Markets began December on the front foot, with investors increasingly anticipating a new year free of interest rate rises amid cooling inflation.
The latest remarks from Federal Reserve Chair Powell were typically guarded, however, as he vowed to move “carefully” on interest rates, while also scotching current optimism on early rate cuts. He stated that it would be “premature to conclude with confidence” that monetary policy is “sufficiently restrictive”, implying that now is not the time for speculating on the timing of any such cuts. He did concede, however, that the tightening situation was becoming “more balanced” in not becoming too restrictive and thus harming the economy.
It was the latter comment which investors chose to latch on to and, despite Powell’s non-committal guidance, the consensus is now hovering between the end of the first quarter and the beginning of the second quarter as bring the time of an initial interest rate decrease. In the meantime, manufacturing data on Friday in the US stayed in contractionary territory, while a further dip in the oil price, which is now down by 9% in the year to date, could also contribute to easing inflationary pressure. Indeed, the combination of an economy which is cooling only gradually, lower inflation and a Fed which is not intervening seems to be the current Goldilocks scenario.
There are more economic releases for investors to ponder this week, culminating with the non-farm payrolls report on Friday. The current expectation is that 180000 jobs will have been added in November, as compared to 150000 the previous month. The unemployment rate is expected to remain unchanged at 3.9%. As ever, market narrative will be swayed by the outcome of the number, with the market hoping for a level which supports the likelihood of a soft landing, without being too strong so as to reopen the hiking debate.
In the year to date, the main indices have been buoyed by a strong November which reflected renewed optimism, such that the benchmark S&P 500 has now added 20%, the Nasdaq 37% and the Dow Jones 9.3%.
Asian markets noted the developments from Wall Street but were mixed on local issues. The recent strength of the Yen on speculation that the central bank could finally begin to unwind its ultra-loose monetary policy has weighed on the main Nikkei index, although it nonetheless remains near multi-decade highs. China’s real estate woes remain a core focus, although Evergrande’s shares popped on some relief that a court hearing to discuss its debt restructuring plans was adjourned until the end of January. Trade figures later in the week are likely to show a continuation of recent Chinese trends, with soft exports offsetting any domestic progress.
In early exchanges the FTSE100 gave up some of its gains from Friday, dipping at the open despite broker upgrades to the likes of Marks & Spencer, DS Smith and Rolls-Royce (LON:RR), which continues its recovery surge and has now risen by 208% so far this year. Weakness particularly across the oil and mining sectors more than offset these boosts as investors chose not to add to the momentum of a positive start to the month. The premier index now stands ahead by just 0.7% in the year to date, and looks increasingly likely to finish a promising year in mediocre fashion.
Whether the UK market as a whole receives additional overseas investor interest next year remains to be seen, and on valuation grounds there is an increasing throng which believes that a rerating is overdue. That being said, such optimism has been in evidence for several years without coming to fruition and any inflection point seems unlikely to emerge without a positive catalyst, such as an improvement to the UK growth outlook and the avoidance of recession.