A concerning decline in Chinese PMI data failed to dent sentiment overnight, with gains throughout Asian indices ultimately transmitting through to a similarly optimistic open in Europe. With both manufacturing and non-manufacturing surveys losing ground in November, the soft growth picture does raise calls for additional support from the Government and PBoC in the coming months. Meanwhile, the burgeoning health crisis seen over recent weeks does raise concerns that the current attempts to stop the transmission of this respiratory sickness could involve social curbs if it gets out of control.
Early signs of strength in European markets highlight the growing optimism over the trajectory of monetary policy in 2024, although yesterday’s OECD forecasts did place the ECB and BoE towards the back of the line in terms of rate cut timing. The sharp monthly decline in Spanish, German, and French CPI data over the past 24-hours had led markets to believe we would see something similar from the wider eurozone inflation gauge today. That optimism seems to have lessened the impact of todays remarkable 2.4% inflation reading out of the eurozone, with headline CPI now just 0.4% above target. While much of this disinflation can be associated with the recent slump in energy prices, the decline in core CPI does show continued headway being made by the ECB. With the target rate now in touching distance, there is a good chance we see the focus shift towards questions over whether we will see the ECB overshoot the target by driving inflation well below 2%. After-all, this latest -0.5% monthly figure means that the past seven months brought a sum total of just 0.6% worth of inflation. With the ECB now staring at a distinct possibility of below target inflation within Q1 2024, markets will more than likely start bringing forward expectations over the first rate cut (currently priced for April).
With energy price weakness having played a key role in driving down inflation, all eyes will be on today’s OPEC meeting as Saudi Arabia seek to bolster the price of their key export. While we have seen concerns grow over the potential struggles finding agreement over production levels for nations in Africa, there is speculation that Saudi will seek to drive additional production limits in a bid to lift energy prices. Unfortunately, production levels are not the only side of the story, with the overnight PMI data highlighting how the weak Chinese growth environment has led to weaker demand and lower prices being paid in Asia.
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