its fifth consecutive weekly gain, its best streak since 2021.The S&P 500 gained 0.8% and the Nasdaq Composite rose 0.4%. The two indices saw their best monthly performances since July 2020, up 8.9% and 10.7% respectively.
Strong November gains weren’t just limited to the US, MSCI’s All Country World index advanced 9% in its best month since November 2020. In Europe, the STOXX 600 climbed 1.4% for the week and experienced its best monthly gain since January, fuelled by real estate and tech stocks. Eurozone inflation cooled to 2.4% in November, lower than expected, another factor raising hopes of the European Central Bank cutting rates next year. Meanwhile Bank of England governor Andrew Bailey pushed back on rate cut talks.
The mood in the Asia Pacific region was more cautious. Japan’s Nikkei 225 lost 0.6% for the week amid some profit taking, with the index gaining 8.5% in November. The Shanghai Composite ended 0.3% lower while the Hang Seng index dropped 4.1%. Economic data was mixed with the official manufacturing Purchasing Managers’ Index falling to 49.4 in November, marking its second month in contractionary territory, however Caixin’s manufacturing PMI reading rose by more than expected to 50.7, returning to expansion.
Latin American stocks ended the week higher, benefiting from peak rate hopes and managed to record a strong monthly gain. Argentina’s Merval index was the notable decliner, down over 5% following on from the 42% surge seen the prior week. Oil prices were weaker with investors sceptical over whether the newly announced production cuts from OPEC+ would be sufficient and followed by nations. Brazil is reportedly set to join the oil alliance from next year.
Weekly macro highlights
US PCE inflation declines in October
Headline US Personal Consumption Expenditure (PCE) inflation declined from 3.4% year-on-year (YoY) in September to 3.0% YoY in October according to data published by the Bureau of Economic Analysis (BEA). In month-on-month (MoM) terms, headline PCE inflation was unchanged. Food prices rose 0.2% MoM, offset by a 2.6% MoM decrease in energy goods and services prices. Core PCE, which excludes these components, rose 0.2% MoM in October. This equated to a 3.5% YoY increase, below the 3.7% registered in September and in line with market expectations. The PCE inflation data is the final release of the Fed’s preferred measure of inflation before its meeting on 13 December, with markets expecting the US central bank to maintain its policy rate at 5.25-5.50%. The BEA also released its second estimate of US Q3 GDP last week, revising up the previously reported 4.9% annualised quarter-on-quarter expansion to 5.9%. The revision primarily reflected higher non-residential investment and government spending.
Flash eurozone inflation data drops in November
Eurozone HICP inflation fell from 2.9% year-on-year (YoY) in October to 2.4% YoY in November according to a flash estimate released by Eurostat. The data was below market expectations for a 2.7% increase. November’s inflation data were asymmetric across economies within the eurozone, with France, Spain, Germany and Italy reporting average price increases at 3.8%, 3.2%, 2.3% and 0.7% YoY, respectively. Nonetheless, the data marked a decline in inflation for all four economies in relation to the previous month. Excluding energy, food, alcohol and tobacco, eurozone core HICP inflation declined from 4.2% YoY in October to 3.6% in November. The measure was below market expectations for a 3.9% increase and reflected the contribution of a 0.6% month-on-month decrease in the index. Though both inflation measures are in decline, they remain above the European Central Banks’s (ECB) 2% objective ahead of its meeting on 14 December. Market expectations are for the ECB to leave its refinancing rate unchanged at 4.5%.
China’s manufacturing PMI signals November expansion
China’s Caixin manufacturing PMI rose from 49.5 in October to 50.7 in November, above market expectations for a smaller increase to 49.8. The data saw the manufacturing sector return to growth, with November’s reading above the 50 level that separates expansion from contraction. Supporting this was the fastest rate of new order growth since June, as firms noted that stronger domestic conditions helped lift demand. New export orders fell from 49.3 to 49.0 in November, highlighting the challenging external environment. Having fallen in October, firms increased output in November, with the subindex rising from 49.4 to 51.7 in response to higher demand. Despite this, employment in China’s manufacturing sector fell for the third consecutive month, though the rate of decline slowed relative to the prior two months. Input prices rose at a slower pace than in October, down from 52.0 to 51.1, while output prices were broadly unchanged at 49.9.
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