Inflation in Retreat: Hopes for Interest Rate Cuts Revive Markets

The recent cooling of inflation in the USA and the UK has given new momentum to the bond markets. This decline supports speculations of imminent interest rate cuts by central banks. In the United States, the core consumer price index – which excludes food and energy costs – recorded a decline for the first time in six months. Responsible for this are more affordable hotel prices, smaller increases in medical services, and more moderate rents. In the UK, inflation surprisingly cooled for the first time in three months, aided by lower travel costs. Meanwhile, China's economy is exhibiting a dual track dynamic with real growth at 5% despite a decline in nominal growth to 4.2% due to deflationary influences. While trade primarily supported the economy, consumption remained rather subdued. In Europe, growth-related prospects are rather bleak: Germany's GDP declined for the second year in a row, posing a challenge for the government. In the UK, retail sales recorded an unexpected decline around Christmas time, which proved to be another setback for the economic hopes of the incumbent government. In Asia, Chinese growth enjoys strong export dynamics, yet geopolitical uncertainties and weakening domestic demand threaten prospective stability. The Middle East showed diplomatic progress: Israel and Hamas agreed on a six-week truce and began the release of hostages. The USA and Qatar played a central role in this mediation. In light of these developments, the IMF has raised its global growth forecast, as the weakening inflation gives central banks room for interest rate cuts. This is also reflected in Indonesia's surprising interest rate cut and the stability in Romania and South Korea.