Dear Investors,
What is happening? Economy is beating all expectations – (10 Updates) Moody’s
Monetary policy is working
The Fed is gaining confidence that its monetary policy efforts are working. The labor market is slowing, and inflation is cooling, all despite continued spending by consumers.
In a recent speech, Fed Governor Christopher Waller, who is largely considered a hawkish leader at the central bank, noted that “Inflation rates are moving along pretty much like I thought.”
What does markets are exepcting?
Markets are expecting rate cuts to begin as soon as March, though this may be premature, given the fact that more progress needs to be made in slowing inflation.
Our baseline forecast expects rate cuts to begin in the third quarter of 2024, though the cycle of cuts will be slower than the cycle of hikes.
GDP revised up
S. GDP grew at the fastest pace in nearly two years in the third quarter, jumping an upwardly revised 5.2%, according to the Bureau of Economic Analysis’ second estimate.
This was the fifth consecutive quarter of growth near or above the economy’s potential.
Economy is exceeding expectations
The economy’s recent performance has consistently exceeded the expectations of those who anticipated a recession by now, and the outsize growth reported for the third quarter only adds to that.
Growth was broad-based and nothing short of robust.
However, it is not the only sign of strength. Average monthly job growth in the quarter was more than 200,000, and job gains remain broad-based across most industries.
Initial claims for unemployment insurance remain remarkably low.
Read this – What does markets are expecting? – (11 Must Highlights) JP Morgan
November summary
Government bond yields declined. The US 10-year Treasury yield fell below 4.4% by the end of November, down from the peak of 5% reached in mid-October.
In Europe, the German 10-year yield fell around 20 basis points.
Lower bond yields and healthy corporate earnings boosted growth stocks and the tech sector, which outperformed value peers.
Small caps rallied in November with the MSCI World Small Cap Index gaining 8% over the month. However, large caps have still outperformed year to date, by around 12 percentage points.
Data suggesting inflation is easing reinforced investors’ view that most developed market central banks have finished their monetary tightening cycles.
Even if it is too early for interest rate cuts, a likely end to policy rate hikes means core bonds can offer diversification against a disinflationary recession
Commodity prices
Contracted from their October peaks.
Despite the ongoing conflict in the Middle East, the price of a barrel of Brent crude oil fell to $80, in part thanks to an increase in US supply and OPEC+ members’ failure to adhere to production quotas.
What is happening on macro world?
The market was particularly encouraged by the release of the US Consumer Price Index (CPI) reading for October, which was cooler than expected.
The fall raised hopes that inflation could touch 2% before the end of 2024, and reduced investors’ expectations of a final interest rate hike by the Federal Reserve (Fed) at its December meeting.
Although we and the market are convinced that peak policy rates have been reached.
Particularly in the US, markets reinforced market hopes for a soft landing. This supported equity markets through November, with the S&P 500 Index now up 21% year-to-date.