It is still about inflation

Thoughts of the Day

This week’s Personal Consumption Expenditures (PCE) Price Index data, the Fed’s preferred measure of inflation, which will be released on Friday will be key to risk sentiment as we head into the year end. If it should show that inflation continues to drop faster than expected towards the 2% target, we’re likely to see risk asset prices rally further.

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Week Ahead

Monday: –

Tuesday: RBA monetary policy minutes will be released and their discussions may shed light on what are their likely steps going forward.
The Bank of Japan will hold its monetary policy meeting with no change to monetary policy expected. 

The Canadian Consumer Price Index is expected to show that prices rose +2.9% in November, down from +3.1% in October.

Wednesday: UK Consumer Price Index is expected to show that prices rose +4.4% in November, down from +4.6% in October.

US Conference Board Consumer Confidence is expected to come in at 104.3 in December, higher than 102 in November.

Thursday: US GDP is expected to grow +5.2% QoQ in Q3, higher than +2.1% in Q2.

Friday: The core CPI in Japan is expected to show that prices rose +2.5% in November, compared to +2.9% previously.

The US PCE Price Index is expected to show that prices rose +2.8% in November, down from +3.0% in October. The core index is expected to show that prices rose +3.4%, compared to +3.5% previously.

US UoM Consumer Sentiment is expected to come in at 69.4 in December vs 61.3 previously. The inflation expectations for the year ahead is expected to dip to 3.1% from 4.5% previously.

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What Happened Yesterday

  • Fedspeak:
    Goolsbee (known dove, non-voter in 2024):
    “Can’t rule out a March rate cut. Expect rates to be lower by this time next year, but not by much. The Fed might need to shift focus to its jobs mandate next year, with inflation cooling and the US employment landscape seeing overarching threats from a slowdown in key economic factors.”
    Williams (slight hawk, 2024 voter): “We aren’t talking about interest rate cuts right now. The Fed has to focus on objectives, not on the view of the market (market may be overreacting). Policy stance “at or near” the right place (financial conditions have tightened overall).”
    Bostic (known dove, 2024 voter): “Rate cuts are not seen as imminent, but preparations for possible principles and thresholds to guide the process are underway. Anticipation of two quarter-percentage-point interest rate cuts in 2024, with the first possibly in the third quarter, contingent on continued progress on inflation. The US economy is still far from the Fed’s 2% inflation target, though progress is being made faster than expected.
  • The US Treasury Yield curve inversion widened to 0.53% as the US 2-year bond yield rose +0.07% to 4.44% while the 10-year bond yield fell -0.02% to 3.91%.
  • The US stock futures rose steadily through the Asian and early London trading hours, with the S&P 500 futures reaching a peak of 4788 (+0.42%) due to some leftover optimism from the Fed meeting. It then started to weaken as the US session approached, effectively erasing the gains made earlier in the day.
  • The US stock market opened almost unchanged from Thursday. The market traded in a volatile fashion as numerous Fed speakers came forth to air their views on monetary policy. Consequently, the S&P 500 was almost unchanged at -0.01% (high: +0.13%, low: -0.31%), the Dow Jones rose +0.15% (high: +0.27%, low: -0.42%) while the Nasdaq rose +0.52% (high: +0.80%, low: +0.12%). 
  • The crypto market saw some weakness over the weekend possibly due to some profit taking. Bitcoin is down -1.42% while Ether is down -1.35%.
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Headlines & Market Impact

Recent data shows AI job losses are rising, but the numbers don’t tell the full story

Notable Snippet: According to a recent report of 750 business leaders using AI from ResumeBuilder, 37% say the technology replaced workers in 2023. Meanwhile, 44% report that there will be layoffs in 2024 resulting from AI efficiency.

Layoffs are a reality, but AI technology is also enabling business leaders to restructure and redefine the jobs we do.

Alex Hood, chief product officer at project management and collaboration software company Asana, estimates that half the time we spend at work is on what he calls “work about work.” Here, he’s referring to the status updates, cross-departmental communication and all the other parts of work that aren’t at the core of why we’re there.

With AI tackling task-based work, humans have the opportunity to move up the value chain, says Marc Cenedella, founder of Leet Resumes and Ladders. “For the entire economy,” Cenedella said workers will be able to focus on “integrating or structuring or defining what the task-based work is.” He compares this shift to mid-century office culture, when there were entire floors of typists — something that the efficiency of word processors eliminated.

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Israel faces new calls for truce after killing of hostages raises alarm about its conduct in Gaza

Notable Snippet: Israel’s government faced calls for a cease-fire from some of its closest European allies and from protesters at home on Sunday after a series of shootings, including of three hostages who waved a white flag, added to mounting concerns about its conduct in the 10-week-old war in Gaza.

The protesters urge the government to renew hostage negotiations with Gaza’s Hamas rulers, whom it has vowed to destroy. Israel could also face pressure to scale back major combat operations when U.S. Defense Secretary Lloyd Austin visits this week, as Washington has expressed growing unease with civilian casualties even while providing vital military and diplomatic support.

In Israel on Sunday, French Foreign Minister Catherine Colonna called for an “immediate truce” aimed at releasing more hostages, getting larger amounts of aid into Gaza and moving toward “the beginning of a political solution.”

The foreign ministers of the U.K. and Germany, meanwhile, called for a “sustainable” cease-fire, saying “too many civilians have been killed.”

“Israel will not win this war if its operations destroy the prospect of peaceful coexistence with Palestinians,” British Foreign Secretary David Cameron and German Foreign Minister Annalena Baerbock wrote in the U.K.’s Sunday Times.

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Fed sparking irrational market optimism over potential rate cuts, former FDIC Chair Sheila Bair warns

Notable Snippet: Market optimism over the potential for interest rate cuts next year is dangerously overdone, according to former FDIC Chair Sheila Bair.

Bair, who ran the FDIC during the 2008 financial crisis, suggested Federal Reserve Chair Jerome Powell was irresponsibly dovish at last week’s policy meeting by creating “irrational exuberance” among investors.

“The focus still needs to be on inflation,” Bair told CNBC’s “Fast Money” on Thursday. “There’s a long way to go in this fight. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far.”

“This is a mistake. I think they need to keep their eye on the inflation ball and tame the market, not reinforce it with this … dovish dot plot,” Bair said. “My concern is the prospect of the significant lowering of rates in 2024.”

Bair still sees prices for services and rental housing as serious sticky spots. Plus, she worries that deficit spending, trade restrictions and an ageing population will also create meaningful inflation pressures.

″[Rates] should stay put. We’ve got good trend lines. We need to be patient and watch and see how this plays out,” Bair said.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord