Are the Fed and ECB opening the door for more?
“The hot phase of the stock market year” has begun
December 10, 2023, 3:26 p.m
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Since the beginning of November, the DAX has made significant progress and reached new highs. And the end of the flagpole does not necessarily have to be reached. With the last interest rate decisions of the year, the markets are facing a trend-setting week.
In the new week, all eyes on the stock markets will be on the last meetings of the world’s most important central banks in the USA and Europe. Almost all market participants are predicting an extension of the interest rate pause by the US Federal Reserve and the European Central Bank (ECB) at the meetings on December 13th and 14th. However, ears are pricked up – because it remains to be seen whether investors’ recent interest rate cut fantasies will be strengthened or dashed.
“The motto of the past trading week was ‘Hope for monetary policy’,” write the Helaba experts. The monetary authorities are trying to cool down the hot labor market and get inflation under control with higher interest rates. But with the latest US job market report, “stock market investors can only live well to a limited extent,” comments Thomas Altmann, portfolio manager at asset manager QC Partners. The numbers are not extremely strong, but strong enough to postpone the expected first interest rate cut.
On the other hand, according to the experts at Capital Economics, the comparatively strong job growth is primarily related to cyclical jobs and those returning from strikes. Without these special effects, development would remain as poor as before – which would fit into the picture of a further weakening of the economy in the fourth quarter. This interpretation would not stand in the way of the hope for timely interest rate cuts and could lead to further DAX records. In the end, “the hot and final phase of the stock market year” began with the US labor market report, wrote the experts at Index Radar.
“We predict that the ECB will cut the key interest rate for the first time in April, while we do not expect the Fed to make its first interest rate move until June,” wrote chief economist Edgar Walk from Bankhaus Metzler. Because he assesses the economic situation in the Eurozone to be weaker than in the USA. In addition, Walk expects core inflation to fall significantly faster in the Eurozone than in the US.
The stock market initially reacted calmly to the data. Over the course of the week, the leading German index advanced by two percent to 16,690 points and even set a new all-time high of 16,727 points. Since the beginning of November, the rally has now resulted in an increase of around twelve percent. In retail, the number of jobs increased to 16,783.
“Premature gift giving”?
Several analysts are skeptical about market participants’ hopes. “The ongoing price gains on the capital market feel like a premature gift from Santa Claus,” said Sascha Rehbein, portfolio manager at Weberbank in Berlin. However, ECB President Lagarde’s latest statements underlined the central bank’s willingness to take further restrictive measures if necessary.
Given the “remarkable” decline in inflation, the ECB can probably keep the door closed to further interest rate increases for the time being, according to its director Isabel Schnabel. “However, we would like to point out that the recent decline in inflation is far less remarkable at second glance,” commented Mark Dowding, chief investor at asset manager BlueBay. Last year the inflation rate was extraordinarily high due to the sharp rise in prices. Therefore, the current numbers appeared low year-on-year. However, this effect will disappear in the next few months.
Lots of business, few companies
By far the most important economic date in the new week for investors is the announcement of the US inflation figures on Tuesday. According to experts, the inflation rate is likely to have fallen further in November. “However, this time the volatile energy prices were probably primarily responsible for this, which is why there is likely to be only a limited sigh of relief,” comments Commerzbank economist Christoph Balz. “The underlying inflationary pressure remains too high.”
In the euro area, investors are primarily waiting for the purchasing managers’ indices for December, which are due at the end of the week. On average, experts expect an increase to 44.5 from 44.2 points in November for the industry. The indicator for the services sector is expected to advance to 49.0 from the previous 48.7 points. However, both would be further below the threshold of 50, above which the sector is said to be growing.
In addition, the ZEW economic expectations will be released on Tuesday as another economic highlight. Most recently, the mood barometer among financial experts in Germany had brightened for four months in a row, albeit at a very low level. In addition, at the end of the year, numerous institutes release their economic forecasts for 2024.
On the corporate side, a quiet week is ahead. The medical technology manufacturer Carl Zeiss Meditec will publish its annual figures on Tuesday, followed by the engineering service provider Bertrandt on Thursday. Otherwise, there will also be news from the fashion industry over the course of the week: Inditex takes stock after nine months of the current financial year and H&M reports on sales in the fourth quarter.