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Weak economic data out of US, Europe support peak rate hopes

The narrative that peak interest rates have been reached by the world’s central banks gained credibility on Thursday following a series of weak economic releases out of the US and Europe. Stocks in the US traded mostly higher. European equities made gains while the euro came under pressure after a slew of weak economic data prompted traders to strengthen bets that the European Central Bank (ECB) will cut interest rates as early as in the spring.

Shane Strowmatt, LGT
Temps de lecture
5 minutes
Stock market indices
© Shutterstock

The Core Personal Consumption Expenditures Price Index (PCE), which excludes food and energy prices, increased 0.2% in October when compared with the previous month and 3.5% compared to the same month a year earlier. That put the important macroeconomic data, which is considered to be the US Federal’s (Fed) preferred gauge of inflation, roughly in line with market expectations. Headline inflation came in year-on-year at 3%, which is not far off but still ahead of the Fed’s 2%-target.

Separate data released Thursday provided evidence of a cooling labour market in the US. Continuing claims for unemployment benefits increased to 1.93 million for the week that ended 18 November. The figure has increased since September, meaning unemployed people are having difficulties finding new jobs. Slowing inflation and a weak labour market support expectations that the Fed has ended its interest rate hiking cycle and will begin cutting rates in the new year, but strong economic growth - at 5.2% in the third quarter - makes it more difficult for the Fed to ease its monetary policy.

In New York, the Dow Jones Industrial sprang to its highest level in nearly 2 years on Thursday, closing up 1.5% on a late rally. The surge was supported by Salesforce, whose shares gained more than 9% after the cloud software firm posted earnings figures that beat expectations. The S&P 500 also gained 0.4%. The Nasdaq-100 fell 0.3%, dragged down by a few heavyweights such as Nvidia and Alphabet. November turned out to be a strong month for all the major indices with the Dow gaining 8.8%, the S&P 8.9% and the Nasdaq-100 10.7% during the month.

European economic releases were looking bleak on Thursday as France became the next major European economy to fall into contraction. France’s gross domestic product shrank by 0.1% in the third quarter, according to revised data, putting its economic contraction in line with that of Germany during the quarter. Germany’s unemployment rate reached its highest level since the pandemic year of 2021 at 5.9% in November. At the same time, euro area inflation was approaching the ECB’s 2%-target, falling to 2.4% in November and down from a peak of more than 10%.

The combination of lower inflation in the euro area, weak labour market data out of Germany and contraction in both of the eurozone’s largest economies increases the likelihood of the ECB cutting rates in the near future. That caused traders to ramp up bets against the euro and take on more risk in the European equity space on Thursday. The euro fell versus other major currencies, including the US dollar and Swiss franc. The Euro Stoxx 50 gained 0.2%, France’s CAC 40 jumped 0.6% and Germany’s DAX was up 0.3% on Thursday.

Elsewhere on the continent, Switzerland’s KOF Economic Barometer increased 1.6 points in November to 96.7 points. The Economic Barometer has been stable for the second half of the year, albeit at slightly low levels, and is slowly approaching its mid-term average. The indicator was aided by the manufacturing sector while hospitality as well as the financial and insurance sector acted as a drag on the overall Economic Barometer. Switzerland’s SMI gained 0.5% on Thursday.

In the Asia-Pacific region, stock markets were trading mostly lower to end the week as traders sorted through a flurry of macroeconomic releases. China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) surprised to the upside, coming in at 50.7 in November, up from October’s 49.5 and above the 50 mark, which separates contraction from growth. That helped pull the Shanghai Composite into slightly positive territory with a gain of around 0.1%. The data was difficult to interpret as the official Manufacturing PMI released a day earlier signalled contraction. Hong Kong's Hang Seng Index was trading 0.4% lower on Friday. In Tokyo, the Nikkei 225 lost 0.1% after Manufacturing PMI slipped to 48.3 in November from 48.7 in the previous month and unemployment fell marginally to 2.5% in October. In South Korea, the Kospi closed 1.2% lower and Australia’s S&P/ASX 200 lost 0.2%.

In commodities, oil prices slipped with Brent crude trading under USD 81 and West Texas Intermediate trading around USD 76. The OPEC+ group announced supply cuts of 900,000 barrels per day Thursday. Additionally, Saudi Arabia and Russia will extend their own cuts of 1.3 million barrels a day. Despite the cuts, prices fell as oil had already made gains in recent days. Traders had priced a slightly higher reduced output from the oil-exporting group in advance.

Corporate news in focus: There is no major corporate news scheduled today.

Economic data in focus: Swiss gross domestic product (09:00 CET); Services Purchasing Managers’ Indices from several countries, including Spain (09:15), Switzerland (09:30), Italy (09:45), France (09:50), Germany (09:55), euro area (10:00), UK (10:30), US (15:45); US ISM Services PMI (16:00); European Central Bank President Christine Lagarde speaks (12:30); Federal Reserve Chair Jerome Powell speaks (17:00).


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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