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Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ which details recent economic data releases and central bank policy news. Received this morning – 17/11/2023

What has happened?

Bond and equity markets received another burst of enthusiasm yesterday after economic data painted a more challenging picture than the day prior. Oil prices continued their decline, adding to the risk on mood, with both Brent Crude and WTI falling more than -4% on the day.

Economic data

 The high frequency initial jobless claims, released weekly, spiked to their highest level since August, adding to the evidence of slowing labour market momentum. 231k people filed for unemployment benefit in the preceding week compared to expectations of just 220k. Continuing jobless claims have also hit their highest level since late 2021 and were slightly higher than the market expected. Industrial production was also weaker than expected, contracting by -0.6%. Lastly, the NAHB housing market index was also weak, recording its lowest reading since December. These data releases added to the belief that economic growth was slowing sufficiently to reduce the demand side of inflation and increased the chances of a soft landing being achieved.

Central banks

 While bond yields fell yesterday, Federal Reserve speakers did little to support the market’s view that interest rate cuts would be on the table next year. President Mester said that it was far too early to discuss interest cuts as the Fed needed confidence that inflation was on a sustained, lower path. Mester said that easing monetary policy ‘is just not part of the conversation right now.’ Governor Cook struck a similar tone, saying that recent signs of economic strength, such as the Q3 GDP release, suggests that demand remains strong and that could ‘slow the pace of disinflation.’ Neither of these speakers deterred the bond market which increased its probability of an interest rate cut as soon as the March 2024 meeting.

What does Brooks Macdonald think?

 The last fortnight has seen a resurgence in risk appetite but this week has shown that the movements are far from one-way as investors are highly aware of the risk of another ‘false pivot’. The market’s pricing of US 2024 interest rate cuts looks quite aggressive given the stickiness of core CPI readings and the rhetoric coming from Federal Reserve speakers. Given this, markets are likely to continue to swing towards bouts of optimism as pessimism as we are still some way from confirming that inflation is on a sustainable path to the Fed’s 2% target.

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Alex Kitteringham

17th November 2023