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Ok. Got itDovish statements from US policy makers in particular set the scene for a further easing of bond yields, even if mixed US labour market data saw markets push out the timing of the first interest rate cut.
A dovish note fuels an end of year rally
Global equity and bond markets staged a meaningful rally in the final two months of the year, making way for positive fourth quarter and improved 12 month returns. While numerous fault lines remain and inflation targets are still elusive in the near term, policy makers did not provide enough push back at December meetings to change the market’s interpretation of peak interest rates with a pivot to follow. Dovish statements from US policy makers in particular set the scene for a further easing of bond yields, even if mixed US labour market data saw markets push out the timing of the first interest rate cut.
The oil price stayed in focus as tensions in the Middle East escalated towards the end of the year. Despite volatile trading sessions over the quarter, however, a lack of meaningful contagion in the Middle East on oil producers, weaker economic data and increased non-OPEC+ supply drove the oil price lower by 7,0% in December and down 19,2% over the quarter. Energy prices in other areas also moderated, with European gas prices trending 18,8% lower over the quarter. Attacks by Houthi rebels on commercial vessels in the Red Sea disrupted the key maritime trade route, leading to several international companies, including Maersk and BP to suspend and reroute shipments at great cost. A broadening of conflict in the region will be closely watched, not least so for implications for the inflation outlook.
Chinese inflation figures remained in deflationary territory, with headline CPI printing at -0,5% y-o-y for November. Inflation rates declined across European countries, with Eurozone headline inflation for November moderating to 2,4% y-o-y from 2,9% the previous month. Similarly, inflation in the UK slowed to 3,9% y-o-y from 4,6% in October, the lowest figure in nearly two years. Lower energy prices have helped the trajectory, although the withdrawal of energy subsidies across the region is likely to lift upcoming inflation figures.
US headline inflation moderated to 3,1% y-o-y in November, decelerating at a slower pace, while core inflation remained steady at 4,0%. Producer prices also slowed to 0,9% from 1,2% the prior month.
Data for the US personal consumption expenditure price index (PCE) was recorded at 2,6% (from 3,0% the previous month), with the annual rate for core PCE (the Fed’s preferred measure of inflation) slowing to 3,2%. In line with expectations, the US Federal Reserve (US Fed) kept interest rates on hold once again in December, at a multi decade high. A more dovish tone, however, was aligned with a forecast for three interest rate cuts projected over the coming year, an increase from previous projections. Similarly, the European Central Bank (ECB) held steady, a unanimous vote, but with more emphasis on keeping financial conditions tight.
Gains were seen across asset classes as the decline in bond yields persisted into year end. The S&P 500 gained 4,5% over the month, with even greater gains from the technology heavy Nasdaq 100 index, several European bourses and Japanese equity markets. Credit ratings agency, Moody’s, changed its outlook for China’s sovereign credit rating to negative, citing debt challenges and a modest growth outlook. Policy makers reinforced the commitment to an economic recovery, with the support of fiscal and monetary policy measures. Despite some improvement in economic data, domestic Chinese equity markets ended the month flat (0,2%) and down over the quarter (-3,6%). Emerging markets benefitted from a weaker US dollar, with the MSCI Emerging Markets index returning 7,9% over the quarter.
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Nedgroup Private Wealth (Pty) Ltd and its subsidiaries (Nedbank Private Wealth) issued this communication. Nedgroup Private Wealth is a subsidiary of Nedbank Group Limited, the holding company of Nedbank Limited. ‘Subsidiary’ and ‘holding company’ have the same meanings as in the Companies Act, 71 of 2008, and include foreign entities registered in terms of the act. There is an inherent risk in investing in any financial product. The information in this communication, including opinions, calculations, projections, monetary values and interest rates, are guidelines or estimations and for illustration purposes only. Nedbank Private Wealth is not offering or inviting anyone to conclude transactions and has no obligation to update the information in this communication. While every effort has been made to ensure the accuracy of the information, Nedbank Private Wealth and its employees, directors and agents accept no liability, whether direct, indirect or consequential, arising from any reliance on this information or from any action taken or transaction concluded as a result. Subsequent transactions are subject to the relevant terms and conditions, and all risks, including tax risk, lie with you. Nedbank Private Wealth recommends that, before concluding transactions, you obtain tax, accounting, financial and legal advice. Nedbank Private Wealth includes the following entities:
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