Podcast Summary
Impact of CPI report on Fed's interest rate decision: The upcoming CPI report could influence the Fed's final interest rate decision for the year, with housing costs being a key area of interest for potential inflation indications.
The upcoming week is significant for the economy as the Federal Reserve is set to make its final decision on interest rates for the year, and key reports on inflation, specifically the Consumer Price Index (CPI) and the Producer Price Index (PPI), will be released. Bloomberg's Michael McKee and Ira Jersey discuss that the CPI report, which comes before the Fed meeting, could influence the Fed's decision as it may indicate whether inflation is stabilizing or continuing to rise. The housing sector, which the Fed has expected to see a decline, is a particular area of interest. If housing costs continue to rise instead of falling, it could signal that inflation may not decrease as anticipated. The CPI report's impact on the Fed's decision and the overall inflationary environment is crucial for investors to watch.
Impact of Housing on Inflation and the Fed's Focus: The Fed is closely monitoring housing and services sectors for inflation signals. Core services, especially housing, remain high, making it challenging for overall inflation to decrease.
Housing makes up about 30% of the Consumer Price Index (CPI), and its fluctuations have a significant impact on overall inflation. The Fed will be closely watching housing, along with the services sector, when they release their inflation report on Tuesday. The disconnect between food, energy, and core goods prices versus core services, particularly housing-excluded services, has been a notable trend. While goods prices have moderated, services prices, especially in the core services category, have remained high and could make it challenging for inflation to decrease. The Producer Price Index (PPI), also coming out this week, is expected to be lower than CPI due to less consideration of domestic services costs in PPI. Market expectations suggest that inflation will remain around 2.2% over the next decade, and current market sentiment is relatively calm regarding inflation. If CPI and PPI come in at or below expectations, it could lead to a rally in the treasury market.
Fed's Economic Forecast and 'Dot Plot' to Influence 2024 Interest Rates: Market expects around five rate cuts in 2024, but Fed's view may differ, leading to significant market movements based on new inflation forecast and 'dot plot' changes, while shape of yield curve might also shift depending on timing and extent of rate cuts. ECB decisions also impacting global monetary policy landscape.
That the upcoming Federal Reserve (Fed) economic forecast and the "dot plot" will be closely watched by the market to gauge the central bank's stance on interest rates in 2024. The market currently expects around five rate cuts, but the Fed's view may differ. The new inflation forecast and any changes to the longer-term interest rate projection (the "dot plot") could lead to significant market movements. The shape of the yield curve might also change if the Fed's rate cuts are delayed or reduced. Investors may consider fading market expectations of rate cuts to capitalize on potential opportunities. The European Central Bank (ECB) is also set to make interest rate decisions, adding to the global monetary policy landscape. Stay tuned for more updates on Bloomberg.
ECB and BoE to Hold Monetary Policy Meetings, Inflation Data May Impact Decisions: Central banks in Europe are expected to consider rate cuts amidst slowing inflation and economic weakness, but previous rate hikes and energy support measures could complicate decisions, potentially leading to more cautious policies.
Central banks in Europe, including the European Central Bank (ECB) and the Bank of England, are expected to hold monetary policy meetings on Thursday, with market anticipation of potential rate cuts. However, recent data, such as the euro area's inflation rate slowing down to 2.4% in November, could impact policymakers' decisions. According to Jamie Rush, the ECB's chief Europe economist, while underlying inflation has been falling and the economy is weak, there is a bumpy trajectory for inflation in the coming months due to energy support measures being withdrawn and base effects. This could mean that the ECB may be more cautious than expected. Additionally, the economic impact of previous rate hikes is already being felt, with weaker-than-expected industrial production and factory orders in Germany potentially taking 0.4% off the country's GDP in Q4. These factors highlight the complexity of central banks' decisions and the need for careful consideration of economic data.
Central banks' rate hikes: Economic impact and dilemma: Central banks face a dilemma as market expectations lean towards imminent rate cuts despite unrealized economic impact of hikes. Inflation trajectories are expected to trend downward, but services inflation remains a concern.
The economic impact of monetary policy hikes, such as those implemented by central banks like the ECB and the Bank of England, is not yet fully realized. Economists estimate that these hikes should reduce GDP by approximately 4%, but we have not yet reached that point. The economy's resilience is a mystery, and central bankers are facing a dilemma as market expectations lean towards imminent interest rate cuts. The ECB's situation differs from the Bank of England's, as the Eurozone did not experience the same wage growth that fueled inflation in the UK. The Bank of England has had to hike rates more aggressively and will likely have to cut later as a result. Looking ahead, inflation trajectories for both the Eurozone and the UK are expected to trend downward, with some bumps along the way. However, the biggest question remains the impact of services inflation, which is heavily influenced by wages. Central banks will be closely monitoring this sector to determine if they have done their job and if interest rates can be reduced. Market expectations for immediate rate cuts may be overdone, and central banks are unlikely to jump the gun given the recent justification for hiking rates to combat persistent inflation. However, data dependency will remain a key factor, and potential economic weakness or further inflation declines could lead to earlier cuts.
Experts predict a soft economic landing with decreasing inflation and potential real wage increases: Experts believe the economic outlook for the first half of next year is promising, with a potential shift in investments from AI to underperforming sectors, as inflation decreases and real wages increase, leading to a soft economic landing
Both experts, Jamie Rush and Daniel Casale, agree that inflation is expected to decrease, leading to potential real wage increases and a soft economic landing. This means a reduced risk of an economic hard landing and a possible rotation of investments from AI theme to other areas, including energy. If this soft landing scenario unfolds, it could lead to a constructive environment for stocks. The ECB is expected to move in the first half of next year, and the US and ECB are in a game of cat and mouse regarding who will make the first rate cut. Overall, the outlook for investment opportunities in the first half of next year is promising, especially in underperforming sectors, if the soft landing narrative prevails.
China's Economic Data: Weakness Beyond Rosy Year-on-Year Figures: Despite rosy year-on-year figures, China's economic weakness persists due to weak sentiment, high debt levels, a struggling property market, and declining foreign direct investment. The government aims to address these issues, but challenges remain, and some businesses may leave due to uncertainty.
While China's economic data for November, including industrial production and retail sales, may show rosy year-on-year figures, the underlying weakness in the economy remains a concern. The month-on-month figures will provide a more accurate reflection of the current state of the economy. The weakness is not just due to weak sentiment but also to challenges such as high debt levels, a struggling property market, and declining foreign direct investment. The Chinese government is attempting to address these issues by implementing measures to attract foreign investment and boost overall sentiment. However, the challenges are significant, and some foreign businesses may be making political decisions to leave China. The lack of transparency regarding youth unemployment also adds to the uncertainty surrounding the Chinese economy.
China's Labor Market and Export Sector Challenges: China's labor market struggles with unemployment for young graduates, while exports are negatively affected by the global economic slowdown. The government aims to find long-term solutions for employment opportunities and reduce the economy's reliance on the property sector, which is not expected to recover soon.
China is currently facing significant challenges in its labor market and export sector, both of which are deeply concerning for the government. Local governments are trying to provide temporary jobs for young graduates, but the government recognizes the need to find long-term solutions for employment opportunities. The global economic slowdown is negatively impacting China's exports, and the property sector, which accounts for 20% of China's GDP, is not expected to recover soon. The government's goal is to reduce the economy's reliance on the property sector and prevent financial risks related to property bubbles. Lowering interest rates to help lower mortgage rates is not expected to significantly improve the property market, as people are losing confidence and expecting further price drops. Instead, the government needs to find ways to support growth in other sectors to fill the gaps left by the property market.
Chinese economy's uncertainty continues, no major game changer expected in 2024: Chinese economy faces uncertainty with no major game changer expected in 2024, while US congress agenda is packed but outcomes uncertain
Uncertainty surrounding the Chinese economy persists, with confidence in the market being a major concern. Looking ahead to 2024, there's no clear sign of a major game changer, with China expected to continue its economic model and the government potentially increasing public investment to offset the drag from the property slump. However, there's hope that more substantial measures could be taken to revive confidence and sentiment. In the US, congress has a packed agenda before the holiday break, including supplemental funding, a border security deal, and appropriations matters. However, it's unclear if any of these items will be accomplished before they go home for the holidays, and the success of these efforts in 2024 may depend on the actions of Speaker Mike Johnson in the house.
Delays in Ukraine aid due to border security debates and McCarthy's past ousting: Ultraconservatives delay Ukraine aid due to border security concerns, while McCarthy's past ousting could pose a risk for Johnson in budget negotiations
The passing of Ukraine aid in the House is facing delays due to opposition from ultraconservatives who want to prioritize border security. Speaker McCarthy's ousting over a continuing resolution early in Johnson's speakership looms as a potential risk for Johnson. The top line numbers for the budget may be set based on previous debt ceiling deals, but the details of where the money goes program by program could cause significant fights in January. The next 6 weeks will be crucial in determining if an agreement can be reached, and the devil will be in the details. The far right seems willing to go along with the top line numbers, but the real battle could start over specific programs. The optimism for getting things done before the year is over is low, but the new year may bring new opportunities in 2024.
