Rate cut expectations rise as European inflation eases

The euro retreated and stocks climbed as decelerating European inflation added fuel to broader rate-cut expectations that have spurred a global rally in assets this month. 

The currency was trading 0.4% weaker versus the dollar after the pace of price growth in the region cooled more than expected. Ten-year bund yields were slightly lower after slipping as much as four basis points earlier as traders bet on an ever-earlier start to ECB interest-rate reductions next year. The Stoxx 600 index climbed 0.3%, adding to its best month since January. 

Meanwhile, US Treasuries paused their November rally as traders awaited further signs on the timing of a possible pivot to rate cuts next year. Easing inflation and signs of a softer-than-expected slowdown in the US economy sent Treasuries, agency and mortgage debt to their best month since the 1980s — triggering a November bounce that pulled along assets from stocks to credit to emerging markets. 

Data due Thursday is forecast to show the Fed’s preferred inflation metric — the personal consumption expenditures price index — decelerated in October to the slowest annual rate since early 2021.

“Momentum on the other side of the pond is likely to remain bullish rates,” wrote Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International Plc in London. “The PCE inflation data for October is most likely going to echo what we already saw in the October CPI and PPI reports and add to the soft-landing narrative.”

Euro-zone consumer prices rose 2.4% from a year ago in November, less than the estimates of all economists in a Bloomberg poll. The numbers came after French data showed the economy shrank by 0.1% and inflation eased. 

Markets now show a quarter-point reduction in ECB rates is fully priced by April, even after policymakers warned that borrowing costs will remain elevated for an extended period. 

US data on Wednesday provided support for a soft landing for the US economy. Economic activity slowed in recent weeks as consumers pulled back on discretionary spending, the Fed said in its latest “Beige Book.” Gross domestic product rose at the fastest pace in nearly two years, while consumer spending advanced at a less-robust rate.

Now traders are looking to a speech by Fed Chair Jerome Powell on Friday. 

The litmus test would be “whether or not Powell reinforces the dovish messages” of other Fed speakers this week, George Bory, chief investment strategist for fixed income at Allspring Global Investments LLC, told Bloomberg TV. “We think the market is getting a little ahead of itself certainly in the front-end of the curve.” 

Elsewhere, China’s equities have emerged as an outlier amid the global rally this month on concerns about the growth outlook, with a report Thursday showing the nation’s manufacturing and services sectors shrank in November. 

Oil rose for a third day as traders count down to a key meeting that will see OPEC+ set output policy into the new year. Gold was little changed after a five-day rally. Bitcoin hovered near the $38,000-mark.

Key events this week:

• OPEC+ meeting, Thursday
• Eurozone CPI, unemployment, Thursday
• US personal income, PCE deflator, initial jobless claims, pending home sales, Thursday
• China Caixin Manufacturing PMI, Friday
• Eurozone S&P Global Manufacturing PMI, Friday
• US construction spending, ISM Manufacturing, Friday
• Fed Chair Jerome Powell to participate in “fireside chat” in Atlanta, Friday
• Chicago Fed President Austan Goolsbee speaks, Friday

Some of the main moves in markets:

Stocks

• The Stoxx Europe 600 rose 0.3% as of 10:11 a.m. London time
• S&P 500 futures rose 0.2%
• Nasdaq 100 futures rose 0.2%
• Futures on the Dow Jones Industrial Average rose 0.4%
• The MSCI Asia Pacific Index rose 0.3%
• The MSCI Emerging Markets Index was little changed

Currencies

• The Bloomberg Dollar Spot Index rose 0.3%
• The euro fell 0.5% to $1.0918
• The Japanese yen fell 0.2% to 147.54 per dollar
• The offshore yuan was little changed at 7.1482 per dollar
• The British pound fell 0.4% to $1.2643

Cryptocurrencies

• Bitcoin was little changed at $37,705.59
• Ether was little changed at $2,028.5

Bonds

• The yield on 10-year Treasuries advanced three basis points to 4.29%
• Germany’s 10-year yield declined two basis points to 2.41%
• Britain’s 10-year yield advanced four basis points to 4.13%

Commodities

• Brent crude rose 1% to $83.95 a barrel
• Spot gold fell 0.3% to $2,038.31 an ounce

This story was produced with the assistance of Bloomberg Automation.