The labor market in the United States continues to add jobs, delaying the anticipated rate cut by financial markets. Recent figures show that job creation has cooled but hiring persists across many sectors. Analysts note that the U.S. labor market has shown resilience even as borrowing costs reach their highest levels in four decades. As a result, the Federal Reserve is expected to proceed cautiously and refrain from immediate short-term rate reductions. Market watchers from XTB highlight that central banks often aim to temper stock market optimism by keeping policy tight for longer, which could influence the pace of any easing. The Federal Reserve is set to convene for its final monetary policy meeting of the year, with expectations among many observers that policy rates will remain unchanged. Meanwhile, investors will be watching how European policymakers respond in their year-end discussions, given the potential spillover effects from Atlantic market dynamics.
With the assumption that rates will stay elevated longer than previously forecast, stock indices drift away from November’s rally. Current data show the Spanish market dipping slightly, reflecting softer European momentum and concerns on Wall Street. Inflation and growth indicators continue to support the notion that rate increases have likely peaked in the United States. The PCE price index, the Fed’s preferred inflation gauge, rose only marginally in September, contributing to a roughly 2.5 percent annual pace over the recent six months. This is near the Fed’s two-percent target and reinforces the belief that inflation may be stabilizing, although momentum remains uneven across sectors. These observations come from Franck Dixmier, Global Investment Director for Fixed Income at Allianz Global Investors. (Allianz Global Investors)
The Fed has not raised rates since July and has signaled a willingness to tighten further should inflation drift away from its objective. The upcoming speech by Powell on the policy outlook is expected to address this balancing act. Recent employment data underscore the ongoing challenges faced by the central bank, prompting investors to revise expectations for rate cuts. Some analysts project the first move could occur no earlier than mid-2024, barring a faster recalibration of markets. The yield curve may adjust higher if investors reprice risks after a period of rapid recovery, according to Allianz Global Investors. (Allianz Global Investors)
This week the Fed faces market scrutiny over the likelihood of a rate cut. Inflation is retreating faster than anticipated, and economic activity remains steady. Yet, recent jobs reports point to a labor market that is still stronger than the market had priced in for a substantial easing next year. In a note to the media, Paolo Zanghieri of Generali Investments cautions that growth forecasts may be lower than consensus, suggesting cuts of around one percentage point in the pace of easing. (Generali Investments)
Europe maintains a cautious stance
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The European Central Bank vice president, Luis de Guindos, spoke at a finance forum about the risk environment in the euro area. He warned that markets have priced in a soft landing, with risk premiums compressed as inflation moves toward target. De Guindos cautioned that even with improving inflation, central banks must stay vigilant to avoid reigniting price pressures. He also noted that deeper risk-taking in the mutual fund sector could pose stability risks in challenging times. The latest euro area inflation data shows a moderation in November, with the headline rate near 2.4 percent and core inflation trending downward. Although inflation is easing, central banks remain reluctant to ease quickly, aiming to maintain price stability. Joaquín Robles from XTB also emphasized prudence in this late stage of inflation, indicating that significant policy shifts are unlikely in the near term. (XTB)
Taken together, these developments illustrate a global pattern: policymakers are seeking to re-anchor inflation at the two percent target while avoiding new price surges. In Europe, inflation signals remain stubborn but show signs of cooling, reinforcing a cautious stance. Across markets, the overarching message is restraint. Central banks want to prevent an inflation resurgence while supporting a sustainable path to growth, even as market expectations adjust to higher-for-longer rates. Analysts from multiple institutions concur that the next steps will hinge on upcoming data and the trajectory of employment, as well as the evolving balance between domestic demand and external cooling. (General market analysis)