Hi there,

In today's newsletter, we cover three key financial stories. Firstly, the unexpected strengthening of the yen by 1.6% triggered a bond sell-off in Japan, raising concerns about global government rallies and central banks' stance on rate cuts. Secondly, we explore the bond market's surprising rally amid Federal Reserve speculation, signaling potential shifts in monetary policy and cautious optimism in equity markets. Lastly, signs of economic headwinds in the Euro-zone emerge as Germany and Italy face industrial production setbacks, hinting at a possible regional recession. We delve into the challenges, including Germany's unexpected production drop and global demand woes, raising questions about the Euro-zone's economic recovery.

– Matheus Zani & Daniel Porto

R&D Featured Article

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2. Market Turbulence: Bonds Rally Amidst Fed Speculation

The bond market experienced an unexpected turnaround after months of falling prices, driven by the Federal Reserve's rate hikes. By late October, 10-year Treasury yields surpassed 5%, heading for a third consecutive annual loss. However, signals of a potential shift emerged in November, as the Fed held interest rates steady and Chair Jerome Powell hinted at a possible end to aggressive monetary tightening. A subsequent flow of data indicated a cooling economy and faster-than-expected decline in inflation, leading to a robust bond rally in November, the most significant monthly returns since the mid-1980s. Stocks also surged amid speculation of a Fed pivot to rate cuts in the coming year.

Analysts and investors are increasingly confident in the possibility of rate cuts in 2024, with economic indicators pointing to disinflation and signs of fatigue in consumer spending and job growth. Futures traders are pricing in strong odds of a Fed rate cut by March, contributing to the rise in equity markets. However, there is a lingering risk that markets may have overestimated the situation. Despite the optimistic outlook, Fed Chair Powell cautioned against premature rate-cut speculation on December 1. The trajectory of Treasury yields remains crucial, impacting borrowing costs, and while markets anticipate a more benign scenario, some investors express doubts. Hedge fund manager Bill Ackman warns of economic risks without rate cuts, tempering enthusiasm in the equity market. Bondholders, however, found relief as losses stopped accumulating, with a gauge of investment-grade bonds showing a 2.5% gain by December, following a 13% loss in 2022. The direction of the stock market remains uncertain, with the potential for a soft or hard landing, while the bond market signals an end to the pain or potentially heralds deeper economic challenges.

3. Signs of Euro-zone Economic Headwinds

Industrial production in Germany and Italy faced setbacks in October, with a 0.4% decline in Germany and a 0.2% decrease in Italy, possibly indicating a regional recession. France and Spain reported similar outcomes earlier in the week. The Euro-zone's GDP contracted by 0.1% in Q3, raising concerns about a potential recession if the downturn persists. Germany's unexpected production drop reflects ongoing challenges from an energy crisis and weak global demand. The manufacturing sector, a key driver of Germany's economy, is grappling with expensive energy, higher interest rates, and cost-cutting measures by major industrial firms. While recent surveys suggest some stabilization, concerns about a recovery linger. France reported a 0.3% drop in production, attributed to lower energy and equipment goods output, while Italy's 0.2% decline was better than expected. Despite weak growth, the Bank of France downplayed recession concerns, describing it as a soft landing for the global and European economies.

Charted Territory

What to look out for today

USD Challenger Job Cuts
USD Initial Jobless Claims
CAD BoC’s Gravelle Speech
JPY Labour Cash Earnings
JPY Current Accounts
JPY Gross Domestic Product

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