Inflation data ahead as Fed comments lift rate cut hopes

European markets have enjoyed a strong start to the week, building off the 2% bump in the Hang Seng overnight. In a week that is stunted by the Thanksgiving celebrations, there is a degree of hope that perhaps the worst is behind us, and we can get into a more festive mood. Commentary from John Williams helped lift the spirits, with the prominent Fed speaker noting that a rate cut would be appropriate “in the near-term”. With the chance of a December rate cut jumping up to 75%, the tide appears to have turned in favour of additional easing next month. This week sees the release of both September and October core PCE inflation data, which will undoubtedly shed additional light on the Fed’s thinking when taken alongside the likes of the durable goods, GDP, and personal spending figures. Coming hot off the heels of last week’s mixed September jobs report, any particular signs of weakness are likely to be seen as a cause for optimism that we will see the Fed cut rates in December.

The UK budget will undoubtedly grab the headlines in Europe this week, with the Chancellor likely having to raise over £30 billion through a smorgasbord of fiscal measures in the absence of the big ticket income tax hike previously mooted. With the government having floated a host of prospective policies, there could be a degree of optimism once we see the uncertainty lifted and the list narrowed down. The recent weakness evident in UK GDP, house prices, retail sales, and PMI data highlights the negative impact this period of uncertainty has had on the economy, with businesses and individuals delaying investment until we see greater clarity.

The main event from the central bank perspective comes from the RBNZ, with the bank expected to cut rates by 25 basis points. Despite having already implemented a 50bp cut in October, recent surveys have shown that inflation expectations appear well anchored. Meanwhile, with unemployment on the rise, and a well publicised trend of emigration due to a lack of economic opportunities, there is a clear need to lift economic output. Nonetheless, for NZD traders, the market pricing signals that this could be the last or penultimate rate cut of the cycle, signalling a period of support coming into play before long. Thus, traders will be watching closely for signals over where the terminal rate lies at the RBNZ.

This week’s earnings are headed up by Chinese tech giant Alibaba; a stock which perfectly straddles two key topics that have been dominating the investor space of late. US futures point towards a positive start today for tech stocks, with traders hopeful that last week’s Nvidia earnings could finally see a line drawn under this latest period of AI concern. Notably, Friday saw rumours that Nvidia could be allowed to sell H200 chips in China, marking a massive new source of revenue considering the sheer size of the Chinese market. Alibaba shares have lost roughly 20% since the beginning of October, but pre-markets signal a sharp bump at the open as traders start to buy the dip. Notably, the recent crypto weakness also could play a part in sentiment, with the widespread popularity in this asset class meaning that declines will force traders and investors to recalibrate positions elsewhere in their portfolio. Thus, while we have grown accustomed to crypto taking its lead from risk attitudes seen in equity markets, the trajectory of bitcoin could play a significant role in driving year-end sentiment for tech stocks this time around.