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Bonds Rally on Lower Inflation

The latest inflation data in the US and the Eurozone confirms an acceleration of the disinflation trend, leading to investors' bets that the tightening cycle is beginning to reverse. Despite warnings by central bankers that the battle against inflation is far from over and demands for a cautious approach, bond markets rallied, stocks advanced for a fifth consecutive week, and gold jumped to a record high.

Economic data in developed economies are having a stronger impact on markets than updates on geopolitical conflicts in the Middle East and Ukraine. Investors are anticipating a change in the interest rate outlook and are pricing in the peak of a two-year cycle. The risk-on sentiment is reflected in the VIX index, which dropped to the lowest level since the start of the pandemic, closing at 12.6%, nine figures lower year-to-date as the S&P 500 gained 19.7% in the same period.

Crude oil prices fell 2% after OPEC+ finally held their postponed meeting to determine the extension of voluntary output cuts. Gold rallied 3.4% to its all-time nominal record of $2,071.

Chinese stocks continue to decline following mixed data releases, and the crypto sector remains strong, with Bitcoin reaching an 18-month high of just under $40,000.

Israeli troops have resumed their attacks on Hamas after the hostage-for-prisoners exchange a few days ago. Israel is planning for a long war against terrorism that could last for at least one year. Washington accused Turkey of facilitating access to international funding for Hamas.

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Monetary Policy

There were three policy meetings in developed economies last week. The Reserve Bank of New Zealand kept rates unchanged at 5.5% as policymakers consider that inflation remains too high (5.6%), and interest rates should be maintained at restrictive levels. The RBNZ signalled that if inflationary pressures did not ease, the OCR rate would likely need to be increased further. The central bank’s target inflation rate is a 1-3% range.

The Bank of Korea also held its policy rate steady at 3.5% and signalled it will remain at the current level as inflation persists. The BoK upgraded next year’s inflation forecast to 2.6% and reduced its growth estimate to 2.1% for 2024. Inflation is running at 3.8%, still above the 2% target.

"It means we are going to take enough time until we are sure that inflation has sufficiently converged - it could be six months but realistically I'd say it's likely to be longer than that," Governor Rhee Chang-yong said.

Inflation Continues to Decline

Eurozone inflation dropped far more than anticipated in November to 2.4% YoY, the lowest reading since mid-2021, raising expectations that the ECB’s tightening cycle is near its peak. Inflation declined from October’s 2.9% print, mainly due to lower energy prices and stable food and services prices, with Italian consumer prices falling the most to 0.7%, and Germany’s easing to 2.3%, below the bloc’s average.

Core inflation also fell to 3.6% from 4.2% a month earlier, an indicator of key importance to ECB’s policymakers. President Lagarde warned that wage pressures remained strong and that victory against high inflation was far from over as the target is still 2%.

Inflation in the US is also cooling with PCE (personal consumption expenditures) prices unchanged in October, following a 0.4% rise in September. On an annual basis, headline PCE inflation rose by 3.0%, much lower than the 3.4% recorded a month earlier. Core PCE, the Fed’s preferred inflation gauge, also decelerated to 3.5% YoY. The Super Core PCE measure, which is PCE services minus energy and housing, rose by 3.9%, also cooler than a month earlier.

The latest data on the labour market, a closely watched indicator by the Fed, is gradually easing with a small uptick in jobless claims. Next week’s monthly employment report will be key. Despite a clear disinflationary trend, central bankers were cautious about mentions regarding the timing of interest rate cuts.

Interest Rates $

The inflation readings in the US and the Eurozone triggered strong demand for bonds, sending yields sharply lower. The disinflation trend was confirmed by last week’s updates, and investors responded with bets on fixed-income securities despite central bankers warning that it is too early to claim victory against inflation. Bond yields fell across tenors in every developed market.

The yield on 2-year US Notes declined by 39 basis points to 4.57%, while 10-year Treasuries closed 26 basis points lower at 4.22%, its lowest closing level in three months. 10-year TIPS, inflation-protected Treasuries, are yielding 2.0%, 41 basis points more than at the end of last year. The TIPS yield curve is reasonably flat, with 5-year bonds at 2.01% and 30-years at 2.11%. German government bonds saw similar moves with a steep drop in yields, but all leading curves in advanced economies remain in inverted mode.

Fitch upgraded Greece on Friday (after market close) to investment grade (BBB-) due to a favourable debt-servicing structure and a notable decline in general government debt. S&P also rates Greece at BBB-, and Moody’s maintains a sub-investment grade rating at Ba1.

The Dollar index was almost unchanged, showing mixed performance for major currency pairs. The Euro fell by half a per cent, cable appreciated by almost 0.8%, and the yen and the Kiwi dollar rallied around 2% last week.

The notable mover was gold, which climbed by 3.4% to close at $2,071, its highest level on record, driven by the outlook for interest rates. Additionally, the World Gold Council reported that central banks bought 800 tonnes of physical gold in the first nine months of the year, a 14% year-on-year increase, with China’s PBoC being the largest buyer.


On Thursday, following a delay of the OPEC+ meeting due to members’ differences, the group agreed to voluntary output cuts totalling around 2.2mbpd for early next year led by Saudi Arabia. Crude oil prices fell on the week as traders doubted the efficiency of the measure as the reduction was voluntary.

OPEC+ members account for more than 40% of global supply with 43mbpd, and the voluntary production cuts account for a total of 5mbpd. The decision to lower supply is aimed at supporting prices and stabilising the market after a 7% fall in the past four weeks. OPEC+ invited Brazil to join the group and an answer is expected soon.

In other energy markets, European gas prices fell almost 7% last week despite colder weather conditions as underground storage facilities were 97% full at the end of November, 12% higher than the five-year average. Ample supply pulled spot prices lower to close the week at €43.5/MWh. 

Corn futures fell to a three-year low on the back of increased supply from Brazil and the US and weak global demand. US farmers increased the size of corn acreage at the start of the year following strong prices at the end of 2022, but demand during 2023 has not risen enough to justify higher prices. On average (several futures contracts) corn has fallen 15% this year.

Coffee ‘C’ Arabica futures rallied almost 10% as data showed that inventories fell to a 24-year low of 224k bags. Coffee and cocoa inventories in EU warehouses are at risk of destruction due to a deforestation law implemented earlier this year. The law’s goal is to limit agricultural commodities harvested in regions where deforestation is not allowed. The countries concerned include Brazil, Vietnam, and Colombia for coffee plantations and Ivory Coast and Ghana for cocoa beans. Coffee’s March contract on the ICE US exchange closed at 184.3 cents per pound, a six-month high.

Upward Momentum Persists

Developed stock indexes traded firmer, with the S&P 500 gaining for a fifth consecutive week and value names outperforming growth companies. The Dow Jones Industrials rose by 2.4% last week to the highest level in nearly two years. The Nasdaq Composite and the S&P 500 indexes had their best month in November since mid-2020 with a 10.7% and 9% rally, respectively. Europe’s broad Stoxx 600 had its best month since January with a 6.5% rise, and the Dax and Ibex were the best-performing country indexes. 

The improved outlook for a lower interest rate environment led to a strong performance for property stocks, with Real Estate as the best-performing sector, rising by 4.7%. The weakest sector of the week was Communication Services, with a 2.5% drop, mostly on Meta’s 4% and Google’s 3.5% decline.