US data – Slowing down, but no panic
In the US, non-farm payroll data for November came in slightly above expectations. The payrolls print was 199k, vs 187k expected and 150k in October. Moreover, the unemployment rates was 0.2pp lower than expected, at 3.7%. Wage growth was slightly above expectations. All in, the numbers are still weaker than a few months ago: the 3m average of job creation is c.200k, a level consistent with a moderate slowdown, and private job creation keeps disappointing. The quit-to-fire ratio remains on a decreasing path. On the other hand, unemployment well below 4% will make it harder for the Fed to legimitise market expectations of a first cut in March. This week the focus will be on the CPI report on Tuesday, which should see core inflation hovering around 4% y/y, and retail sales on Thursday.
Fed – Mind the dot (plot)
On Wednesday, the Federal Reserve will hold its last meeting of the year. The policy rate is expected to be kept on hold at 5.25-5.50%. Forward guidance will be more important, as the market moved to a more dovish stance in November, and now prices almost five cuts in 2024. On one side, the Fed will need to turn more accommodative compared to the November meeting. Inflation came low in October, and NFP weakened in October and November. So both the 2.5% inflation and the 1.5% GDP growth forecast by the Fed in September for 2024 have room on the downside. The dot plot, on the other side, can disappoint market expectations. Fed forecasters expected 50bp in 2024 cuts back in September, and the recent dataflow hardly justifies a revision by more than one cut.
ECB – No time for hawks
The ECB will have a somewhat harder time in pushing back against hikes, in our view. At its Thursday meeting, the central bank will leave the deposit rate unchanged at 4% and will likely postpone the discussion on PEPP re-investments to early 2024. Still, the 3.2% inflation projections which worked as “hawkish anchor” in September looks pretty shaky, as CPI has consistently surprised on the downside across countries since summer. Also, economic data have been substantially worse than in US, with Germany already in recession territory, and PMIs showing a contraction across the board. We thus suspect that the pushback against the abundant cuts priced in the curve will be lower compared to the Fed.
Algebris Investments’ Global Credit Team
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