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
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.
— The Kobeissi Letter (@KobeissiLetter) January 26, 2024
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.
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
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.
Shares in US chipmaker Intel have slumped in pre-market trading after it revealed a weaker forecast of earnings.
Chipmakers have been flying in recent years as shortages followed by the huge hype over artificial intelligence – which is hungry for processing power – prompted investors to pile into the sector.
Intel was one of the companies that underpinned the rise of the US tech sector to global dominance, but there have been concerns in recent years that it got complacent with its hold on the market for chips in desktop and laptop computers and servers. It largely missed the mobile phone revolution, and much younger rival Nvidia leads in the race to dominate the burgeoning artificial intelligence sector.
Pat Gelsinger, its chief executive, has launched an ambitious and costly effort to make its own cutting-edge chips once more.
Intel’s shares fell by 12% in pre-market trading on Friday.
Lucas Keh, semiconductors analyst at Third Bridge, a research provider, highlighted concerns about its sales of graphics processing units (GPUs) for datacentres, in comments to Reuters:
Although Intel beat estimates, investors’ disappointment in Intel’s datacentre GPU story’s growth can be primarily attributed to the slower-than-expected product delivery and ramp-up.
GPUs are often used alongside central processing units (CPUs), giving abilities that are better suited to artificial intelligence.
Updated
The UK’s Competition and Markets Authority said it was inviting views on how the Vodafone/Three merger would affect competition by 9 February.
The phase 1 investigation would need to be completed by 22 March.
The proposed merger has already proved controversial. The Balanced Economy Project, an anti-monopoly campaign group, wrote in the Guardian that it was “a classic monopolisation play that will have classic results – higher prices, stagnant investment, poor service and job cuts”.
The Guardian’s Nils Pratley pointed out in June that you only get one shot at a “four-to-three” consolidation – nobody is knocking down the door to get into the UK’s mature – i.e., not fast-growing – telecoms market.
At the moment the four are Vodafone UK, Three UK, BT/EE and Virgin Media O2. Vodafone and Three argue they are far behind the two leaders, earning well below their cost of capital, and that scale would help them to compete more effectively.
But Unite, one of the UK’s largest unions, said it would be “a terrible deal for Britain”. It believes that mobile network prices would go up by as much as £300 per year if the deal goes through.
Vodafone UK and Three merger to be investigated by competition regulator
The UK’s competition regulator has announced a formal investigation into the merger between Vodafone UK and Three that would create the biggest mobile operator in the country.
The Competition and Markets Authority (CMA) said it would look at the potential impact the proposed deal could have on competition for consumers and businesses.
The regulator has up to 40 working days for the “Phase 1” investigation to test whether the deal may lead to a “substantial lessening of competition”. If the CMA thinks that threshold has been met it could order the more in-depth “Phase 2” investigation.
If it still has concerns, the CMA has the power to order changes to the deal, or even block it altogether.
Sarah Cardell, chief executive of the CMA, said:
This deal would bring together two of the major players in the UK telecommunications market, which is critical to millions of everyday customers, businesses and the wider economy. The CMA will assess how this tie-up between rival networks could impact competition before deciding next steps.
We now have 40 working days to complete this formal Phase 1 investigation, before publishing our findings and any next steps.
There is something of a divergence on European stock markets this morning: while German’s Dax benchmark is still in the negative, down 0.1%, the French and British counterparts are both up by well over 1%.
The FTSE 100 in London has gained 1.1%, with Diageo the biggest gainer. The drinks maker was up 3.9% after French rival Remy Cointreau reported increased sales.
And in France the Cac 40 index (which does not include Remy Cointreau) gained 1.7%.
Part of the gain may be down to Christine Lagarde, the president of the European Central Bank, as markets increased their bets on rate cuts sooner rather than later after comments by her yesterday.
Analysts at Deutsche Bank led by Jim Reid wrote:
ECB President Lagarde struck a more dovish tone than expected, which led investors to dial up the chance of a rate cut as soon as April. So with hopes for a soft landing in the ascendancy, and yet more validation for near-term rate cuts, there was a significant cross-asset rally that saw equities and bonds post gains on both sides of the Atlantic.
Germany’s weak consumer confidence may be one factor holding back the Dax index today, but it is also worth remembering that it is bumping along less than 100 points shy of its all-time record (17,003 points) hit in mid-December. The prospect of rate cuts gets investors excited.
European inflation could fall faster than previously expected according to a survey of EU economists – the flip side of lower output in the bloc’s largest economy.
A survey by the European Central Bank said that headline inflation under the harmonised index of consumer products inflation was expected to decline from 2.4% in 2024 to 2.0% in both 2025 and 2026. Expectations for 2024 were revised down by 0.3 percentage points and those for 2025 by 0.1 percentage points.
The economists pointed to surprise lower inflation readings, lower oil prices and weaker economic activity. GDP growth of 0.6% in 2024, 1.3% in 2025 and 1.4% in 2026 was forecasted on average.
Drop in German consumer confidence prompts fears for recovery
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.
A consumer confidence index fell from a reading of -25.4 to -29.7 in the latest month, according to a survey by GfK which is closely followed by economists. The consensus expectation had been for an increase to -24.5 points.
Germany’s economy is in the doldrums, after output fell in 2023, and many economists expect a two-year recession with high energy costs and faltering industrial demand.
Melanie Debono, senior Europe economist at Pantheon Macroeconomics, a consultancy, said:
The plunge in the GfK measure of consumer confidence for February is not what we wanted to see; it casts a shadow over the consumer-led recovery in activity we are expecting at the start of the year. The fall in February more than reverses the increases seen in December and January and leaves the index at its lowest since March 2023.
Consumers’ willingness to save money was its highest since 2008, as they batten down the hatches.
The UK and Canada put in place interim arrangements after Brexit to keep trading terms the same while they negotiated. But the collapse in talks means that the relationship is worse than it was while the UK was part of the EU.
British cheese exporters will be among the sectors which are hit worst, with steeply rising tariffs. Canada’s dairy farmers argue that they should not be made worse off by the UK’s decision to leave the EU. The Canadian Broadcasting Corporation reported:
Representatives from the Dairy Farmers of Canada have argued the UK should be negotiating with the EU to recover its share (15%, based on British population) of the market access Canada handed over to foreign competitors under [trade deal] CETA.
“How is this the Canadian government’s problem to solve?” wrote Jacques Lefebvre, DFC’s CEO, in an email to CBC News.
European stock markets have opened with a mixed picture across the continent, although the UK’s FTSE 100 has jumped.
Here are the opening snaps from Reuters:
EUROPE’S STOXX 600 UP 0.2%
BRITAIN’S FTSE 100 UP 0.7%
FRANCE’S CAC 40 UP 0.5%, SPAIN’S IBEX UP 0.2%
EURO STOXX INDEX UP 0.1%; EURO ZONE BLUE CHIPS UP 0.1%
GERMANY’S DAX DOWN 0.1%
British farming lobby welcomes end of Canada trade talks
The end of trade talks between the UK and Canada is a “relief for farmers”, the head of the British National Farmers’ Union (NFU) has said.
Agricultural products represent a tiny proportion of output in the UK and Canada. Only 0.8% of UK GDP in 2022 and 1.7% of Canada in 2019 was from agriculture, forestry and fishing, according to the World Bank. However, the position of farmers is often a totemic issue in trade talks.
“Canadians love British cheese” but they “have been determined to do a contra” to get hormone-treated beef and certain pork products into the UK, Batters said. She said:
Trade on agricultural products is always the first thing to be discussed and the last thing to be agreed, and I’m pleased the government has stuck to its line and not given way.
Canada has played hard ball for a long time and it was always going to come to a crunch point.
Batters said compromise would have damaged the UK farming sector by producing a “two-tier” industry, with British farmers competing with Canadian farms with lower standards.
The below chart from the World Bank shows how the proportion of economic output accounted for by farming in the world has fallen markedly since the 1980s across the world.
Updated
UK-Canada trade talks break down in beef over cheese
The UK has walked away from post-Brexit trade talks with Canada in what one expert described as a “blow to the government’s trade story”.
Canada said the breakdown in talks came because the UK insisted on maintaining restrictions on its agricultural products, of which beef treated with hormones has been a persistent problem. The BBC on Friday reported that the beef dispute was a key factor in the failure of talks.
British cars will also face tariffs from the end of April when imported to Canada. Canada had already imposed a 245% tariff at the start of the year on British cheeses such as stilton and cheddar if they fell outside the already existing quota for non-EU imports.
In a statement posted on X, a British government spokesperson said “we reserve the right to pause negotiations with any country if progress is not being made”.
A spokesperson for Canadian trade minister Mary Ng said:
We are disappointed that negotiations with the UK are being paused. Their decision to continue to maintain market access barriers for our agriculture industry and unwillingness to reach a mutual agreement has only stalled negotiations.
Ng’s UK counterpart, Kemi Badenoch, did not appear to have commented on the breakdown in talks by Friday morning. Badenoch has been seen as a contender for the Conservative party leadership if Prime Minister Rishi Sunak is pushed aside, in part because of her work on trade deals.
David Henig, UK director for the European Centre For International Political Economy, a trade-focused thinktank, said it was “little surprise” that the UK had failed to reach a deal with “persistently tough negotiating partners”. He added it was “a blow to the government’s trade story.”
UK trade news! Canada have proved persistently tough negotiating partners for the UK, and this comes as little surprise. The existing replica of the EU agreement is presumed to hold for now, but must also raise a question on CPTPP ratification. https://t.co/NtPzeLf5ZY
— David Henig 🇺🇦 (@DavidHenigUK) January 25, 2024
The agenda
9am GMT: European Central Bank survey of professional forecasters
1:30pm GMT: US core personal consumption expenditure inflation price index (previous: 0.1%; consensus: 0.2%)
