Europe follows the US higher after Powell’s less hawkish speech – Daily Market Brief, December 1, 2022

The Nasdaq jumped 4% yesterday, and the DAX is set to rise 1% on the open after Federal Reserve Chair Jerome Powell signaled that the Fed would slow the pace of rate hikes in December.

·         German retail sales fell -2.8% MoM in October, more than the 0.6% decline forecast

·         ECB could slow the pace of rate hikes after inflation cooled to 10% YoY in October

·         Core PCE expected to cool to 5% and could help Gold rise higher

US stocks booked a solid end to the month, with the S&P500 closing 3% higher yesterday while the Nasdaq closed up 4%; a fitting end to a strong month for equities.

Across November, the S&P500 rallied 5% and the Nasdaq 4.3%. The strong rally wasn’t limited to the US, with the DAX charging 8% higher across the month and the FTSE hitting a 6-month high. Meanwhile, the USD suffered its worst monthly performance in over a decade.

November’s rally was the market pricing expectations of a less hawkish Federal Reserve. The expectations were met last night when Federal Reserve Chair Jerome Powell signalled that the Fed was ready to downshift the pace of interest rate rises in the December meeting.  His comments come as inflation has started to cool and as policymakers have expressed concerns over the lag time between the rate hikes and the impact on the real economy. Powell’s speech cemented expectations for a 50 basis point hike over a 75 basis point hike on December 13-14.

Jerome Powell also said that interest rates would need to be raised by more than was expected in September, suggesting that the terminal rate would be higher. The market is not paying much attention to those comments.

USD/JPY has fallen below 136.00 to 3.5 month low as BoJ-Fed divergence narrows.

German retail sales

Strong gains on Wall Street are translating to a strong start for European indices, with the CAC set to open 0.7% higher and the DAX 1%, despite disappointing retail sales figures.

German retail sales fell -2.5% MoM in October after rising 0.9% in September. Expectations had been for a decline of -0.6%. The data highlights the squeeze on household incomes as they contend with elevated inflation and rising interest rates.

ECB

In Europe, there are also growing expectations that the ECB could slow the pace of rate hikes after data showed that eurozone inflation cooled by more than expected in November to 10% YoY, down from 10.6%. This was the first fall in inflation in 17 months and has raised expectations that the ECB will raise rates by 50 basis points rather than 75 at this month’s meeting.

EUR/USD is trading +0.5% above 1.0450 at the time of writing.

Looking ahead

The economic calendar is busy both in Europe and the US. Eurozone manufacturing PMI data will be in focus. However, these are second readings and are usually less market-moving than the preliminary readings.

Eurozone unemployment will also be under the spotlight after data yesterday showed that German unemployment unexpectedly increased.

US core PCE

CPI and PPI inflation data have shown that price increases are cooling. Will core PCE, the Federal Reserve’s preferred measure of inflation, show the same? Expectations are for core PCE to fall to 5% in October, down modestly from 5.1% in September.

A larger-than-forecast fall in core PCE could pull the USD lower, help stocks continue the rally, and lift Gold. Gold trades at $1780 at the time of writing, a 2-week high after rallying 8% across November.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters 

Original article provided by Trading Writers

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