Market sentiment continues to be supported by hopes of inflation cooling further, even if macro data came out somewhat on the strong side this week. Euro area and UK PMIs edged cautiously higher, albeit from low levels, while output price indices remained above pre-pandemic averages on the key service sectors. US jobless claims fell back after the surprising uptick earlier in November, and euro area Q3 indicator of negotiated wages continued to point towards sticky price pressures stemming from the labour markets.
Bond yields moderated further, providing support for equity markets as well. OPEC’s decision to delay a meeting where markets had anticipated possible new production cuts sparked some volatility in the oil markets, but generally oil prices have continued to edge lower, which has also weighed on markets’ long-term inflation expectations.
While we have anticipated lower long-end bond yields, and continue to see further downside towards 2024 we also think that much of the decline could already be behind us. The sharp uptick in yields earlier in the fall was largely driven by an increase in term premium, which was likely linked to the high bond issuance and rising concerns of public debt sustainability not least in the US. These concerns have all but faded ever since, which could lead to persistently higher term premium also going forward. In addition, we do not anticipate the markets to price in significantly faster rate cutting cycles for either the ECB or the Fed unless we see further clear signs of weakening in macro data. Read more in our latest Yield Outlook – Too much too soon? 23 November.
On the central bank front, Swedish Riksbank left rates unchanged this week, in line with our expectations. Markets speculated in a possibility for another hike ahead of the meeting, but lower October inflation print, the recent SEK appreciation and lower oil prices have likely eased the need for further tightening. Furthermore, Riksbank still hawkishly signalled that it remains on a tightening bias going forward. The updated rate path shows the policy rate 10bp higher in Q1 2024, and Riksbank also mentioned that it is considering an increase to the QT sales volumes. For now though, we stick to our call that Riksbank is most likely already done with rate hikes, and that its next move will be a rate cut in June 2024. See our Flash comment Riksbank – “Hawkish hold”, 23 November.
Next week the focus will once again turn to inflation. We expect euro area November flash HICP to continue easing both in headline (2.7% y/y; Oct 2.9%) and core (3.9% y/y; Oct 4.2%) terms, slightly below consensus forecasts. Some of the negative base effects, which have pushed the headline figure lower over the past months, are now fading and we expect headline inflation to remain close to 3% towards next summer. US October PCE data is also due for release, consensus expects Core PCE inflation to slow down to +0.2% m/m SA, mirroring a similar decline in the CPI measure released earlier.
Markets will also keep an eye out for PMI data from China and the US. The official Chinese NBS PMIs are due for release on Thursday followed by the private Caixin Manufacturing survey on Friday. US ISM Manufacturing Index will round up the week on Friday afternoon. The Reserve Bank of New Zealand is the only G10 central bank having a monetary policy meeting next week, we expect an unchanged rate decision.
