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Weekly Market Update · 12.05.23

U.S. Bonds Gain with Cooling Inflation, China’s Economic Indicators May Remain Weak

U.S. investment grade fixed income gained 2% on cooling inflation and comments from the Federal Reserve. Scheduled economic indicators in China expected to show disinflation and weak trade.
  • Markets & Economy
  • Market & Investment Trends
  • Commentary
Key Points
What this is
We review how key market events from last week affected investment performance and highlight what could impact markets this week.
Why it matters
Easing inflation in the U.S. boosted investment‑grade bonds last week, while Treasury yields fell.
Where it's going
The U.S. jobs report, scheduled for Friday, is expected to demonstrate continued resiliency in the jobs market, while China’s economic indicators this week may show lagging exports.

Last Week Review

 

U.S. investment grade fixed income gained 2% on cooling inflation and comments from the Federal Reserve. The two-year Treasury yield fell 0.41% while the 10-year yield declined 0.27%. Global equities underperformed fixed income but still managed a 0.8% gain with the U.S. ahead of emerging markets and developed markets outside the U.S.

 

Investors Temper Rate Cut Expectations

Federal Reserve Chair Jerome Powell reiterated that the Fed will not hesitate to tighten policy if appropriate. The remarks were largely aligned with previous comments, but the futures market pushed out the timing for expected Fed rate cuts. Expectations for European Central Bank rate cuts were also lowered after President Christine Lagarde guided against rate cuts in the first half of 2024.
 

An Exceptional November

November was an exceptionally strong month for most major financial assets. Global equities gained 9.3% last month and investment grade fixed income rose 4.5%. The 10-year Treasury yield fell 0.6%, off its near 15-year high with tempered Fed expectations and cooling inflation possible catalysts. Equities benefitted alongside the rate moves as economic activity remained intact overall and third quarter corporate earnings outperformed. Against this backdrop, credit spreads fell meaningful, 0.67% for high yield bonds and 0.22% for investment grade bonds. High yield bonds returned 4.5%. Natural resource stocks gained 5% and real estate equities rose 10.5%.

 

U.S. Inflation Moderates

The , which excludes more volatile food and energy prices, increased 3.5% year-over-year in October and 0.2% from September to October. to 3% year-over-year, while core PCE services ex-housing eased to 3.9% year-over-year and 0.1% month-to-month.

 

Europe’s Preliminary Inflation Eases

Europe preliminary Consumer Price Index fell to 2.4% year-over-year in November, below expectations, from 2.9% in October. Core inflation fell to 3.6%, also below expectations, from 4.2%. As a result, the futures market moved forward its expectation for the first European Central Bank rate cut to March/April from June.

 

OPEC Announces Production Cuts

Oil prices rallied in the leadup to last week’s OPEC meeting before giving back most of those gains post-meeting. The group announced additional voluntary cuts of 1 million barrels per day but left formal quotas unchanged.

This Week Preview

 

U.S. Jobs Expected to Stay Resilient in Friday Report

Friday’s U.S. employment report for November is expected to remain resilient with the pace of hiring estimated to increase to 180,000 from 150,000. The unemployment rate is projected to be unchanged from the prior level at 3.9%, while wage growth is expected to slightly ease to 4.0% year-over-year from 4.1% in October.

 

China’s Economic Indicators Expected to Remain Weak

China is scheduled to release trade data on Thursday and the Consumer Price Index later in the week. Activity is expected to remain weak with modest improvement in imports, estimated at 3.7% year-over-year, while exports are expected to fall by 1.2%. The Consumer Price Index is expected to fall 0.1% year-over-year, indicating deflation.

 

Israel-Hamas War Resumes After Cease Fire

An extended cease-fire deal that allowed for the release of hostages and humanitarian aid into the Gaza area ended late last week. The facilitation of hostage exchanges offers some hope of future deals that may lead to de-escalation. However, for now, military operations have resumed and we expect investors to continue to watch for any signs of escalation. Since the start of the war in October, natural resource stocks are up 4.6% and oil prices have fallen 6.7%.

Main Point

Inflation’s Downward Trend Sparks Optimism

November was an exceptionally strong month for most major financial assets. Global equities gained 9.3% last month and investment grade fixed income rose 4.5%. The 10-year Treasury yield fell 0.6%, off its near 15-year high with tempered Fed expectations and cooling inflation possible catalysts. Investors likely will look to the U.S. jobs report on Friday for wage growth, which could pressure inflation upward.

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