Markets have firmly accepted the view that the Federal Reserve will not raise interest rates further and that 2024 will see a series of rate cuts starting in the second quarter. Currently around 90 basis points of cuts have been priced in, while we forecast 150 basis points for next year on the basis that consumer weakness is likely to be a key issue given the moderate growth in household real disposable income, less savings resources and less debt as interest rates continue to rise. . This should allow inflation to slow more quickly, giving the Federal Reserve more room to ease monetary policy.
Next week’s data stream includes the Fed’s favorite inflation measure, which we expect to show a 0.2% month-on-month rate of price increase. This is largely in line with what the central bank wants to see and, if repeated over time, would bring the annual rate of inflation as measured by the central personal consumption expenditure deflator back to 2%. We are also getting more housing numbers, which should indicate healthy new home sales, but this is due to the lack of availability of existing homes for sale. Prices should continue to rise in this environment, but as housebuilder confidence has plummeted in recent months, cracks are starting to form as the legacy of high borrowing costs hits harder. We will also closely monitor the ISM manufacturing index for any signs of recovery after being in contraction territory for the past 12 months.