Week in review
- U.S. PCE inflation flat in October from September
- U.S. consumer spending grew 0.2% in October, less than 0.7% previously
- China’s November NBS PMI below expectations
Week ahead
- U.S. CPI and FOMC meeting
- China activity data
- ECB rate announcement
Thought of the week
November saw a rally across the board, to the delight of those who stayed invested. Cash returns were dwarfed by the 9% monthly return in MSCI AC World and S&P 500 (best month in more than a year), as well as the near 5% return in U.S. Aggregate Bonds (best month since mid-1980s). All this was supported by expectations of peak Fed rates from cooling inflation (October PCE was also softer than expected) and softening Fed narratives, prompting the Goldman Sachs US Financial Conditions Index to ease by more than 90bps in November. Markets are also seeing a goldilocks scenario in economic data, fueling momentum in a soft or no landing narrative. Markets are shifting from speculating when the Fed will stop hiking, to betting on when the Fed will cut rates - Fed Funds Futures market are now pricing in a 50% chance of a March rate cut but a 100% by May. Looking at the past 5 Fed rate cycles, markets tend to underestimate the magnitude of easing versus what was delivered eventually. However, in the current cycle, markets are pricing in far more cuts than previously. We remain cautious on such optimism and don’t expect a rate cut until the second half of 2024. In terms of asset allocation, peaking rates reinforces our lean into duration, while we remain cautious on equity, seeing as valuations reached a high again after the November rally. Attention continue to evolve around whether there will be a material slowdown in consumer spending.
Markets are pricing in a much more dovish Fed than in previous 2 months
Overnight Index Swap forward rates
Source: Bloomberg, J.P. Morgan Asset Management. Data reflect most recently available as of 1/12/23.
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All returns in local currency unless stated otherwise.
Currencies’ return are based on foreign currencies per U.S. dollar. An appreciation of the foreign currency against the U.S. dollar would be positive and a depreciation of the foreign currency against the U.S. dollar would be negative.
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