Pimco CIO’s warning: ‘Excessive excitement risk on rate cut expectations next year’

【Bloomberg News,

1. Pimco CIO’s warning: ‘Excessive excitement risk on rate cut expectations next year’

Daniel Ibasin, chief investment officer (CIO) of Pimco, warned that the bond market is at risk of leaning too much toward expectations of a rate cut next year and that “the inflation problem is still far from being resolved. “Moving in the right direction is quite another way to reach the central bank’s 2% target,” Ivacine, who is responsible for the largest active bond fund, the roughly $126 billion Pimco Income Fund, said in an interview at Pimco’s headquarters in Newport Beach, California, on Tuesday local time, noting that inflation is expected to take a “clarge path” before it clearly slows down with the Fed’s goal. As U.S. inflation generally slowed last month, the market speculated that the Fed could start cutting interest rates as early as May next year. “There is a risk of getting a little too excited about next year’s rate cut,” Ivasin said, predicting that the Fed will take a very cautious stance on rate cuts until the economy weakens significantly. So it says it intends to reduce Pimco’s bond exposure if the bond rally goes too far.
Fed Chairman Jerome Powell said last week that there were several “head fakes” in which prices, which had stabilized, reversed and rose again, stressing that the Fed will “continue to move carefully.” As a result, he added that he would be wary of “both risks of misjudgment or excessive tightening with good indicators for months.” Jamie Dimon, CEO of JP Morgan, also warned that people are overreacting to short-term figures and that such actions should be stopped. “I’m worried that inflation won’t go away that quickly,” he said in an interview with El Financiero Bloomberg TV on the 14th. “The Fed is right to stop raising interest rates, but they may have to raise rates a little more.”

2. October PPI Surprise Drops in U.S…Retail sales are less sluggish than expected

Consumer price indicators released the previous day add to evidence of easing inflationary pressures across the economy as U.S. producer prices fell sharply last month since April 2020. In October, the producer price index (PPI) retreated 0.5% month-on-month on-month on the basis of final demand thanks to weak gasoline prices. The market had forecast a 0.1% gain. Year-over-year growth was 1.3%, a significant slowdown from the previous 2.2%. Excluding food and energy, core PPI growth remained unchanged from the previous month, reaching 2.4% year-on-year, the lowest since January 2021. The PPI report draws significant attention from Wall Street and Fed economists because the multiple sub-indices that make up the PPI are used to estimate the personal consumption expenditure (PCE) price index, the Fed’s preferred inflation indicator. Meanwhile, retail sales growth in October was -0.1% month-on-month, better than market expectations of -0.3% and the previous estimate was raised from 0.7% to 0.9%. Management group retail sales, which are included in the GDP estimate, rose 0.2%, signaling a smooth start to the fourth quarter following a strong third quarter. Recession concerns have been reversed as consumption, the main growth engine of the U.S. economy, has continued to exceed economists’ forecasts, but it is now unclear how much longer this strength will last. This is because high-interest rates, inflationary burdens remain, and the job market is cooling down. Bloomberg Economics said consumers are now starting to tighten their belts after significantly increasing spending in the previous few months, and diagnosed that economic activity is likely to fall due to sluggish consumer spending.

3. Fed’s ‘stand up’ policy warning

San Francisco Fed President Mary Daly warned in an interview with the Financial Times that if the Fed operates monetary policy in a “stop-start” way, it could eventually lose confidence. While evaluating the recent further retreat in inflation as very encouraging, they argue that the Fed should avoid having to raise interest rates again after hastily declaring victory in the fight against inflation. There is still uncertainty about whether the Fed’s efforts have been sufficient to return inflation to 2%, so the Fed does not rule out the possibility of an additional rate hike, stressing that it should “take time carefully. “We have to be brave enough to say ‘I don’t know’ and to say ‘I need time to do it properly’,” he said, pointing out that there is not enough information yet to determine whether the deflation trend is clearly heading for 2%. Currently, the risk of reviving inflation due to excessive tightening and insufficient policies is generally balanced.

4. 英Inflation at its lowest level in two years…June bets to cut interest rates next year

As inflation in the UK fell to its lowest level in two years last month, bets that the Bank of England (BOE) could start cutting interest rates as early as the middle of next year have been bolstered. October’s Consumer Price Index (CPI) growth was 4.6% year-on-year, a significant slowdown from 6.7% previously. In a Bloomberg pre-question survey, economists had forecast a median of 4.7%. This is the lowest figure since October 2021, and the fall in energy prices is the main effect. As a result, British Prime Minister Rishi Sunak will be able to meet his goal of halving inflation this year among the five priorities he promised ahead of the upcoming general elections. Global bond markets cheered and rallied against the unexpected U.S. CPI index the previous day, further solidifying the outlook that the BOE’s rate hike is also over, and traders now move up the expected timing of the first 25bp rate cut from August to June.
BOE President Andrew Bailey tried to draw a line on market expectations, saying it is still too early to discuss a rate cut after freezing the benchmark interest rate at a 15-year high on November 2. BOE Chief Economist Hugh Phille warned Tuesday that inflation and wages in the services sector remain “stubbornly high” and that price pressures could persist. With inflation still more than double the BOE’s 2% price stabilization target, policymakers say the “last leg” toward the target could be the most difficult. BOE and outside economists predict 2% will not be reached until 2025. Yael Selfein of KPMG UK said: “Today’s indicators look unlikely to change BOE’s clock. Interest rates are expected to remain at the current level before the second half of next year. Bloomberg Economics also pointed out that progress is slow, and it is difficult to expect a rate cut before the second half of next year.

5. Eurozone soft landing fears

Mario Centeno, a member of the European Central Bank’s (ECB) policy committee, pointed out that there are concerns that the eurozone economy will be able to make a soft landing due to sluggish growth in recent quarters. Centeno, who is also governor of Portugal’s central bank, said in a Bloomberg TV interview on Wednesday local time, “For the fifth consecutive quarter, quarterly (GDP) growth has not been good at 0%, 0.1%, and -0.1%, creating some anxiety about a soft landing,” adding, “I’m not worried about a recession, but I’m worried that downside risks may become a reality.” Among the ECB members, he is a dovish member and argues that monetary tightening has had about half the effect on the overall economy, and that he still has to wait longer. Inflation has made good progress so far, but there could be more resistance on the way to 2%, predicting that it will be 2%-3% for the time being, but probably closer to 3%. Shortly after his interview, the European Commission predicted that the eurozone’s economic growth rate, which hit -0.1% in the third quarter of this year, is expected to rebound to 0.2% in the fourth quarter amid the ECB’s aggressive tightening. Former ECB President Mario Draghi previously claimed last week that the eurozone is almost certain to suffer a recession by the end of the year. Eurozone October consumer inflation to be announced this week is expected to be at a two-year low of 2.9% year-on-year.