What has happened

The yo-yo of bond market optimism continued yesterday with a fresh rally within bond markets in Europe and the US. Signs of US labour market easing was the main catalyst for this resurgence in the dovish pivot narrative with markets upgrading the chance of a soft-landing outcome.

ECB speakers

While the Fed is in blackout, markets have had to rely more heavily on European central bankers for an interpretation of recent macroeconomic data and bond market implied pricing of interest rate cuts. The ECB’s Schnabel delivered on the market’s desire for dovish commentary, saying that the November flash CPI reading was ‘a very pleasant surprise’ and noting that the recent path of inflation markets a ‘further rate increase rather unlikely.’ Bond investors took this as an increased chance of an ECB interest rate cut with a 25bp interest rate cut almost fully priced in by March. Few ECB speakers are talking about interest rate cuts yet so that’s quite a narrow window for the ECB to be convinced that disinflation is a sustained theme.

JOLTS data

The US JOLTS job report showed a rapid fall in job openings versus market expectations. The numbers are now at their lowest level in 2 ½ years. The all-important ratio of job openings to unemployed people moved down to 1.34, far lower than earlier in 2023 but still higher than the pre pandemic average of 1.2. This represents good news for the soft-landing narrative as a cooling jobs market will be essential to keep demand led inflation under control.

What does Brooks Macdonald think

One of the challenges is that all hard-landings (recessions) need to cross through a benign soft-landing scenario on their way to a more troubling economic outlook. For the time being, bad economic news is good news for the markets as it increases the probability of a cooling inflationary backdrop and therefore looser monetary policy. Should the downward momentum in economic growth continue however, investors could begin to worry more about a hard-landing scenario making bad economic news a double-edged sword. For the time being however, investors are pleased to see a slowing US jobs market as they are more concerned about inflation than economic growth.

Index		1 Day	1 Week	1 Month	YTD
		TR	TR	TR	TR
MSCI AC World GBP		0.0%	1.0%	3.0%	11.8%
MSCI UK GBP		-0.3%	0.5%	1.5%	4.0%
MSCI USA GBP		0.1%	1.2%	3.4%	16.1%
MSCI EMU GBP		0.6%	1.4%	5.1%	13.0%
MSCI AC Asia Pacific ex Japan GBP		-0.9%	-0.8%	0.2%	-3.2%
MSCI Japan GBP		-0.6%	-0.2%	0.8%	9.7%
MSCI Emerging Markets GBP		-0.6%	-0.6%	0.9%	0.0%
Bloomberg Sterling Gilts GBP		1.3%	1.0%	2.5%	-0.9%
Bloomberg Sterling Corps GBP		0.9%	1.1%	3.0%	5.6%
WTI Oil GBP		-0.8%	-4.6%	-11.7%	-13.4%
Dollar per Sterling		-0.3%	-0.8%	1.7%	4.2%
Euro per Sterling		0.1%	1.0%	1.1%	3.3%
MSCI PIMFA Income GBP		0.2%	0.7%	2.1%	5.5%
MSCI PIMFA Balanced GBP		0.1%	0.7%	2.1%	6.4%
MSCI PIMFA Growth GBP		-0.1%	0.7%	2.2%	7.7%

Index		1 Day	1 Week	1 Month	YTD
		TR	TR	TR	TR
MSCI AC World USD		-0.2%	0.2%	4.7%	16.4%
MSCI UK USD		-0.5%	-0.3%	3.2%	8.3%
MSCI USA USD		-0.1%	0.4%	5.2%	20.9%
MSCI EMU USD		0.4%	0.6%	6.9%	17.7%
MSCI AC Asia Pacific ex Japan USD		-1.1%	-1.6%	1.9%	0.8%
MSCI Japan USD		-0.8%	-1.0%	2.6%	14.2%
MSCI Emerging Markets USD		-0.8%	-1.3%	2.6%	4.1%
Bloomberg Sterling Gilts USD		1.3%	0.5%	4.5%	3.9%
Bloomberg Sterling Corps USD		0.9%	0.6%	5.0%	10.7%
WTI Oil USD		-1.0%	-5.4%	-10.2%	-9.9%
Dollar per Sterling		-0.3%	-0.8%	1.7%	4.2%
Euro per Sterling		0.1%	1.0%	1.1%	3.3%
MSCI PIMFA Income USD		0.0%	-0.1%	3.8%	9.8%
MSCI PIMFA Balanced USD		-0.1%	-0.1%	3.9%	10.8%
MSCI PIMFA Growth USD		-0.3%	-0.1%	4.0%	12.1%

Bloomberg as at 6/12/2023. TR denotes Net Total Return

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References

Source: https://www.brooksmacdonald.com/insights/daily-investment-bulletin