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BoE holds rates; cuts anticipated


Was That the Big Pivot?  

European indices opened higher on Friday morning and global stocks are set for a healthy weekly gain with London, Paris and Frankfurt rallying 2-3% for the week, whilst Wall Street’s major indices are looking at posting gains of about 5%. Asian equities firmed overnight after the S&P 500 rallied almost 2% to rally north of the 200-day line again. Decent enough earnings are part of the story, but the major shift seems to be coming from central banks: the peak seems to be in, even if they are still pressing home the message that they might do more. The Fed in particular offered markets a sense that there is no more to come. Jobs data is key now for the Fed – it can only cut when the labour market cracks – so nonfarms today will be important. Yields have retreated sharply with the US 10yr back towards 4.6% and its lowest since mid-October.  We had seen a sharp swing up for yields so this retreat is part of a crowded trade unwinding in the face of the Fed; I don’t think as some that it’s the start of the bond bull market…we are into a multi-year bond bear market and multi-year ranges for stocks. 


Non-Farms and Oil 

Nonfarm payrolls today seen at 180K for October, roughly halving from September’s 336K increase. Earnings are seen +0.3%, unemployment steady at 3.8%. Jolts was strong this week, ADP soft. Last month the Jolts report was the better guide for the NFP. The dollar trades towards the lower end of the week’s range – a hot print can push up Treasury yields and support otherwise a retest of 105.30 for DXY futs might be on. Also watch the ISM services PMI, looking at the headline but also the prices index. 

Oil has gained for a second day after the market decided the Fed is done with hiking. But it’s still on course for a sharp weekly reversal on reduced geopolitical premium from the Middle East as the Israel-Hamas conflict didn’t - thus far – draw in too many other regional factions. Yesterday Brent fell to its lowest since before the atrocities of October 7th, whilst WTI plumbed its weakest since August before both rallied. 


A Turning Point for Rates? 

Yesterday, the Bank of England left interest rates unchanged, but signalled a willingness to raise again if required. But nobody is really buying it; less so much the resolve than the actuality of the situation. Growth is flatlining, unemployment is going to rise – the barrier to hiking again gets higher. But that does not mean cuts are forthcoming; the view from Table Mountain is pretty good for now. Markets moved to price in a cut by August.   

Does the Fed cut early next year? BofA: “So much anger, so much hate, yet unemployment so low; can you imagine the social disorder if unemployment hits 5%; that’s why policy panic comes early in ‘24.” I don’t buy it; unwinding the higher for longer message will take time. Still, front running the first cut is the name of the game. And if CBs are accepting inflation will be higher – the symmetric approach implies a readiness to cut.   


ECB Comments  

ECB’s Schnabel warned about the difficulties facing central banks in getting inflation to 2%, alluding to the fact that they will need to accept structurally higher inflation. She said “bringing inflation from here back to 2% in a timely manner may be more difficult…Headline inflation in the euro area declined rapidly to 2.9% in October from its peak of 10.6% one year earlier…Oil and gas prices, in particular, have come down remarkably fast from the highs…underlying price pressures can prove much stickier than volatile commodity prices…the disinflation process is projected to slow significantly…there is large uncertainty about how structural changes will affect activity in the euro area and globally, making the calibration of monetary policy more difficult”  


Apple Falls Not Too Far from the Tree 

Apple shares slipped in after-hours trading on Wall Street and opened lower in Frankfurt after earnings mostly exceeded expectations but failed to really impress investors that the current quarter is going to be much better than feared. The numbers also showed hardware and China remain problematic (relatively speaking!). Fiscal fourth quarter earnings beat but the company reported a fourth consecutive period of revenue declines. Sales of the iPhone rose 2%, but Mac sales –34% was worse than expected, iPad –10%. Services +16% was way ahead of forecasts and helped lift the gross profit margin. Revenue from Greater China was down 2.5%, $2bn below expectations. So, a story of Apple – iPhone proves resilient though questions persist over the pace of the replacement cycle and new iPhone 15 device; China remains a bit of an unknown; other hardware sales are lumpy; Services growth is key to the story. 

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