Before the market heads into the holiday-New Year’s break, they will receive the latest inflation picture in the USA thanks to Friday’s report on American personal spending. Low figures may further fuel speculation about possible swift cuts in interest rates by the Fed, while higher results will cool market sentiment and may cause an increase in the yield of US bonds and declines in the stock market.
The euphoria after the signals from the Federal Reserve that rate hikes are already over and that cuts will be considered, led the markets to price in 150 basis points of reduction next year in futures contracts for interest rates.
Traders see about an 80% chance of a rate cut as soon as March. The yield on 10-year treasury bonds, currently standing at 3.9%, has fallen by over 110 basis points from a little over 5% at the end of October.
The market bet is that decreasing inflation will force the Fed to make swift cuts to prevent a rise in real interest rates. Two-thirds of the 251 participants in a December survey conducted by Bank of America among fund managers see a ‘soft landing’ for the American economy, and investors are the most optimistic about bonds since March 2009.
Yesterday’s US GDP data disappointed with lower figures, somewhat suggesting that today’s report on Americans’ spending may also turn out to be below consensus. The final GDP for the third quarter came out at 4.9%. The forecast had pointed out 5.2%. Private consumption also grew at a slower pace than expected, reaching 3.1%.
Wednesday’s correction on Wall Street (due to Harker’s words from the Fed) suggests that markets will be unstable in the pre-holiday period, so today’s session may be nervous and bring increased volatility.
This morning, data will be published from the UK on GDP and retail sales. This week we already received a surprise in the form of lower inflation data, to which the pound reacted by weakening and the British FTSE index gained. The lower CPI readings to some extent are an argument for BoE’s slightly earlier interest rate cuts.
Łukasz Zembik Oanda TMS Brokers.
