Last night saw huge volatility in the Asian session, with the Hang Seng (4%) and Nikkei 225 (2.5%) making major gains. This came despite a worrying decline back into contraction for Japan, with their third quarter GDP figure of -0.5% annualizing to -2.1%. In China, a swathe of economic data saw a welcome surge in retail sales (7.6%), with the New Zealand dollar particularly on the rise in anticipation of higher exports. With the Chinese data improving, and markets looking ahead to today’s meeting between Xi Jinping and Joe Biden, sentiment appears to be taking a clear turn for the better. Meanwhile, Taiwan appears to be edging towards a pro-Chinese political shift that could dramatically lower the chances of a regional conflict, with two opposition parties coming together on a joint ticket ahead of the January 13 election. Greater detail on this coalition will be provided by this weekend, but market sentiment has clearly taken to the idea of a political shift away from the pro-independence DPP.
UK inflation has grabbed the headlines this morning, with the headline CPI reading falling sharply to 4.6%. This helps ease concerns that saw the UK painted as an outlier, with the UK headline inflation rate now just 1.4% higher than the US. That differential stood at a whopping 4.9% back in June. Looking under the hood, October inflation was always set to see a huge slump as we see the 2% October 2022 figure drop out of the annual calculation. As such, today’s announcement is likely to be as good as it gets in terms of a one-month decline, with the disinflation pathway likely to be very gradual until we start to see it gather momentum from February onwards. Nonetheless, today does show the world why many are confident that we will see the Bank of England cut interest rates in the second half of 2024, with headline CPI looking on course to move back below target by May.
US markets look set for another bumper day, with falling inflation in both the US and UK helping to drive home expectations that the next move from the FOMC and BoE will be to cut rates rather than raise them. The repricing of market expectations for a Fed hike in December or January has seen the 15% chance fall to a mere 1%, essentially ruling out any additional tightening. With markets typically forward looking, investors and traders will invariably look at this as a prime time to be preparing their portfolios for the 2024 monetary easing that looks increasingly likely. Today sees the inflation theme continue, with the US PPI reading due alongside retail sales.
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