Read on the Trading Floor - 30 Nov 2023
Today’s focus… ECB vs Fed … who cuts first in 2024?
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Macro Themes At Play
Theme 1 - ECB in play for March / April 2024???
Softer inflation numbers have continued to print in Europe today (Nordea - Euro area flash inflation: The final nail in the inflation coffin) which leaves the ECB with a clear communication issue. Germany's fiscal response was a lot different to Biden's, prices are weakening and with China a key export economy stagnant, pressure will come early and fast in H1 for the ECB to adjust policy.
SEB - Price dynamics changes quickly, new communicational challenges for the ECB…. "Next to weaker prices we also see the real economy finally losing more speed. Past months the ECB have rightly refrained from calling a victory on the battel of inflation. Indeed, they continue to point towards the wage setting later in the spring as key for assessing second round effects from past years high inflation. But as numbers are creeping lower and lower, and when the projections are being lower this will be a communication challenge for the ECB as markets have just priced a full cut in April and start betting on March. In our view, March is still a bit too early, but solely taking the inflation readings into account April is definitely at play."
Theme 2 - EUR vs USD, ECB vs Fed ... which CB will cut the most in Q2 2024?
The market was happy to see a softer set of PCE numbers today (ING - A cooling US economy points to swifter rate cuts), but peak short USD consensus hit in the 12-24hours after Williams first appearance this week. It never pays to hold the month end signal in the final 2/3hours before the WMR. Brent Donnelly has done a lot of good work on this topic, but to put it simply, hedging strategies have changed, Asset Managers have evolved to be more adaptable, execute over a longer time horizon and those that need to buy USD have a natural tendency to wait until the end to fade the signals, whilst those who have to sell USD, will go early as soon as the signals start to populate their inbox. Once again today we've seen the degradation of the month end models but I'm sure we will trade them next month (sigh).
Core PCE hit 3.5% and is now lower than the Fed's 3.7% projection. Similarly, headline hit 3% vs Fed's projection of 3.3% which will make for interesting reading when we see the Fed's SEP in less than 2 weeks. Remember Powell bookmarks the end of the Fed speech and start of their blackout window tomorrow. Has the Fed cut 125bps in a year without something being very very wrong?
During today’s session, we've already started to see the market roll back the first cut from May, the economy is cooling fast, but is it the same as Europe?
Source: CME FedWatch Tool
The Fed's favourite inflation indicator continues its descent, but in contrast, we weirdly had a very strong US MNI Chicago PMI Nov ... 55.8 vs an estimate of 46.0 and previous 44.0). Bloomberg's John Authers has already written a timely piece Schizophrenia Is Coming for the Election-Year Economy. Growth is surging, but unhappy consumer sentiment sits at odds with markets looking forward to lower rates.
As the market cheers disinflation, one should remember the weight of the inflation tax is not falling evenly on households...
Axios - Young and low-income Americans experience inflation at higher rates
ZeroHedge - Rice Nears 15-Year High As Global Food Crisis 'Much Worse Than 2008'
Theme 3 - Where is AI trending?
Society has a bad example with social media, which one can argue has delivered more problems/issues than benefits so why are we not being more protective with the evolution of AI? The recent OpenAi power struggle begs the question, where are we heading with AI and who is in control?
Bloomberg Video - Sam Altman’s Firing, Rehiring and the Battle Over OpenAI’s Soul
TechCrunch - One year later, ChatGPT is still alive and kicking
Axios - Altman says OpenAI governance changes could alter its non-profit structure
Fortune - AI won’t steal your job—but it might cut your paycheck, Europe’s central bank says
Theme 4 - OPEC+ reaches a deal in principle
News stories of an additional 1mio barrels had already been circling through the mng, but where does the burden of these cuts fall? The market has not taken it well... buy the rmr sell the fact?
Oilprice.com - OPEC+ Reaches Deal “In Principle” on Oil Output Cuts
Source: Trading Economics
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