December 20, 2023

“Sterling has fallen sharply this morning as UK consumer price inflation in December cooled to the slowest rate in over two years, bolstering expectations for Bank of England rate cuts beginning next summer. Policymakers are unlikely to declare victory any time soon, however, with the 2% target still distant.”

Sam Cornford – Head of Trading

Main Headlines

The Biden administration announced on Tuesday that it is initiating the first stages of developing essential standards and guidance for the safe deployment of generative artificial intelligence (AI). The National Institute of Standards and Technology (NIST) under the Commerce Department stated that it is soliciting public input until 2^nd February. This input will be crucial for conducting testing to ensure the safety of AI systems. NIST is actively working on guidelines for evaluating AI, aiming to facilitate the development of standards and provide testing environments for the comprehensive evaluation of AI systems.

The UK’s financial watchdog, the Financial Conduct Authority (FCA), has put forward a proposal for a single entry point to simplify and expedite company listings, marking the most significant overhaul in three decades. This initiative aims to enhance London’s competitiveness with New York and European Union centres post-Brexit. Between 2015 and 2020, Britain accounted for only 5% of global IPOs, with the number of listings decreasing by approximately 40% since the peak in 2008. The FCA’s proposal involves merging the more stringent ‘premium’ listing on the London Stock Exchange with the less burdensome standard listing, creating a unified set of criteria under a ‘commercial’ company listing.

GBP

Sterling slumped 0.6% this morning after UK CPI inflation cooled sharply in November, erasing yesterday’s gains driven by slower rate cut expectations next year relative to the ECB and Fed. The headline year-on-year figure declined from 4.6% to 3.9% – well below the 4.3% consensus – but most interestingly, prices actually fell by 0.2% month-on-month compared to October. The fall is broad across different categories, with large downward contributions from transport, recreation and culture, and food and non-alcoholic beverages. The Bank of England will be particularly encouraged by the drop in the less volatile core measure (excluding food and energy) from 5.7% to 5.1%, and by the easing in services inflation to 6.3%. That said, policymakers are unlikely to hint at sooner rate cuts, given their hawkish stance and expectations that price growth should tick back up in the new year. For the market, however, this number will bolster bets for policy easing in the summer.

EUR

The euro has steadied overnight following a 0.5% rally yesterday amid a broad-based decline in the dollar. The final CPI estimate for November remained unchanged at 2.4%, reinforcing the notion that sharply lower inflation will spur rate cuts as soon as the spring. Data out of Germany this morning also indicated a bottoming out in consumer pessimism after it reached a trough in the previous month. The euro macroeconomic calendar is all but wrapped up for the festive period by now, although this will certainly not dampen volatility ahead of some key US data releases and thinner trading volumes that open the door for big swings.

USD

The dollar hovers above a four-month low with jobless claims and core PCE in the sights for investors towards the end of this week. Following the sharp weakening last week, greenlit by Fed projections for cuts next year, markets have continued to latch on to any signal pointing towards dovish policymaker attitudes or a potential soft-landing, fuelling declines in US Treasury yields and a rally in equities that have sent multiple Wall St indices to all-time highs. Yesterday, markets dismissed several hawkish warnings again, instead opting to absorb Barkin’s comments, who said that they are making good progress on inflation, although declined to discuss how this changed the expected rate path for next year. Meanwhile, the greenback failed to draw any notable strength from an uptick in residential building construction in the property sector to a six-month high. In today’s diary, the Conference Board’s consumer confidence survey is due to improve this month when it is released this afternoon.

Markets

European equity futures saw a slight increase, along with Treasuries, as traders appeared to dismiss warnings from policymakers attempting to manage expectations for US interest rate cuts. Benchmarks in Asia showed gains following a rally on Wall Street on Tuesday, while indicators in China experienced marginal declines. Treasury 10-year yields fell by three basis points to 3.91%.

Main Economic Data/Central Banks/Government (All Times CET)

8:00am.: UK CPI Inflation
8:00am.: German GfK Consumer Climate
8:00am.: German CPI
10:00am.: Eurozone Current Account
3:00pm.: SNB Quarterly Bulletin
4:00pm.: US CB Consumer Confidence
4:00pm.: US Existing Home Sales
4:30pm.: US Crude Oil Inventories
6:00pm: FOMC Member Goolsbee speaks

To learn more about Ballinger Group, please visit our website or our LinkedIn page.