Global Economy & Markets, Weekly Roundup 05/12/23

Global bond yields declined further due to dovish central bank comments and lower-than-expected euro area inflation 

Key Takeaways
Euro area CPI surprised to the downside, with the headline index decelerating by -0.5 pps to +2.4% year-over-year, the lowest since July 2021, versus consensus expectations for +2.7%. In a similar vein, the core index declined by -0.6 pps to +3.6% year-over-year.   

On economic activity, the latest data have been mixed. The US ISM manufacturing was unchanged at 46.7 in November, meaningfully below the expansion/contraction threshold of 50.0, albeit the relatively more forward-looking component of new orders, partly improved to 48.3 from 45.5.   

The optimism for a “soft landing” of global economic activity remains in place. According to the OECD, after a strong H1:2023 during which global GDP posted a pre-pandemic “norm-like” growth of slightly above +3% in annualized terms, a gradual slowdown is anticipated to an annualized rate of just above +2.5%, before picking up from H2:2024.  

As a result, global real GDP growth will ease to +2.7% in 2024 from +2.9% in 2023, the weakest pace of growth since the global financial crisis excluding the first year of the pandemic, due to, inter alia, higher interest expenses. The aforementioned (mild) slowdown for GDP growth is estimated to be short-lived, with a pick-up to +3.0% in 2025, as real incomes recover, and monetary policy turns less restrictive.

The significant downward surprise for euro area inflation, resulted in investors revising their estimates towards monetary policy interest rate cuts starting sooner and proceeding faster. As a result, risk free rates declined, resulting in significantly lower government bond yields (US Treasury 10-year: 4.17%, low since September 2023 | Bund 10-year: 2.25% low since June 2023).

Falling inflation and “soft landing” (instead of “hard landing”) optimism also provided a slight positive backdrop for global equity markets, with the MSCI ACWI up by +0.8% (+15% YtD).

Market pricing, according to overnight index swaps, suggests that rate cuts by the ECB will total -125 bps by end-2024 (from -80 bps a week ago). In a similar note, according to Federal Funds Rate futures pricing, investors anticipate -125 bps of Federal Fund rate cuts by end-2024, instead of -100 bps a week ago.

On Monday (December 4th), Greece’s government bond yield spreads against the Bund narrowed, by -10 bps in the 10-year tenor to 112 bps, the lowest since October 2021, after Fitch Ratings upgraded the country’s credit rating late on Friday December 1st, to BBB- (stable outlook). 

That development (the 2nd of the “Big-3” rating agencies assigning IG status to Greece), potentially paves the way for an expansion in the investor base for Greek financial assets and improving funding conditions for Greek non-financial corporations and financial institutions. 

The rating upgrade came on the back, inter alia, of robust fiscal consolidation, with the primary budget surplus set to reach +1.1% of GDP in 2023 and average +2.2% in 2024-2025 according to Fitch Ratings and favorable public debt dynamics. Regarding the latter, Fitch forecasts that the ratio of public debt to GDP will fall to 160.8% in 2023 and 141.2% in 2027, from 171.4% in 2022. 
Global Economy & Markets, Weekly Roundup 05/12/23