Markets Extend Gains Ahead of Holidays

For the week ending 22 December 2023

As of midday Friday, global equities were modestly higher on the week. The yield on the benchmark US 10-year Treasury note edged three basis points higher from a week ago, to 3.92%. The price of a barrel of West Texas Intermediate crude oil rose $3 to $74.70 amid repeated attacks on shipping in the Red Sea. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 13.8 from 12.2. 

Macro News

Fed’s favorite price measure falls

Market reaction to the lower-than-expected reading in core PCE was muted on Friday morning as markets had already “backed into” the data, extrapolating from other inflation measures. Still, the data will be welcomed by US Federal Reserve policymakers. From a year ago, core PCE rose 3.2% in November compared with a downwardly revised 3.4% in October. From a month ago, the price measure declined 0.1%. The odds of a Fed rate cut as early as March rose this week to 94%. 

IRS grants late-payers wiggle room

Americans who owe back taxes will be given an incentive to pay up after the Internal Revenue Service said Tuesday it would waive nearly $1 billion in late-payment penalties. About 4.6 million taxpayers delinquent for tax years 2020 and 2021 will be eligible for the penalty relief. The relief applies to those who owe under $100,000 and expires 1 April 2024. The IRS also announced this week that by repaying 80% of the pandemic-era employee retention tax credit, employers who were ineligible for the credit may avoid civil penalties.  

EU finance ministers agree on new fiscal rules

After months of negotiation, EU finance ministers have agreed to a new budget framework that would allow more flexibility in regard to fiscal adjustments, though the framework would put in place safeguards to ensure that countries with excessive deficits will reduce their debt and build up buffers to absorb future shocks. The package would give members of the European Union greater independence in negotiating debt and deficit plans with Brussels, but only within tight spending limits. Countries with debt ratios above 90% of GDP would be required to cut excess debt by one percentage point per year for the duration of their national spending plan. Countries with ratios between 60% and 90% would have to cut excess debt by half a percent per year. The deal must be approved by the European Parliament to become law.

Red Sea attacks reroutes shipping

Attacks on cargo ships in the Red Sea by Iranian-backed Houthi militias have prompted some of the world’s largest shipping companies to divert cargos around Africa, avoiding the Suez Canal along with the Red Sea, which leads to it. This will cause slower delivery times and increased costs. Approximately one-third of global container traffic typically transits the Suez, as does a significant portion of the world’s seaborne oil and natural gas. The move comes despite the United States announcing the formation of a ten-nation force to protect commercial shipping in the region. 

QUICK HITS

US Q3 GDP was revised down to a still-hefty 4.9% annual rate from an initial 5.2% reading. The PCE price index was revised down to 2% from 2.3%.

The Conference Board Leading Economic Index fell 0.5% in November, its twentieth straight monthly decline. However, the organization’s consumer confidence measure jumped in December to 110.7 from 101 last month. 

The Bank of Japan left its negative interest rate regime in place and offered no fresh guidance on the timing of rate increases. Markets expect a hike by the middle of 2024. 

US housing starts jumped nearly 15% in November, though building permits fell 2.5%. Existing home sales rose 0.8% last month, snapping a streak of five monthly declines in a row. However, new home sales declined 12.2% in November.

The minutes of the 6 December meeting of the Bank of Canada showed that policymakers felt additional rate hikes may be needed to restore price stability and said that wage growth of 4% to 5% is not consistent with reaching 2% inflation.

S&P Global raised Brazil’s sovereign debt rating to BB, two levels below investment grade, from BB- with a stable outlook. 

Eurozone inflation held steady at 2.4% in November, as did the core reading of 3.6%. 

Fitch Ratings affirmed Canada’s sovereign rating at AA+ with a stable outlook.

Consumer prices in the United Kingdom unexpectedly fell 0.2% in November and dropped to 3.9% from a year ago., from 4.6% in October. The odds increased that the Bank of England will cut rates early next year, with the first cut priced in for May. 

The yield on Germany’s 10-year bund dropped below 2% for the first time in nine months this week. The rate peaked near 3% in early October. 

Angola quit OPEC this week amid disagreement with Saudi Arabia over output quotas.

The US and Chinese militaries restored senior-level communications this week, mending a 16-month rupture. 

Revised Q3 GDP data saw the British economy slip into a modest 0.1% contraction. Q2 data were revised down to 0%, the Office for National Statistics said. 

US personal income rose 0.4% in November while October’s reading was revised up to 0.3%. Personal spending rose 0.2%.