Rate Cuts Expected in December for the US and Europe

The performance of global asset classes has been a focal point recently, showcasing varied outcomes across key economies. Leading the way, the Shanghai Composite Index saw an impressive increase of 1.8%, while the S&P 500 and the Hang Seng Index followed closely with rises of 1.1% and 1.0% respectively. Conversely, the Nikkei 225 experienced a slight downturn, decreasing by 0.2%. In the commodities arena, COMEX copper experienced a notable uptick, rising by 1.4%. On the downside, prices for London gold and IPE Brent crude futures dropped by 2.4% and 3.1%. The U.S. Treasury saw a decline in the yield of 10-year bonds, which fell 23 basis points to 4.18% compared to the previous week. Domestically, the futures for 10-year Chinese government bonds also experienced a small increase of 0.15%. In the forex market, the dollar index decreased by 1.6%, closing at 105.8, while the yen appreciated with the dollar to yen exchange rate settling at 149.8. The Chinese yuan showed slight appreciation against the dollar, with the exchange rate marking 7.2.

From an economic perspective, the United States exhibited signs of resilience as personal disposable income and consumer spending rose in October. The Personal Consumption Expenditures (PCE) and core PCE price indices also reflected a year-on-year rebound. However, the real estate market faced challenges, particularly with new home sales significantly dropping in October. The S&P/Case-Shiller Home Price Index indicated a continued decline, highlighting a potentially cooling market. In terms of production, the October data showed a positive flip with a year-on-year growth rate for new durable goods orders, and core capital goods new orders also rebounded.

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Turning to inflation expectations, they appear to be receding, with the five-year inflation expectation on November 29th standing at 2.33%, a drop of 10 basis points from the previous week. Similarly, the ten-year inflation expectation saw a slight decline to 2.26%, down 8 basis points. Interest rate cut expectations have gained traction, with market predictions indicating a 66% probability of a 25 basis point cut by the Federal Reserve in December, up from 52.7% the prior week. Furthermore, expectations for the total rate cut by 2025 have risen from 25 basis points to 50, suggesting that March and September may each witness a 25 basis point decrease.

In Europe, the inflation dynamics also tell a significant story, with the November Harmonized Index of Consumer Prices (HICP) witnessing a year-on-year increase, while the core HICP remained stable compared to October. The economic climate within the Eurozone saw a slight improvement, with an uptick in the economic sentiment index for the 19 Eurozone countries. Additionally, the production of crude steel in the EU rose by 6.6% year-on-year in October, a positive sign in the manufacturing sector.

Looking into policy discussions, December could see both the Federal Reserve and the European Central Bank (ECB) considering potential interest rate cuts. Fed officials have indicated that while there is room for rates to decline, such adjustments will need to be gradual and data-driven. Minneapolis Fed President Neel Kashkari has suggested that a rate cut in December remains suitable, while Chicago Fed President Austan Goolsbee expects lower rates to be in play next year without losing sight of inflation goals.

Across the ocean, ECB officials seem to be leaning towards a dovish stance. With inflation in the Eurozone showing signs of cooling, Vice President Luis de Guindos hinted that the central bank might lower rates further if inflation aligns with expectations. However, caution was emphasized, as officials underscored the need for a steady approach in any future rate cuts. Germany’s central bank governor, Joachim Nagel, echoed thoughts on maintaining a balanced pace in rate adjustments, highlighting the delicate nature of the economic recovery.

In Japan, the Bank of Japan remains cautious, with Governor Kazuo Ueda stating that wage trends will be critical in any future interest rate hikes. The current data indicates a positive trajectory for the Japanese economy, yet the risk from a weakening yen cannot be overlooked.

On the Pacific side, New Zealand's central bank decided to cut interest rates by 50 basis points, lowering the rate to 4.25%, aligning with market expectations. Meanwhile, South Korea's central bank opted for a 25 basis point cut, setting its benchmark interest rate at 3.00%, deviating from expectations of stability. Conversely, Nigeria's central bank increased its key interest rate by 25 basis points to 27.5%, reflecting its unique economic challenges.

As we assess these dynamics, it’s clear that the global economic landscape is in transition, with various countries navigating through different levels of recovery and challenges. Inflation, interest rates, and consumer behavior will be pivotal in shaping the future economic outlook. Investors and policymakers alike will be focusing closely on how these factors evolve in the coming weeks and months, as they can have significant implications not just locally but globally, affecting trade, investment, and economic stability.