Oil rises amid risks of supply disruption across the Red Sea. The UK economy is close to recession

On Friday, the US PCE deflator for November fell to a 2-year low of 2.6% y/y from October’s revised 2.9% y/y and was weaker than expectations of 2.8% y/y. The core PCE deflator for November fell to 3.2% y/y from October’s revised 3.4% y/y and weaker than expected 3.3% y/y. Other economic indicators showed that US Durable Goods Orders for November rose sharply by 5.4% m/m, more than offsetting the revised 5.1% decline in October and exceeding expectations of 2.3%. US new home sales for November fell by 12.2% m/m to 590,000, much weaker than the report’s expectations of 690,000. The University of Michigan Consumer Sentiment Index for last December was revised by 0.3 points upward to a 5-month high of 69.7, which was stronger than market expectations. As a result, the economic reports led to a drop in government bond yields on Friday. Falling yields have been the main reason for the dollar’s decline and the stock market’s rise of about 15% since late October. Not only do they stimulate the economy by encouraging borrowing, but they also ease pressure on the financial system and lead to higher investment prices. The easing of rates comes amid hopes that inflation has cooled enough for the Federal Reserve to cut interest rates in the spring of 2024. Markets estimate the odds of a 25 bps rate cut at 7% for the January 30-31 FOMC meeting and 78% for the March 19-20 meeting.

Nike (NKE) is down by nearly 12% after posting a weak report. The company lowered its revenue forecast for the fiscal year, citing weakness in China, the negative impact of a stronger US dollar on exporters, and other concerns.

Canada’s economy changed little in October for the third straight month, missing growth forecasts. Economic growth has been slowed by the Bank of Canada’s 10 rate hikes between March 2022 and July. GDP unexpectedly declined in the third quarter, and the Central Bank expects growth to remain weak for several quarters. Money markets still believe there is about a 25% chance of a BoC rate cut in January and a 50% chance of a rate cut in March. A rate cut in April is discounted at 100%.

The Swiss franc’s exchange rate against the dollar jumped to its highest level since 2015 when the Swiss Central Bank abandoned its policy of curbing currency appreciation. Swiss inflation has remained within the central bank’s target range of 0 to 2% since June, reinforcing its decision to leave rates unchanged since the last hike at its quarterly meeting in June. The franc has outperformed all of its rival currencies from the G10 countries this year. But as the economy slows, markets expect the SNB to start cutting rates in March.

The UK is getting closer to a technical recession after revised data showed that the economy contracted in the previous quarter. UK GDP contracted by 0.1% between July and September, a downward revision from the previous estimate that growth was unchanged. This could put further pressure on the Bank of England to cut interest rates earlier than planned in an attempt to support the weakening economy. Cutting interest rates soon would be a win for the Sunak government as the UK enters an election year.

Geopolitical risks are bullish for crude oil prices after BP, along with Equinor and Euronav, suspended oil tanker shipments through the Red Sea due to increased attacks on vessels in the region. Attacks on oil tankers in the Middle East have forced shippers to divert cargoes around Africa instead of going through the Red Sea, disrupting crude supplies.

Asian markets were mostly up last week. Japan’s Nikkei 225 (JP225) gained 1.46%, China’s FTSE China A50 (CHA50) increased by 1.51% over 5 trading days, Hong Kong’s Hang Seng (HK50) ended the week down by 1.98%, and Australia’s ASX 200 (AU200) ended the week positive by 0.79%.

Japan announced cuts in overall spending for the first time in 12 years in its FY 2024/25 budget amid speculation that the central bank may soon abandon its ultra-easy monetary policy. The budget for the coming fiscal year, which starts in April, is estimated at 112.07 trillion yen ($787 billion), down 2% from the current year. However, the size of the budget has exceeded 110 trillion yen for two consecutive years amid pressure on military spending to combat threats from China and North Korea and social welfare spending for Japan’s rapidly aging society.

China’s yuan overtook the yen as the currency with the fourth-largest share of international payments in November, according to Swift data. The share of transactions involving the yuan among all currencies rose to 4.6% last month from 3.6% in October. The figure was a record high for the yuan and surpassed the yen’s 3.4%. The last time the yuan ranked fourth was in January 2022. The US dollar maintained its lead in November with 47%, followed by the euro and pound sterling with 23% and 7.15%, respectively.