US equities responded positively after the encouraging economic data. The market is expecting the hiking cycle is end and disinflation is underway. The market is pricing a 30% likelihood of a rate cut in Q1 2024 now. The US government has avoided a shutdown by approving the funding plan.
Inflation: Headline CPI came in lower than expected (3.24% actual vs 3.3% expected) and lower than the previous month (3.24% Oct vs 3.7% Sep). The decline was driven by travel, health insurance, auto and oil prices. Other than the US, two-thirds of 30 other countries, including the UK, eurozone, and emerging countries have also reported softer-than-expected inflation.
Economic Data: Mortgage rate dropped after the weak inflation data, which is favorable to the US housing data. US housing starts came in higher than expected (1.9% actual vs -0.6% expected). It is a relief for the real estate sector, with a real estate index increased 4.7% while a commercial real estate index increased 4.5%.
Long-end Yield: The recent indications of cooling inflation have led to a decrease in long-term Treasury yields. Specifically, the benchmark 10Y reached an intraday low of approximately 4.40% on Friday, the lowest level since mid-September. The decline in yields can be attributed to the market's response to the signals of reduced inflationary pressures.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
UBS: The market has responded more to the expectation for monetary easing than worries that slower growth would drag earnings. S&P500 is up 7.5% this month.
Goldman Sachs: We expect the S&P500 will end 2024 at 4700. The mega-tech companies are expected to continue to outperform given the high expected growth in sales, reinvestment ratio, margin and strength in the balance sheet. The 7 mega-tech firms have returned 73% YTD while the other 473 firms in the S&P500 have returned just 6%.
Goldman Sachs: As the market is expecting a higher likelihood of recession and dropping inflation, it is pricing more rate cuts in the coming year relative to last month. It is pricing 9bps cuts in Q1 2024, 27bps in Q2 2024 and 65bps in the second half of 2024.
Standard Chartered: US and European government bonds are attractive in the 6-12 months term. It is supported by the view of peaked policy rates in the US and Eurozone, and their economies are likely to slow notably in the coming year.
J.P. Morgan: The net compensation and hiring plans dropped significantly, indicating the moderation in the job market. It was also reiterated in the jobs report in October - lower-than-expected nonfarm payroll and decelerating growth in hourly earnings.
Barclays: A pullback in growth is expected in 2024. Although we expect a lower growth rate in the coming year, the forecast is still stronger than the call a year ago, suggesting how surprisingly resilient the economy has been.
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