The US economy continues to create employment, which postpones the interest rate cut that the market expects. Latest data showed that job creation has slowed but companies continue to hire staff. “It is surprising that the US labor market has survived at a time when the price of money is the most expensive in the last 40 years. Therefore, The Federal Reserve (Fed) is likely to act cautiously and avoid short-term interest rate cuts. “Central banks want to reduce the optimistic expectations of stock markets, which have already started to reduce interest rates,” says Joaquín Robles, an analyst at XTB. The US central bank is holding its last monetary policy meeting of the year this Wednesday. While analysts predict that there will be no change in monetary policy, it can be predicted that the European Central Bank will take into account the events on the other side of the Atlantic in its last meeting of the year, which will be held this Thursday. .
Given the expectation that interest rates will remain higher for longer than expected, Stock markets are already starting to leave the November bull rally behind. According to market data, the Spanish stock market fell 0.22 percent this Wednesday, losing 10,100 points, due to the decline in European markets and doubts on Wall Street. “The latest data on inflation and growth support shows that rates have peaked in the United States. Inflation has continued to fall in recent months. The Personal Consumption Expenditures Price Index (PCE), the Federal Reserve’s preferred measure of inflation, rose only 0.16 on a monthly basis in September %, which gives an annual rate of 2.5% for the last six months. This figure is close to the 2 percent inflation target set by the Fed.“says Franck Dixmier, global investment director of Fixed Income at Allianz Global Investors.
The Federal Reserve has not raised interest rates since July but has reiterated to the market that it is willing to raise rates again if its goal of reaching its 2% inflation target falls away. Powell’s speech this Wednesday will likely focus on that. The latest employment data is a reminder of the challenges facing the Federal Reserve. Investors are aware of this and have revised their interest rate cut expectations. “We believe the first cut of 25 basis points should occur no earlier than mid-2024. To the extent markets recalibrate their expectations, the US yield curve should adjust higher following what we consider to be an extreme recovery,” they explain. Allianz Global Investors.
“This week the Fed will have to convince markets that a rate cut is not imminent. Inflation is falling faster than expected (core CPI was 3.5% in October compared to the Federal Reserve’s expectation of 3.7%) and activity is now continuing.” slimming.However, The latest jobs report shows the labor market remains too strong for markets to forecast around 125 basis points of easing next year. (With the growth forecast lower than consensus, we expect cuts of 100 basis points),” said Paolo Zanghieri, senior economist at Generali Investments, in a letter to the media.
Europe maintains its harsh stance
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European Central Bank (ECB) vice president Luis de Guindos warned at the Iberian Press Finance Forum last Monday. high stock market optimism And “Compressed” risk premia in the Eurozone At the end of the year as a result of the moderate course of inflation. “Markets are pricing in a soft landing for the European economy” This means that risk premiums are compressed and investment funds take on many risks. “In an environment of negative surprises, the high-risk mutual fund industry can create a situation of great instability and fragility,” he said.
The latest inflation data for the eurozone in November stood at 2.4%; This was positive because market consensus predicted CPI would reach three-tenths higher. Core inflation is at 3.6% and all indicators show it is slowing down. “Central banks always need to be prudent. You can’t claim victory“Although we are in the last mile of inflation reaching price stability and the 2% target inflation, central banks are very afraid of taking their foot off the gas pedal and causing prices to skyrocket again,” Luis de Guindos said. We will not return to the high levels we experienced last year, but there is still work to be done to control the rise in prices,” says XTB’s Joaquín Robles.