Markets welcome the latest inflation news from the US, eurozone, and UK

I have to confess that between my husband and me, we are not very “street smart” when it comes to raising teenagers. I’m embarrassed to admit that we didn’t realize our 17-year-old daughter was hosting a party in our basement until the next morning when our doorbell camera revealed a steady stream of late-night guests. Fortunately, I have a better sense of when a party is getting started in the markets. Last week’s inflation reports from the US, eurozone, and UK were certainly welcome guests, going a long way in convincing markets that these central banks are finished hiking interest rates.

The disinflation trend continues

The US Consumer Price Index print for October indicated continued progress on the disinflationary front. Markets took this as a strong signal that the US rate hike cycle has ended. That data was quickly followed by readings on eurozone and UK inflation, as well as the US Producer Price Index, which markets interpreted to mean that rate hikes among Western developed central banks have come to an end.

However, at the same time, we received some data last week showing that those same Western developed economies are cooling. For example, US retail sales for October experienced their first decline since March. And the decline of industrial production in the eurozone was worse than expected. So why are markets so happy?

Recent events have been positive for markets

First of all, this is what Western developed central banks want to happen. They want their economies to cool to hopefully ensure disinflation continues. In addition, the US avoided a government shutdown without any drama this month, passing a short-term laddered spending plan that kicks the can down the road to early 2024. But the key reason for rising global risk appetite is that markets are looking through today and out to 2024; they are discounting the start of rate cuts later in the first half of the year and an economic recovery in the back half of the year.

Yields on the 10-year US Treasury, the 10-year UK gilt and 10-year European bonds such as the Italian 10-year bond have fallen in recent days. And stocks have risen.¹ I believe markets are anticipating a global economic recovery, with other major economies such as China and Japan likely to contribute to a second half recovery with supportive fiscal and monetary policy in the near term.

Volatility may present opportunity

But while a party seems to have started in markets, I expect some volatility in the near term. There is still significant uncertainty around the timing of when rate cuts will begin, and so we could see a pattern of "bad macro news is good news for markets" and vice-versa in the near term. However, I would take advantage of these opportunities to add long duration fixed income exposure and also find more attractive entry points for equities.

Is this the start of a change in sentiment?

All in all, I think we may look back on the last several weeks as the start of significant change in market sentiment and global risk appetite, as markets seem to like what they anticipate will unfold in the months to come. We will need to remain very vigilant, however, recognizing the long and variable lags of monetary policy might throw a wrench into the future that markets are currently discounting – although that is certainly not my base case.

Giving thanks

This week we will celebrate Thanksgiving in America. While the date on the calendar is US-specific, the sentiment of expressing gratitude is universal. First, I would like thank our clients for putting trust in us. Second, I would like to thank my colleagues; I am grateful to work with such a talented group of people who care so much about our clients. Finally, I can’t help but express how incredibly grateful I am for my family – even my daughter, our resident party planner. 😉

Dates to watch

Next week, I will be taking a break from Weekly Market Compass following the Thanksgiving holiday. I look forward to returning the first week in December to discuss our 2024 investment outlook.