 Good morning, welcome to CMC markets on Friday the 15th of December and this weekly market update with me Michael Houston and this will be the final weekly market update of 2023. As we look ahead to the week beginning the 18th of December, look ahead to get towards the Bank of Japan rate decision and latest inflation numbers from not only the UK but also the EU and the US and we've certainly got quite a bit to get through today because we've seen record highs this week for not only the Dow but also for the DAX and the CAC4C in the wake of a surprise pivot on monetary policy from the Federal Reserve. I've been widely anticipated that Fed Chairman Jay Powell's main challenge on Wednesday would be in trying to push back on the idea that the US central bank was ready to cut rate sharply over the course of the next 12 months. Certainly earlier this month he certainly gave the distinct indication that the Fed was in no mood to consider cutting rates at this point or certainly not at this point but or at any point in the near future and to be quite honest why would they? You've got third quarter GDP at 5%. You've got weekly jobless claims which are still around about 200,000 and inflation has been slowing but it's still at 3.1% and with the sharp fall that we've seen in yields since November there was an expectation that the loosening in financial conditions might put the Fed's fight against inflation at risk. I mean let's look at where two-year Treasury yields were on the 18th of October well above 5% and now nearly 90 basis points lower at 4.35% and obviously that's the move in the last couple of days. So it's therefore quite surprising that the statement on Wednesday and the doplots actually embraced that narrative delivering an early Christmas present to the markets were turning the 2024 median for doplots from 5.1% to 4.6% back to where it had been in September while forecasting core PCE to decline to 2.4% and obviously the dollar sank along with yields and two-year yields fell 30 basis points to a six-month lower back to the levels we were back late May early June. So Huck it was expecting a hawkish pushback we didn't get that now obviously that then created a bit of a problem for the likes of Christine Lagarde at the ECB but also Andrew Bailey at the Bank of England because ultimately while the US economy is in much better shape I don't think there had been an expectation that the Fed would turn dovish and certainly I think when you look at the data that we've seen this morning out of the European Union we can see here that the manufacturing sector as well as the services sector for the EU is really struggling at the moment. If we look at France manufacturing PMI we can see that 42 and services is a 44.3 we look at Germany 43.1 on manufacturing 48.4 for services and yet Madam Lagarde would have us believe that the Euro area is not in a recession well got news for you I think you are and I think France already is French economy contracted 0.3% in Q3 those PMI numbers give no indication whatsoever that you're not going to see a contraction in Q4 and yet the ECB would have us believe that they're not going to be cutting rates any time soon when the Fed has indicated that it's likely to start cutting rates in the middle of next year nobody's buying it Christine you look at the numbers and the numbers don't lie and while we did see a little bit of a rebound in German yields on the back of that pushback yesterday we've since rolled over again on the German two-year we can see that there we dropped down but we actually pulled off the lows now we're back lower again on the back of those disappointing PMI numbers I think what was slightly more encouraging from the UK point of view was the fact that services PMI actually jumped to 52.7 in December from 50.9 in November so perhaps the UK might be able to avoid a recession there's no question that the economy is stagnating but is it in contraction we just might avoid it it's probably in stagnation more than anything else nonetheless the it's probably not a surprise that the Bank of England pushed back on the idea that they would be cutting rates simply on the basis of the fact that headline inflation in the UK is almost double what it is in the euro area and I think the Bank of England came in for a bit of criticism yesterday when three members of the MPC voted for another 25 basis point rate hike but I think there's probably an element or a method to the madness I don't think anyone for one moment thinks another rate hike is the solution but given the fact that people are very skeptical about guidance and the fact that the exchange rate is very much a key it's a key pressure valve when it comes to inflation perhaps in acting as hawkish outriders the pushback on rate cuts has helped to support the pound which when it's weak does tend to import an awful lot of inflation so hopefully putting a floor under the pound maybe in some way helping to try and help bring that headline number down because it's still much much higher in the UK than it is in the EU we've got EU CPI out next week for November that's expected to be confirmed at 2.4 percent with core prices coming in at 3.6 if we look at UK CPI that is at 4.6 percent in October is expected to fall ever so slightly to 4.4 percent so you can see why the Bank of England it probably doesn't want to come across as too dovish when you look at inflation numbers like that they want to basically push that number down even further and particularly when the fact that core still remains at 5 core CPI remains at 5.7 percent so perhaps that's not so much of a surprise and that's certainly borne out in this cable chart here where we've managed to break above the 61.8 Fibonacci retracement level from this down move here 127.30 I managed to hold above the 200 day moving average over the course of the past couple of days and the hope is that a weaker dollar will help to push the pound back up towards 130 and the highs that we saw back in July certainly I think a stronger pound is the thing that will help in bringing headline inflation down from its currently very elevated levels and if you actually look at grocery price inflation that's still at 9 percent so certainly given the fact that UK imports an awful lot of goods and services a firmer pound is probably a decent way of helping to achieve that. Against the euro we continue to range trade here we've managed to hold below this 100 day moving average here this acting as a bit of a cap and we are now starting to track lower on the back of that weaker economic data that we saw out of France and Germany this morning I'm still of the opinion that the ECB will be first to cut rates sometime in the new year probably around about the end of Q1 beginning of Q2 the Federal Reserve obviously has said that they will be cutting rates next year there is an added complication for the Fed in that they've got the elections presidential elections in November so the hope will be that they'll want to get all of their rate cuts out of the way probably before September so that they can set themselves apart and above the political process because make no bones about it if they start to brush up towards the presidential elections they will be accused of being political if they start cutting rates in the run up to that so we've seen a rig rebound in equity markets this week FTSE 100 has broken above its downtrend from its peaks the record highs back in February the big worry I have there is that it wasn't able to completely sustain all of that move but we are currently holding above the trend line now and I think as long as we can hold above these two moving averages here in this uptrend here then we could we'll see further gains in the FTSE 100 back to 7800 in this series of peaks through here this is a bit of a barrier we can see that in September 7750 there or thereabouts sorry you'll have to forgive me but my voice is slowly giving out I've not been well this week struggling a little bit with a cough and a cold so I'll try and try and bear with me sorry just had a bit of a cough there um the DAX record highs yesterday closed lower on the day will that undermine will this will this upward move this move to new record highs be undermined in the short to medium term as we head into 2024 I think momentum can continue to remain a positive here while we're above the 16500 so while we could see a period of consolidation into year end I will be surprised if the current upward momentum doesn't continue as long as we're above the 16500 level here but it is a concern that we weren't able to consolidate a lot of the gains that we saw yesterday similarly with the similarly with a cat cat on the branch index again saw a decent move higher yesterday we weren't able to hang on to those gains but we do appear to be starting to move higher again as well this morning Chinese retail sales and industrial production was a bit of a mixed bag Chinese authorities have injected extra money into the financial system 112 billion dollars worth in one one year in one year loans to try and boost the economy there whether or not they succeed is another matter but hopefully that will provide a bit of an end of year stimulus the nest act 100 is still below the record highs of 2021 so that's the next key resistance for me on the nest deck around about 16,760 s and p 500 similarly is still well short of its 2021 highs even though it's managed to get above its 2022 high so again momentum remains positive here but obviously valuations are going to play a part as we head into 2024 the Dow has hit record highs already and the biggest rebound this week has been in the US small caps the Russell 2000 but that still remains well below the levels it was back in 2021 and I think the big catalyst for a potential move higher on the Russell will be is if we can actually move above this series of peaks back from 2022 that's a big level just above 2000 if we get the same move through 2020 then we could well see the sharp move higher in the Russell as for currencies euro dollar the weakness of the dollar saw us move back above 110 we need to move back through this series of peaks in November to keep the upside momentum intact there's no reason to suppose that might not happen but for the fact that if we get further disappointing economic data out of Europe then an ECB rate cut and very rapid ECB rate cuts could start to follow in 2024 particularly if the data doesn't show any signs of picking up as we head into January and February I'm still in the opinion that we'll see big rate cuts from the ECB probably not so much from the Fed the market's pricing in five or six rate cuts from each central bank next year from the ECB from the Federal Reserve and from the Bank of England I must admit I struggle with the idea that we can see rate cuts in the early part of the year apart from the ECB certainly there is more downside risk on the ECB given the data that we're seeing the Bank of England will try and hold out as long as possible while inflation is trending at above four percent but hopefully as we start to go into January-February inflation will continue to slow and we'll start to get down below four percent into three three and a half and that should provide the catalyst for pricing for rate cuts towards the middle of next year Cable I've already talked about that a little bit we're back about 27.30, 127.30 which is 61.8 if we could hold above that we can certainly head back to 130. Now Dolly N this is a bit of this is a bit of a strange one this because earlier this month Bank of Japan Governor Ueda appeared to suggest that the Japanese central bank might be inclined to look at how it intends to navigate its way out of its current negative rate policy now this did prompt a sharp decline in the Dolly N rate back here on the 7th of December is traded paired back short yen positions in anticipation of a change a few days later the narrative shifted again with unnamed officials saying that the central bank saw little need to end negative rates this month and to be quite honest when you look at the data coming out of Japan and the fact that the Japanese economy contracted by 0.7% in Q3 there's really little need for a shift in monetary policy from the bank of Japan but given what Powell came it came out with earlier this week you'd have to say all bets are off when it comes to unexpected shifts in central bank rate policy nonetheless the barter to a change is likely to remain high given that China is already in deflation and the lex and then the likely next move in rates for the bank of Japan's closest peers is likely to be a rate cut so why would the bank of bank of Japan look at hiking rates when everyone else's cutting rates it does seem a little bit strange I mean given this week's events if someone had told me that the Federal Reserve would be going dovish and the ECB in the Bank of England would be going hawkish I would have said well surely you've got that the wrong way around because you've got weakness in Europe got a little bit of weakness in the UK you would think that the ECB in the Bank of England would be going dovish and the Federal Reserve would be maintaining a fairly hawkish status quo but that's not what happened so it's almost like the world is upside down anyway in some respects what the Fed has done this week is taking the pressure off the bank of Japan due to the slide that we've seen in the dollar and the rebound in the yen we've broken below the 200-day moving average on dollar yen consequently we could well see a move back towards 139 140 over the course of the next few days as markets continue to look at unwinding yen longs and dollar dollar longs and yen shorts as we head into year end so you could argue that perhaps we could well see further dollar weakness towards 140 135 140 over the course of the next few days irrespective of what the BOJ does in this meeting next week we've also got UK CPI coming out on the 20th as I say that's expected to slow from 4.6 to 4.4 and on the Friday 22nd we've got US core PCE deflator now in october the fed's preferred inflation measure slowed to 3.5 from 3.7 the lowest level since june 2021 the Federal Reserve is already projecting 2.4 by the end for this by the end of 2024 for this particular indicator but this week's numbers for core PCE I'd like to see another modest slowdown but only to around about 3.4 percent we have also seen good news this week in the context of slide in oil prices back towards the lows that we saw in the summer we've seen a little bit of a rebound in the past couple of days on the back of dollar weakness but also the fact that potential for rate cuts could act as an economic stimulus into 2024 and hopefully act as a as a bit of a pickup on the demand side so that's seen Brent crew prices rebound and obviously gold prices have also rebounded quite strongly as well rebounding off the 50 day moving average and potentially heading back to the record highs that we saw at the beginning of this month so I mean that's pretty much it for the almost the final it's not quite the final week of 2023 but it is as far as I'm concerned third quarter GDP the final third quarter GDP number out of the US that's due on the 21st revised up to 5.2 percent in the last number not really expecting to see many changes in that and on the earnings front we've got second quarter numbers from Nike and fourth quarter numbers from Carnival Corporation as a as a as a little bit of a side note I have written some end of year end of year articles which will be posted on the trading news and analysis section of the website over the course of the Christmas and New Year period and the topics that I will be covering I'll be looking ahead or I'll be looking back rather at the performance of equity markets this year projecting forward what could well happen into 2024 also looking at the prospects for the pound looking back at UK retail which is done very well this year looking at oil and gas the oil and gas sector looking at banks and the outlook for banking stocks over the course of the next six to twelve months once again as I wrap up this year because this will be the last one that I do this year I'd like to thank you all for your feedback this year thank you all for listening to my weekly ramblings I'd like to wish you all Merry Christmas a happy new year and here's to a successful 2024 once again thank you very much for listening this is Michael Houston signing off for 2023 and I will see you all next early next year in January 2024 thank you for listening