Asian equity markets are mostly higher this morning following gains yesterday in Europe and the US. Those moves were fuelled by a lower-than-expected outturn for November US CPI inflation which further boosted hopes of an early peak in US interest rates. Attention will today be on tonight’s US Federal Reserve monetary policy update with markets looking for signs that they are about to take a more dovish tilt.
Just released UK CPI for November showed that annual headline inflation had slipped by more than expected to 10.7% from 11.1% in October. The ‘core’ rate (excluding food and energy prices) also unexpectedly declined to 6.3% from 6.5% in October. The data will boost hopes that October’s numbers represented a peak for inflation. Nevertheless, inflation is still expected to remain very elevated in the near term.
Today’s US Fed update is the first of several central bank announcements this week. All of them are expected to result in further rises in interest rates but, in the case not only of the Fed but also of tomorrow’s updates from the Bank of England and the European Central Bank, they are expected to opt for smaller rate rises than previously. For markets globally, the Fed’s announcement will probably be most crucial. It has raised rates by 75 basis points at each of its last four meetings. However, comments from Powell and subsequently from other Fed policymakers have convinced markets that Wednesday’s increase will be a smaller one of 50bp.
Nevertheless, the Fed seems likely to temper this by reaffirming the message delivered by Powell after the November policy meeting that rates are likely to peak at a higher level than previously suggested and that any rate cut is a long way off. Powell will likely stress this in his press conference, and this will probably be supported by revisions to policymakers’ economic forecasts. Expectations are centring on the possibility that the median forecast will now show rates peaking above 5% next year. It will also be interesting to see if cuts previously forecast for 2024 are now pushed further out.
Ahead of the Fed update, the data calendar is relatively light. The Office for National Statistics house price index for October will be watched for confirmation of the message from more timely indicators that UK house price inflation is slowing. Meanwhile. Eurozone industrial production is expected to have fallen by 1.5% in October.
US bond yields dropped sharply after the lower-than-expected CPI data. They later recovered from their lows but were still substantially down on the day. In contrast, UK gilt yields rose yesterday although the market may get a boost today from the lower UK inflation outturn. The US data also had a marked impact in currency markets where the US dollar fell sharply against both the euro and sterling.
