(Reuters) – Investors continue to wonder about the timing of interest rate cuts by major central banks as the opening week sees the publication of inflation data in the euro zone and the UNITED STATES.
In the meantime, their doubts weigh on the dollar at a time when the greenback is about to begin its traditionally most difficult month.
In China, questions about growth prospects dominate, while for the rest of the world, the main leaders are due to meet from November 30 in Dubai for a summit on climate change which does not bode well for prospects. of an agreement.
Overview of the market outlook in the coming days:
1) THE DOLLAR TOWARDS ITS WEAKEST MONTHLY PERFORMANCE
The dollar is heading for its weakest monthly performance in a year, with a loss of 2.7% at this point.
The prospect of a rapid cut in interest rates from the US Federal Reserve (Fed) next year has pushed investors into Treasuries, causing yields to fall the most in a month for four years, and boosted stocks to the detriment of the dollar.
From a historical point of view, December is traditionally the worst month in terms of performance for the greenback. Since 1973, the American currency has lost an average of 0.9% in the last month of the year, although it tends to recover part of its losses in January, with an average gain of 0.98%.
However, based on the statistics, the greenback should not depreciate over three months, or even two months. There were 16 years in which the dollar fell in November and December, but only four in which it fell in November, December and January of the following year.
2) RECOVERY MEASURES PENDING IN CHINA
Despite headwinds affecting China’s economy due to instability in the key real estate market and weak domestic demand, compounded by record youth unemployment, China’s top economic adviser is considering to recommend a growth target of 5% for the second year in a row, sources told Reuters on Wednesday.
To achieve this goal, sources say more fiscal stimulus will be needed as next year’s GDP will not benefit from the low base effect of 2021’s COVID-19 rule restrictions. Markets visibly expect the same thing, with company shares in mainland China currently trending rather downward.
So far, support measures in China have been largely insufficient, meaning it will be difficult to achieve this year’s growth target. China will release official manufacturing PMI data on Thursday, which last month showed an unexpected contraction, dashing hopes of a strong economic recovery.
3) AN EXPECTED SLOWDOWN IN INFLATION IN THE USA
After an encouraging report on consumer prices in the United States, markets are hoping that other data will support the expected end of the Fed’s rate hike cycle.
The personal consumption expenditures (PCE) price index for October, due to be released on November 30, is expected to remain unchanged from the previous month, according to Reuters consensus. The PCE index increased by 0.4% in September, the same pace as in August.
Another key indicator of inflation, the Consumer Price Index (CPI), remained unchanged in October, sending stock markets higher as it reinforced the prospect that the Fed would no longer raise the rent of money.
As investors assess the extent of the expected slowdown in the economy, other key economic reports are expected in the coming days, including the Consumer Confidence Index which will be released on November 28. This index recorded a third consecutive monthly decline in October.
4) BALANCING GAME AT THE ECB
Euro zone inflation data, which will be published on November 30, could confirm the moderating trend in price increases.
But if market participants anticipate too strongly a rate cut from the European Central Bank (ECB), which would cause bond yields to fall further, the Frankfurt institution could react by toughening its tone.
After the publication of eurozone inflation figures for October, which showed a deceleration to 2.9% year-on-year, Christine Lagarde, the president of the ECB, warned that borrowing costs would remain restrictive for many months.
Other ECB officials, like Pablo Hernández de Cos, judged it premature on Tuesday to talk about a reduction in interest rates over the coming quarters as expected by the markets, which are counting in particular on a reduction in 25 basis points of the deposit rate, currently at 4.0%, starting in April.
ECB officials fear that these expectations will result in an increase in bank loans and household spending, which would revive inflationary pressures.
Euro zone bond yields, stuck in a narrow range, suggest that this tug of war between market optimism and central bank caution will continue for some time.
5) THE CHALLENGES OF COP28
The COP28, which will be held in Dubai from November 30 to December 12, is expected to constitute a major challenge for the approximately 200 countries and institutions gathered to reach an agreement on how to combat global warming and, above all, on its financing.
The main objectives set by Sultan Ahmed Al Jaber, President of the COP and Minister of Oil of the United Arab Emirates, are to accelerate the abandonment of fossil fuels, to strengthen financing for the fight against climate change, to preserve the biodiversity and to create a fund for “loss and damage”, so that the poorest and most vulnerable countries are not abandoned to their fate.
In the absence of consensus and pessimism surrounding the key target of 1.5 degrees of warming, the best we can hope for is that major multilateral institutions, such as the World Bank, devote more money and attention to the climate, and that agreements be reached in less controversial areas, such as tripling the world’s renewable energy capacity.
(Writing by Lewis Krauskopf in New York, Kevin Buckland in Tokyo and Naomi Rovnick, Marc Jones and Amanda Cooper in London; compiled by Amanda Cooper; graphics by Pasit Kongkunakornkul, Sumanta Sen, Kripa Jayaram, Vineet Sachdev, Prinz Magtulis; French version Claude Chendjou, edited by Blandine Hénault)
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