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Europe Fiscal Strategy Crisis And Rate Ruling in US

OECD Warns About Possible Global Rate Slowdown

Fed hints potential rate cuts following market shifts. U.S. economy strong at 5.2% growth, but OECD projects global slowdown.

Market Swings Trigger Rate Cut Expectations

In the financial markets, the Federal Reserve’s policy pivot takes center stage. Fed Governor Christopher Waller’s comments indicate confidence in the current policy to curb inflation without a substantial rise in unemployment. This hints at a potential shift towards rate cuts in the coming year, with Waller stating that there is “no reason” to insist on keeping rates “really high” if inflation continues to decline consistently.

Fed Futures Bet on Future Rate Cuts

Market reactions have been pronounced, with Treasury yields and the dollar experiencing significant declines. Fed futures now fully price in a quarter-point rate cut in May, with expectations of 110 basis points of rate cuts by the year-end. Bond markets have seen substantial moves, with two-year Treasury yields hitting four-month lows.

U.S. Economy Surges at 5.2% Growth Rate

Shifting to economic indicators, the U.S. economy surprised with a brisk 5.2% annual growth in the third quarter, up from the previous estimate of 4.9%. Consumer spending played a pivotal role, rising at a healthy 3.6% annual rate. The resilience of the U.S. economy, despite 11 interest rate hikes since March 2022, raises hopes for a soft landing.

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S&P 500 Climbs Despite Subdued Equity Market

The equity market, while reacting positively, has been more subdued compared to the bond market. The S&P 500 posted a modest gain, capping off November as the best month of the year with an 8.6% rise. The VIX volatility gauge remains near its lowest levels since the pandemic.

Global Markets Soar, China Lags

Global markets also felt the impact, with MSCI’s all-country stock index on track for its best month since late 2020. However, China’s stocks continue to underperform, lagging behind the MSCI global index by almost 25% for 2023, raising concerns about China’s economic recovery.

Real Estate Sector Woes in Europe

In Europe, attention turns to November’s inflation data, but concerns emerge with Austria’s Signa Holdings applying for self-administrated insolvency proceedings, reflecting potential challenges in the region’s real estate sector.

German Court Ruling Disrupts Fiscal Strategy

A crisis looms as Germany’s top court rules against special funds for large-scale investments, challenging the country’s fiscal strategy. This comes at a time when European countries are transitioning from years of generous stimulus to leaner government spending, reflecting a broader trend across the region.

OECD Forecasts Global Growth Slowdown

On the global front, the Organization for Economic Cooperation and Development (OECD) projects a slowdown in international growth to 2.7% in 2024, citing challenges from wars, persistent inflation, and continued high interest rates. The OECD anticipates a deceleration in the U.S. and Chinese economies next year, contributing to the overall global slowdown.

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