Please see below, Brooks Macdonald’s Daily Investment Bulletin received this morning – 09/11/2023.
What has happened
US equities managed to deliver a small gain yesterday, marking the 8th consecutive day of gains, as the bond rally continued. Further falls in the oil price also helped support the view that inflation would come down quickly, with Brent Crude closing below $80 per barrel for the first time since July. In terms of the bond rally, the US 10-year Treasury yield fell below 4.5% after the bond market absorbed a fresh $40bn 10-year Treasury auction, raising hopes that the current level of supply would not destabilise the rally.
Bond market rally
The recent fall in bond yields is already following through to US mortgage pricing with the average 30-year mortgage rate down 0.25% over the last week alone. The overall rate remains above 7.5% however so we are by no means back to ‘cheap’ borrowing even if the path of travel is to be welcomed. Mortgage applications rose as a result but remain subdued versus recent history. Fed Chair Powell will today speak at a panel at the IMF conference so he may shine some additional light on current Fed thinking post the last week’s moves. Over in Europe, sovereign bonds also rallied despite prominent ECB bankers stressing that it was ‘far too early’ to be talking about cutting Euro Area interest rates.
The fall in energy prices yesterday helped lower market expectations for inflation with medium term Euro Area inflation expectations falling to one of their lowest levels in six months. The energy moves were not limited to just the oil price with European natural gas prices falling. Reflecting concerns about the resilience of global demand, the highly economically sensitive copper price also fell yesterday.
What does Brooks Macdonald think
While the market has been quick to price in an improving inflation backdrop within Europe, consumer surveys still point to higher expectations. The ECB’s Consumer Expectations Survey is published with a significant lag, so reflects thinking in September but at that point, 1 year inflation expectations increased by 0.5% month-on-month to 4%. Falling energy prices should start to filter through to expectations over the coming months however the ECB will need to see a shift in consumer mindset in order to entertain any thoughts of a rate cut in 2024.
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