US inflation data ‘keeps alive’ prospect of Federal Reserve rate cut – closing summary
US inflation data did not deliver a huge surprise on Friday, but the trajectory appeared to be enough to set up a Federal Reserve interest rate cut in March, several economists and investors argued.
Charles Hepworth, investment director at GAM Investments, said:
The Federal Reserve’s preferred measure of inflation was just released for the month of December 2023 and it keeps alive the chances of a rate cut in March.
Core PCE was forecast to show 0.2% growth over the month and it came in in-line with that and means the yearly PCE inflation rate is now 2.9% – much closer to the Fed’s target rate of 2% than it has been at any time over the last three years.”
Kieran Clancy, senior US economist at Pantheon Macroeconomics, a consultancy, said:
The bigger picture is that core goods inflation is now just above zero, core services inflation is falling and rent inflation is grinding lower, lagging private sector measures of rents for new tenants. The Fed’s inflation forecasts are stil too high – the December [summary of economic projections] shows core PCE inflation running above the 2% target until Q4 2026 – and will be revised down again in March, for the third successive quarter, giving the Fed the necessary hook on which to hang the first rate cut, either at that meeting or in May.
In the UK, the car industry has expressed its displeasure at the breakdown in talks with Canada over a trade deal to replace the pre-Brexit EU arrangement.
That gave zero tariffs for exports to Canada, but that deal will lapse in April, with little prospect of an agreement before then. The British farming lobby welcomed the continued protections against imports of hormone-fed beef, which is currently illegal in the UK.
In other business news:
The UK’s competition regulator will scrutinise the merger between the British mobile networks of Vodafone and Three.
Superdry has parted ways with its fourth finance boss in five years as losses widen at the troubled UK fashion brand.
The chief executive of the Telegraph has stepped down after seven years as the government prepares to launch a second investigation into public interest concerns raised by the Barclay family’s complex deal to transfer control of the titles to a UAE-backed consortium.
The Conservative peer Michelle Mone and her husband have reportedly had about £75m of assets frozen or restrained by a court order.
Shares in US chipmaker Intel slumped after it revealed a weaker forecast of earnings.
Germany’s consumers grew markedly more pessimistic looking ahead to February in a surprise that add further to concerns over a continued recession in the powerhouse of European output.
You can continue to follow the Guardian’s live coverage from around the world:
In US politics, Mitch McConnell walks back Trump-driven opposition to Ukraine and border deal
In our Europe coverage, French farmers protest as government prepares to announce new measures
In our coverage of the Middle East crisis: ICJ ruling a ‘reminder no state is above the law’, says Palestine, as Netanyahu says Israel is fighting a ‘just war’
In our coverage of the Russian war on Ukraine, a former Nato chief says Ukrainians are ‘fighting for us’ and ‘we need to do more’
Thank you for joining us this week. Next week we have: February! JJ
Key events
In Europe the UK’s FTSE 100 and France’s Cac 40 have both had strong days.
The FTSE 100 has gained 1.5%, or 114 points, to hit its highest since 12 January. Chemicals company Croda and drinks company Diageo have both gained more than 5%.
Fashion label Burberry, investment manager St James’s Place and pest controllers Rentokil Initial rounded up the top five gainers on Friday in London.
In France the Cac 40 gained a weighty 2.3% on Friday. It was helped by a 12% jump from LVMH, the conglomerate which owns the Louis Vuitton, Moët & Chandon and Hennessy brands, among many others.
LVMH reported a 10% gain in fourth quarter sales, sparking the surge in luxury goods companies that also benefited Burberry and other luxury brands in France including Kering and Hermès.
US stock market futures are about flat with 20 minutes to go until the opening bell on Wall Street.
The S&P 500, the leading benchmark for large US companies, will gain 0.01% at the open if futures are to be believed, while the Dow Jones industrial average will drop by 0.05%. The Nasdaq tech-focused index is on for a slightly bigger drop of 0.3%.
Will the latest US inflation data be enough to persuade the Federal Reserve that it is time to cut interest rates?
Andrew Hunter, deputy chief US economist at Capital Economics, a consultancy, said:
The December income and spending data confirm that core PCE inflation has been running at an annualised pace in line with the Fed’s 2% target for seven months now. This reiterates the message that there isn’t really any “last mile” of disinflation still to achieve and that, even with real economic growth still resilient, there is plenty of scope for the Fed to start cutting interest rates soon.
US core inflation dropped back in December
The Federal Reserve’s preferred measure of US inflation dropped slightly to 2.9% in December, almost in line with economists’ predictions.
The core personal consumption expenditure (PCE) index eased from 3.2% to 2.9% in December, according to the US Bureau of Economic Analysis (BEA). That was slightly below the 3% expected by economist. The core measure excludes volatile food and energy prices.
The standard PCE measure (including food and energy) remained unchanged at 2.6% in December.
BREAKING: December PCE inflation, the Fed’s preferred inflation measure, was unchanged at 2.6%, in-line with expectations.
Core PCE inflation fell to 2.9%, below expectations of 3.0%.
This is the lowest Core PCE inflation number since April 2021.
A welcomed sign by the Fed.
— The Kobeissi Letter (@KobeissiLetter) January 26, 2024
Financial markets are saying it’s a toss-up over whether the US Federal Reserve cuts interest rates at its meeting in March.
CME’s Fedwatch tool shows how market participants are betting on interest rate movements to gauge expectations. The below graph shows that for the March meeting the probability of a cut is seen as 49.3%, against 50.7% for the target range for the federal funds rate to stay on hold at between 5.25% and 5.5%.
There is a meeting of the Fed’s rate-setting federal open markets committee (FOMC) next week as well, but almost nobody believes the Fed will move that abruptly.
Economists and traders are gearing up for one of the key data points of this week: the most closely followed gauge of US inflation.
The snappily named core personal consumption expenditures (PCE) index is the measure of inflation that the Federal Reserve references the most when it is weighing up monetary policy. That means that any surprises can roil financial markets.
In November the core PCE inflation fell slightly to 0.1% month-on-month, down from 0.2% in October. The year-on-year reading is expected to dip from 3.2% to 3%, according to a poll of economists.
If that easing of inflationary pressure comes to pass, markets could price in more chance of a rate cut in March.
Bob Savage, head of markets strategy and insights at BNY Mellon, an investment bank, said the core PCE reading was “widely expected to drop to a level to justify the [Federal Reserve] easing in March at 3%, implying 1.9% six-month average annualized, below their target.”
The UK car industry has warned that British carmakers face the prospect of tariffs on exports to Canada after bilateral trade talks between the two countries fell through.
The British industry is able to sell cars to Canadians without tariffs because the two countries agreed to temporarily extend the privileges the UK had as a member of the EU. However, that tariff-free status is due to lapse in April unless the two countries can reach a bilateral deal.
Canada buys 1.3% of UK car exports – fewer than 8,000 cars – meaning it is only a small sliver of trade dominated by the EU and the US. Nevertheless, the prospect of new tariffs can only hurt those carmakers that sell to Canada.
Mike Hawes, the chief executive of the Society of Motor Manufacturers and Traders, said in a statement to Reuters:
If UK car exports can’t use EU parts and components to avoid additional duties it creates a risk that tariffs, potentially charged on top of luxury goods taxes, could be reintroduced.
Canada is an important market for UK car exports and, given the close ties between our two countries, the suspension of trade talks is especially disappointing and sends a signal that the UK’s world-class automotive products are not welcome in Canada.
Another technology darling (see Intel earlier) that has had a tricky few days is Tesla.
Elon Musk’s electric carmaker slumped by 12% on Thursday after missing analysts’ expectations for revenues in the final quarter of 2023.
The company has started deliveries of its Cypertruck pickup, and it is planning to make a long-teased mass-market model next year. Musk said he was “very excited” about the new model:
This is going to be very profound not just in the design of the vehicle itself but also in the design of the manufacturing system.
However, investors focused more on its profit margins, which have been under pressure as competition in the electric car market increases.
The price of Tesla shares soared during the coronavirus pandemic as huge monetary stimulus combined with a surge in interest in environmentally friendly technology. Yet even Musk warned that the share price was too high in May 2020, before the valuation broke $1tn in 2021 – making it worth more than most of the rest of the car industry combined.
Tesla’s shares were worth less than $55 in May 2020, but were worth $182.6 on Thursday evening, giving the company a market capitalisation of $572bn.
The Conservative peer Michelle Mone and her husband have reportedly had about £75m of assets frozen or restrained by a court order.
The pair face an investigation by the National Crime Agency into alleged medical equipment fraud. The Financial Times reported that the frozen assets included a six-bedroom central London townhouse, a country estate on the Isle of Man, and 15 accounts with Coutts, C Hoare & Co and Goldman Sachs International.
The court order was “a result of a consensual process during which negotiations took place with the CPS”, a spokesperson for Mone and Barrowman told the FT.
“It allows the wider businesses and assets of the Barrowman family to operate normally and free from any restrictions or uncertainties.
“Doug and Michelle did not contest the application and were happy to offer up these assets, which means they can begin the task of proving their innocence more quickly.”
You can read the full story here:
Daily Telegraph chief executive steps down ahead of takeover probe
Mark Sweney
The chief executive of the Telegraph has stepped down after seven years as the government prepares to launch a second investigation into public interest concerns raised by the Barclay family’s complex deal to transfer control of the titles to a UAE-backed consortium.
Nick Hugh, who has run Telegraph Media Group (TMG) since 2017 and was also the boss of parent company Press Acquisitions, has left the company with immediate effect and did not provide a comment in a statement announcing his departure.
However, in an internal announcement Hugh, who has driven led the Telegraph’s drive to more than 1 million print and digital subscribers, said it was an “honour and privilege” to lead a group of titles that have had “such an impact on society and democracy”.
“The interest in the ownership of TMG is testament to that fact,” said Hugh, who will be replaced by Anna Jones, the former chief executive of the UK publisher of Cosmopolitan, Men’s Health and Esquire.
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