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• Bonds rallied on more dovish news from central banks. Gilts gained +2.8%
• Europe led equities higher for a second week, gaining +1.4% in sterling terms’

• Dovish Fed comments meant the US dollar slipped -1.4% on a trade weighted basis
• Sterling fell against both the yen and the euro

The US kicked off a bumper week of central bank announcements on Wednesday with the decision to leave rates unchanged. The upper bound remains at 5.5%. While the market anticipated this, Powell’s comments at the press conference went further than many had expected, departing from the “higher for longer” message to acknowledging that “naturally, [the timing of rate cuts] begins to be the next question.” There were also two edits to the post-meeting statement. Firstly, the statement acknowledges that inflation “has eased over the past year.” Secondly, the forward guidance language was softened, with Powell saying that this change was “an acknowledgment that we are likely at or near the peak rate for this cycle.” In the wake of the comments, bonds rallied and the dollar weakened. The first rate cut is expected in Q2 of 2024. Until this meeting Fed officials had largely pooh-poohed talk of imminent rate cuts. The change in tone is likely due to softer data, including inflation prints. On Tuesday, November’s US inflation slowed to 3.1% from 3.2% in October. Energy continues to be disinflationary on an annual basis, though energy prices were actually a little stronger in November, boosting monthly inflation to 0.1%. Despite pockets of strength, CPI appears to be travelling in the right direction for the Fed. Consensus sees CPI close to target by the end of 2024.

Closer to home, the UK’s Bank of England also kept rates unchanged. As in November, the statement acknowledged that policy was tight but still made it clear the committee had a tightening bias. Once again, the vote was divided, with five in favour of a hawkish hold, one hold fearing overtightening, and three proposing a dovish 0.25% increase to rates. While broad UK data continues to soften, the statement made it clear that the Committee members prefer a wait-and-see approach as incoming data may confirm that the labour market is easing sufficiently.

One reason why MPC members may wish to wait for more data is that the Office of National Statistics is still publishing experimental employment statistics for employment, unemployment and inactivity due to low response rates for traditional surveys. Estimates point to unemployment remaining at 4.2%. Other data suggests a more marked slowing. Wage growth fell by 1.6% in October, cooling the headline three-month average year-on-year rate from 8% to 7.2% in October. While MPC members clearly wish to wait for further evidence of easing, Bank staff point to a range of labour statistics which illustrate the job market is easing. As such, cuts are expected by the summer of 2024.

Like the Bank of England, members of the European Central Bank’s Governing Council also voted to leave rates unchanged. However, ECB President Lagarde took the opportunity to push back against market expectations of rate cuts, stating that ECB projections assume “markedly” higher rates than priced. Expectations of cuts in the Eurozone have increased rapidly in recent weeks, with a commensurate move in bond prices. Futures now suggest that rates will be cut by over 1 percentage point next year.

China’s key economic meeting took place last week, offering some cause for optimism. At the Central Economic Work Conference (CEWC), Chinese officials pledged to do more in terms of policy, as well as increasing the use of local government special bonds to fund projects. Policymakers also hinted at consumption stimulus including a possible “trade-in” programme. However, China’s real estate sector remains challenged, and there has been no mention of new initiatives to backstop troubled developers' liquidity stress. This means that liquidity will likely remain tight for property companies, making it hard for them to recover. Given the significant role for real estate in China’s economy, this is likely to slow the recovery.

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