Stocks continue to drift higher, bonds slightly more cautious

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It would appear that, at present, any news is good news for stock markets; US stocks are on track for their 7th straight week of gains. Everyone is looking forward to next year’s combination of inflation slowly falling back to the central bank’s 2% target, interest rates falling, and the global economy continuing to expand. Goldilocks porridge is just right again. Yesterday’s US inflation data came in pretty much as anticipated, with the headline rate falling from a prior 3.2% to 3.1%. Core CPI came in line at 4%. Yields at the shorter end of the curve continue to rise modestly, suggesting the bond market is becoming slightly more cautious about when the Fed’s first move on interest rates will be. The US dollar was largely unchanged on the news. Inflation rates going forward will be helped by further falls in the oil price as crude oil finished the day below $70 a barrel.

Closer to home, the UK unemployment rate remained at 4.2%. Year over year wage inflation fell and is now at 7.3%, which is well above the current rate of price inflation, which means wages are growing in real terms, which should further ease the much headlined cost of living crisis.

In the next 24 hours, the Fed, Bank of England and ECB all meet; the likelihood is the Chairmen will all sing from the same song sheet, with the possible exception of Christine Lagarde, the ECB chair as the euro area economy continues to struggle and inflation continues to fall faster than anticipated. Powell is likely to present a hawkish tone, warning markets to not get ahead of themselves when it comes to their expectations of bringing interest rates down. Stock markets have recently been looking through any hawkish comments. This morning, we get the latest UK industrial and manufacturing production data for November. Both are expected to decline modestly month over month. Gross Domestic Product for the UK economy is expected to grow by 0.5% year over year but remain flat in the third quarter.

Ahead of the outcome of the Fed meeting later today, Powell and his fellow members get the latest Producer Price data. The falling oil price should help falling input costs. We said a few weeks ago as stocks recovered their way back to previous highs, it felt there was little to unsettle markets into the year-end but, likewise, little to encourage them to go much higher. Well, it would appear the pain trade was higher, and it looks like European equities are on for another positive start to the day.