The yield on the 10-year Treasury edged lower on Monday to 4.2%, down from a 16-year high struck in late October.
Behind the positive sentiment is the expectation of continued good news on inflation that would allow central banks to bring rates lower swiftly in the new year. The extent of this enthusiasm will be put to the test this week with the release of the US consumer price index (CPI) for November, along with policy decisions from both the Federal Reserve and the European Central Bank.
We continue to expect a benign macroeconomic outlook heading into 2024. But with so much good news already priced in, there is a risk that even modest disappointments could lead to market volatility.
Investors will be looking for further good news on US inflation to offset recent concerns over the continued strength of the labor market. Confidence had started to build that employment conditions were easing gradually, removing a major impediment to Fed rate cuts for 2024. This optimism was dented by data on Friday pointing to more robust job creation than had been expected in November, while unemployment fell back to 3.7% from 3.9%.
So, investors will be hoping for reassurance from today’s inflation data that price pressures are easing sufficiently to justify decisive Fed rate cuts next year. The consensus forecast is for headline annual inflation to slow to 3.1% for November, from 3.2% in the prior month and a peak of 9.1% in June 2022. Economists expect the core rate, excluding food…
