Rate Cut Optimism Continues to Lift Risk Sentiment

In focus today

This morning, the Danish statistics office will release the consumer confidence indicator for December. In November, consumer confidence improved, although sentiment was still overall negative at -10.3. The labour market is still going strong, and inflation was low in November. Given the high expected wage growth, consumers’ purchasing power is increasing. This is positive for consumer confidence, and we think it will improve again in December.

Today, we closely follow the EU meeting regarding a new set of fiscal policy rules in the EU. The EU economy and finance ministers will hold an informal videoconference to discuss the fiscal rules. This is likely the last chance to get a deal on a new set of rules before the self-imposed year-end deadline. Read more about the negotiations on fiscal rules in Euro Area Research – New fiscal rules in the EU – aligning theory and practice?, 29 November.

In the US, existing home sales for November and Conference Board consumer survey for December will be released.

Looking at the central bank calendar, ECB’s Lane and Riksbank’s Thedeen are scheduled to speak.

The 60 second overview

Fed speak: The Fed’s Goolsbee and Bostic continued to push back on the notion of imminent rate cut talks yesterday even if both underscored the recent positive developments on inflation. Goolsbee noted that ‘market has gotten ahead of themselves’ while Bostic reminded that there ‘is not going to be urgency’ in easing the current restrictive policy stance. Barkin was more optimistic, as he described the retreat in inflation as ‘remarkable’, which contrasts his more cautious comments heard in late November. We still think that the Fed is going to cut rates for the first time in March, but given the recent easing in financial conditions and that there are few signs of a clear cooling in economic momentum, we think the Fed will opt for a relatively gradual rate cutting pace of 4x25bp in 2024 (market prices in a total of 145bp of cuts).

PBoC: The People’s Bank of China left the 1 and 5 year Loan Prime Rates (LPR) unchanged overnight, which was widely anticipated after it made no changes to the Medium-term Lending Facility (MLF) rate last Friday. Loan Prime Rates are the key reference rates for business loans and mortgages. As both economic data and the outlook for new stimulus remain mixed, we stick to our ‘muddling through’ scenario for China, with no boom but also no signs of an imminent bust. We expect Chinese GDP to grow by 4.5% in both 2024 and 2025.

Equities: Global equities were higher (again) yesterday. Fed officials are trying to push back against rate cut expectations for next year, but investors are not listening. They have decided that rate cuts are coming and that means less monetary headwinds and cheaper financing. Russell 2000 was up by almost 2% yesterday, which was not surprising with the soft-landing and lower yields dominating. Energy doing well as oil prices are higher, not due to lower yields but rather as the Red Sea conflict is escalating. Materials also outperforming as industrial metals have grinded higher lately. Major indices in US yesterday, Dow +0.7%, S&P 500 +0.6%, Nasdaq +0.7% and Russell 2000 +1.9%. The positive sentiment is continuing in Asia this morning with both Kospi and Nikkei 225 up more than 1.5% despite lacklustre trade data out of Japan. US and European futures both in green this morning as well.

FI: The markets keep ignoring comments from the Federal Reserve officials that rate cuts will be gradual and limited and inflation needs to decline further such that the “battle against inflation” can be declared to be “won”. Hence, the 10Y US Treasury yield is testing the 4%-level and the US curve flattened from the long end, which is not what we see during the start of a rate cutting cycle.

FX: In Scandies, NOK/SEK closed higher for the fifth consecutive session, hand in hand with relative yields on the back of Norges Bank’s surprise hike. On Tuesday, the cross traded above 0.99 for the first time since early November. In majors, GBP and AUD were among the outperformers both in response to hawkish central bank comments. Meanwhile, the USD continues to trade on the back foot after Fed/Powell refrained from pushing back on rates pricing last week and as such fuelled further risk on. EUR/USD took another step higher and is seemingly having its eyes on the 1.10 handle.