There are just four days to Christmas Day, but celebrations have begun early as markets have continued to soar. Falling inflation within the Eurozone and UK has continued to spur markets on.
UK inflation was released on Wednesday, falling to 2-year lows. Headline inflation for November (year-on-year) fell to 3.9%, down from 4.6% the previous month. Core inflation (excludes food and energy prices) fell to 5.1%, beating expectations of 5.6% and October’s previous 5.7%. This strengthens the case for interest rate cuts by the Bank of England (BoE) next year and investors have begun to price rate cuts by the beginning of Q2 2024. UK government bonds, which have been unloved for much of the year, have performed very well over the last six weeks, and this week was no different. The yield on the 10-year UK government bond fell to 3.5%, after reaching 4.7% only weeks ago, as investors reacted to lower inflation and the expectation of rate cuts in early 2024.
Eurozone inflation for November was released on Tuesday, showing inflation is now only just above the 2% target. 2.4% was the final figure (year-on-year) which was in line with market expectations and a fall from the previous month’s 2.9%. European Central Bank (ECB) President, Christine Lagarde, has warned against investors celebrating too soon and pushed back on early interest rate cuts. However, the market has so far dismissed her comments, believing the ECB will be forced to cut rates early in 2024. The yield on the 10-year German Bund dropped below 2% this week.
Assessing Eurozone inflation at a country level, it is tough not to be optimistic with regards to inflation. Year-on-year inflation dropped in 21 of the EU’s member states and remained the same in three more. In the case of Italy, headline inflation (year-on-year) has dropped off a cliff since September, falling from 5.3% to 0.6% in November, again largely driven by energy. It appears that for certain nations, deflation could soon be more of a risk than elevated inflation.
US home sales have risen in November by 0.8% (month-on-month), breaking five consecutive monthly falls. The popular US 30-year fixed rate mortgage rose to a 23 year high of 7.8% in late October but has since dropped off to 6.6% as US treasury yields have fallen. The market expectation that interest rates will be cut in 2024 has also fuelled the housing market, however two thirds of home owners are currently locked into mortgages under 4%. This will mean mortgage rates will have to continue to fall before we see significant shifts in the housing market. US equities have continued to advance this week and bond yields fall, with the US 10-year yield now falling through 4%. The market is now pricing in six interest rate cuts in 2024.
In the US, two of Hollywood’s big five studios, Warner Bros and Paramount, have held discussions for a possible merger. The main motivation behind the deal is to combine the streaming services, Paramount Plus and Max (formerly HBO) in order to better rival Netflix and Disney Plus, who are dominating the streaming space. Netflix has recently cracked down on account password sharing, leading to more account openings and are up to 247.2m subscribers. The combination of Paramount Plus and Max subscribers would still be under 160m.
The strong moves in December have been pleasing to see, helping push portfolios to their highest levels in 2023. With plenty of cash still on the sidelines, M&A activity picking up and interest rate cuts potentially around the corner there is reason to believe this rally can continue into 2024.
This will be our last weekly round-up of 2023 and we would like to thank everyone for their support over the year.
Nathan Amaning, Investment Analyst.
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