Take Five: That rate cut trade

LONDON (Reuters) – Markets are keen to trade rate cuts and big central banks are pushing back, shining a new light on upcoming data in that tug of war.

China continues to battle its property demons while it is Italy’s turn to be in the eye of the ratings agencies.

Here is your week-ahead primer from Lewis Krauskopf in New York, Kevin Buckland in Tokyo, Danilo Masoni in Milan and Alun John and Dhara Ranasinghe in London.

1/ INFLATION WATCH

A slew of Federal Reserve policymakers including boss Jerome Powell say they are still not sure that rates are high enough to finish the battle with inflation.

Traders, anticipating roughly three quarter-point Fed rate cuts next year, will now turn their attention to Tuesday’s inflation data to confirm their view on the outlook.

The October consumer price index is expected to have climbed 0.1% on a monthly basis, according to a Reuters poll. September’s CPI rose 0.4% on a surprise surge in rental costs, but also showed a moderation in underlying inflation pressures.

A sharper cooling could fan the peak rate talk, fuelled by October’s employment report, which pointed to an easing in labor markets.

    A federal government shutdown meanwhile looms if lawmakers in Washington are unable to pass a measure to at least temporarily fund operations before a Nov. 17 deadline.

Fresh wrangling could renew concerns about governance in the world’s biggest economy.

2/ TROUBLE AT HOME

    The question of who will be left holding the bag filled with China’s property mess may have gone some way to being answered – much to the chagrin of Ping An shareholders.

    Reuters reports that Beijing asked the insurer to take control of ailing Country Garden, China’s biggest private developer.

    Ping An shares dived to one-year lows, in spite of the company’s denials. Worries about the sector continue to weigh.

Government measures to shore up the economy have repeatedly fallen flat this year, which has not deterred China’s central bank from professing the 5% growth target can be achieved, a view the IMF shares.

    Data has pointed the other way, with more evidence of slowing factories and tepid consumption. Markets will see Wednesday if that trend continues, with October retail sales and industrial production data.   

3/ ONCE BITTEN

The robust dollar suddenly appears vulnerable to the push and pull in the market’s Fed rate cut bets.

A bounce thanks to Fed chief Powell pushing back on talk that rates have peaked may not last as dollar bears grow confident that rate cuts are likely next year.

Take the latest Reuters poll: nearly two-thirds of analysts say the dollar is likely to trade lower by year-end.

Long dollar positions are decreasing. SocGen reckons dollar/yen could fall back to around 145-150 after trading as high as 151.74 recently.

Rate-cut talk is dollar negative but a sharply slowing U.S. economy that hurts the world could quickly bring back demand for the safe-haven currency.

4/ SUNAK’S SCORECARD

UK inflation has been stickier than in most developed economies.

That is bad news for consumers, the Bank of England, and Prime Minister Rishi Sunak, who pledged at the start of 2023 to halve inflation, then running at over 10%, by year end.

October CPI data, due on Wednesday, will show whether Sunak is starting to get close to that goal. A fall from September’s 6.7% is likely, but by how much?

The data could also help justify, or challenge, recent remarks from BoE chief economist Huw Pill that mid-2024 could be the time for rate cuts. Latest British jobs figures, retail sales and the producer price index are also on the calendar.

Euro zone flash third-quarter GDP data out on Tuesday is in focus given signs of economic weakness in Germany, the bloc’s largest economy, and described by some this year as the “sick man of Europe.”

5/ ITALY RISK

Italy is back on the worry list with many investors concerned about growing fiscal risks steering clear of big exposure to the euro zone’s third-largest economy.

Moody’s (NYSE:), which rates Italy just one notch above junk with a negative outlook, reviews the sovereign on Nov. 17. Fitch’s latest review is due after Friday’s market close.

A Moody’s downgrade is the bigger risk given its Italy outlook and such a move could see the closely-watched yield gap over Germany pop to 250 bps, with potential ramifications across the periphery.

Italian stocks meanwhile are trading at a 50% discount to world stocks, the widest gap since 1988.

There is a silver lining. Stronger balance sheets mean banks are less vulnerable to bond turmoil than in the past and with parts of the equity market so deeply discounted, some see a buying opportunity that cannot be ignored.

(Graphics by Sumanta Sen, Pasit Kongkunakornkul, Riddhima Talwani, Prinz Magtulis and Kripa Jayaram; Compiled by Dhara Ranasinghe; Editing by Tomasz Janowski)

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