rn© Reuters. SUBMIT PHOTO: Macy’s Santa Claus appears on the trading flooring to commemorate the 97th Macy’s Thanksgiving Day Parade at the New York Stock Exchange (NYSE) in New York City, U.S., November 22, 2023. REUTERS/Brendan McDermid
LONDON (Reuters) – Festive cheer has come early to world markets (bar those dollar bulls) on growing certainty that reserve banks will begin slashing interest rates next year.
For sure, crucial U.S. jobs data will test the enthusiasm, while Australia’s reserve bank might reinforce a view that rates have peaked.
Here’s your week ahead in financial markets from Ira Iosebashvili in New York, Kevin Buckland in Tokyo, Naomi Rovnick and Marc Jones in London and Yoruk Bahceli in Amsterdam.
1/ SANTA’S BEEN
Christmas has come early with global stocks posting their best monthly performance in 3 years in November and global investment-grade bonds returning almost 4% – the best month on record dating back to 1997.
Now, the early Santa rally risks running into a central bank Grinch. Market values rate cuts as early as the first half of 2024. The U.S. Federal Reserve and the European Central Bank, wary of market euphoria loosening monetary conditions, may begin to push back.
Whether equities and bonds can rise in tandem next year also feels doubtful. Stocks price in a benign economic backdrop of lower borrowing costs and steady growth. Government bonds, which shine in downturns, have been lifted by signs that the impact of past rate increases is starting to cause pain.
Both cannot be.
2/ GOLDILOCKS, WELCOME
Will Goldilocks remain? That’s the question investors are pondering as they await the Dec. 8 U.S. jobs report after a rebound that has taken the within spitting distance of a fresh year high.
The data will need to walk a fine line to satisfy the so-called Goldilocks story of cooling inflation and resilient growth that has underpinned asset prices.
Too strong a number would damage bets that the Fed will start easing monetary policy sooner than expected, providing a barrier to the scorching fourth quarter rally in stocks and bonds.
A weak number, on the other hand, could spark worries that the economy is beginning to roll over following 525 basis points of rate hikes, potentially dulling risk appetite.
Economists surveyed by Reuters expect the U.S. economy to have added 175,000 jobs in November, versus 150,000 in October.
3/ A HAWKISH HOLD?
Cooler than expected consumer inflation has sounded the death knell for any expectations the Reserve Bank of Australia will hike rates on Tuesday.
Investors are wary of a hawkish hold, with rates still elevated and new Governor Michele Bullock increasingly seen as more of a hawk than her predecessor. Traders currently put odds for a hike at the following meeting in February at about 1-in-3.
