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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Is eurozone inflation still falling?
Investors searching for reasons to believe central banks will start cutting interest rates sooner rather than later could be encouraged by a further drop in eurozone inflation when the latest price data is released on Thursday.
The harmonised index of consumer prices in the 20 countries that share the euro is set to fall from 2.9 per cent in October to 2.8 per cent in November, according to economists’ forecasts compiled by LSEG.
“We expect lower core inflation to be the main driver of lower headline with both goods and services inflation likely [to be] lower,” said UBS economist Anna Titareva, forecasting the core rate, excluding energy and food, would drop from 4.2 per cent to 3.7 per cent.
The expected decline in headline inflation would take it closer to the European Central Bank’s 2 per cent target. This could generate more excitement about how soon rate cuts will start. The ECB only stopped raising rates last month and investors are betting it could start cutting as early as April.
However, ECB president Christine Lagarde said last week it was still too early to “start declaring victory” in the push to tame inflation, warning price growth was set to reaccelerate “in the coming months” as recent disinflationary forces start to fade.
Lagarde said ECB rate-setters needed to see more evidence that wage growth was stalling before being sure that inflation is on track to drop to its target. This caution will have only been reinforced by negotiated wage data published by the ECB last week, showing it accelerated from 4.4 per cent in the second quarter to 4.7 per cent in the third quarter. Martin Arnold
Will the Fed’s inflation gauge show an easier pricing environment?
Thursday sees the release of US core personal consumption expenditures data including the Federal Reserve’s preferred inflation gauge, known as core PCE.
Price pressures eased more than expected in October, but the watchful tone of last week’s Federal Reserve meeting minutes signalled officials are unconvinced yet that inflation is clearly on course to return to the Fed’s 2 per cent target.
For October, core PCE, which strips out energy and food, is expected to have risen 0.2 per cent from September, down from a rate of 0.3 per cent, according to economists polled by Reuters. Year-on-year in September, the gauge rose 3.7 per cent. That matched the year-end projection by Fed committee members made that month. At the Fed’s last meeting however, staff forecast a rate of 3.5 per cent for December.
Several strategists have warned against assuming a steady easing in inflation from this point.
“While each softer inflation print does increase the chance that inflation may convincingly return to 2 per cent in the coming months without a deeper economic slowdown, we do not see that as likely,” wrote Citigroup economists. “Core inflation . . . still appears more volatile than usual month-to-month around a higher 3-4 per cent average pace.” Jennifer Hughes
Is Chinese manufacturing in a renewed downturn?
Data out on Thursday will hint at the efficacy of policymakers’ recent attempts to stimulate China’s stuttering economy.
Factory activity from the world’s second-largest economy expanded for the first time in almost half a year in September but contracted unexpectedly in October. November’s manufacturing purchasing managers’ index will go some way to answering whether last month was a blip or the start of a renewed downturn.
The non-manufacturing PMI last month came in at 50.6, marking a slight increase in activity. But that was the slowest rate of expansion so far this year, with economists having forecast a reading of 52.
“Most early indicators [of manufacturing activity] point to subdued momentum,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
He added that construction activity, which contributes to the non-manufacturing PMI, “probably dropped back” in November and that new housing starts also “almost certainly fell”, offsetting any acceleration in infrastructure construction.
Chinese policymakers have for months been trying “and largely failing” to stabilise the country’s struggling property market, said Evans-Pritchard. Downpayment requirements and purchase controls were relaxed in several major cities in September, and additional support continues to be rolled out. But the measures have so far “failed to put a floor beneath the volume of new home sales”.
China’s stop-start recovery since it abandoned strict coronavirus controls this year has weighed down on domestic stock markets, with global investors having now pulled about three-quarters of the money they invested during the first seven months of 2023.
Yet there are signs of improvement elsewhere. China’s consumer and industrial activity expanded faster than expected in October, and analysts at Barclays said they this month turned “more constructive” on growth in 2024 thanks in part to “some improvement” in relations between China and the US and officials having stuck with their 5 per cent target for annual gross domestic product. George Steer
