Inflation figures confirm its slowdown – all eyes on the Fed

This evening, the US Federal Bank will announce its interest rate decision after its monetary policy meeting. The European Central Bank, the Bank of England and the SNB will also announce their decisions later this week Markets are betting that central banks will slow the pace of their rate hikes to 50 basis points. The few economic indicators published on Friday prompted investors to be cautious. In the eurozone, the composite PMI purchasing managers’ index continues to point to an economic contraction. In terms of growth, third quarter GDP was revised slightly upwards (+0.3% v +0.2%) but a recession seems inevitable in the fourth quarter. In the US, the PPI producer price indicator came out higher than expected on Friday: in November, producer prices were 7.4% higher than at the same time a year ago. While less favourable than the 7.2% increase expected by the market, it is still better than October’s figure of 8.1%. On Tuesday, US CPI figures confirmed that inflation is, in fact, improving. Consumer prices rose by 0.1% in November, less than the 0.4% increase recorded in October. Over a year, the increase has slowed down to 7.1% against 7.7% the previous month and even below the 7.3% forecast. This is the lowest level since December 2021. Looking at core CPI, it rose by 6.0% year-on-year in November, compared with 6.3% the previous month. On a monthly basis, this means an increase of 0.2%, less than the 0.3% increase of the month before. Both of these increases are also lower than what had been estimated. With these lower-than-expected figures, the market was keener on selling the greenback. Thus, USD/CHF gave up more than a cent to reach 0.9250 and EUR/USD broke through the resistance at 1.06 to reach a high of 1.0673. Against the JPY, the decline was even more significant as the Japanese currency appreciated by 3 JPY to a low of 134.66, after a high of 137.97 in the morning. The price of gold rose – as did the price of the other precious metals – from $40 to $1,820 per ounce. The Antipodean currencies also benefited from this, with the Aussie rising by 2.20% and the Kiwi appreciating by 2%.

However, the good inflation figures did not change expectations: the market still expects the Fed to raise its key rate by 0.5% this evening. Specifically, the Fed is expected to raise rates from 3.75% to 4.25% before the Swiss, British and European central banks do the same tomorrow. The market expects these three central banks to also hike rates by 0.5%. The prospect of less aggressive Fed rate hikes has encouraged risk taking and boosted the equity market. The main European and US stock market indices rose strongly before dipping on profit taking. The bond market was also up. The 10-year Treasury yield closed down by 11 bps at 3.501% and the 2-year yield lost even more (-15.7 bps) to close at 4.218%. In Europe, the German 10-year government bond yield closed slightly down by 1.4 bps at 1.925% as did the Swiss 10-year government bond yield, also down by 1.4 bps at 1.14%.

In other news, fallen crypto ‘rock star’ Sam Bankman-Fried was indicted on Tuesday by the US courts for defrauding investors who put their money into his companies FTX and Alameda. Mr Bankman-Fried was arrested Monday night at the request of the United States in the Bahamas, where he resides. The Bahamian government decided to keep him in detention pending his possible extradition.

In China, economic decline and protests have managed to bring the zero-COVID policy to an end. Exports fell by 8.7% in November year-on-year, the largest drop since March 2020. Exports to the US are down, and there has been a sharp drop in exports of electronic equipment. There have been numerous reports of a worrying increase in COVID cases in recent days following the lifting of key lockdown measures. Several large banks in Shanghai had to reduce their operations after many traders contracted the disease. The USD/CNY trade volume is at its lowest for the year. Hospitals appear to be overcrowded and even sick hospital staff have to come to work, which increases the spread of the virus. It seems that the Chinese Communist Party has decided to let the virus circulate and is now banking on herd immunity.

Crude oil stocks ended a four-week losing streak this week in the US, according to data from the American Petroleum Institute. US crude stocks have risen by 14 million barrels since the beginning of the year. But at the same time, the crude oil stored in the country’s strategic reserves has fallen by almost 15 times that figure since the beginning of the year, i.e. by 211 million barrels. As a result, crude oil stocks are at their lowest level since January 1984. WTI prices rose on Tuesday as the market reacted to a drop in OPEC crude production in November, according to the organisation’s monthly oil market report. The WTI traded at $75.36 this morning.