Cautious Fed Signals Fewer 2025 Cuts

For the week ending 20 December 2024

As of midday Friday, global equities were substantially lower on the week after a hawkish outlook from the US Federal Reserve. The yield on the US 10-year Treasury note rose 0.14% from last Friday to 4.50%, having traded as high as 4.59% on Thursday. The price of a barrel of West Texas Intermediate crude oil fell $1.60 from a week ago to $69.10. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 19.6 from 14.15 last week. 

MACRO NEWS

Fed cuts rates but next move unclear

The Fed delivered a 0.25% rate cut on Thursday, lowering the fed funds target range to between 4.25% and 4.50%, but said it will consider the extent and timing of additional cuts, a hawkish shift from its prior statement. Fed Chair Jerome Powell used the word “cautious” six times during his Wednesday press conference and said that policy is entering a “new phase” in which the Fed will proceed at a slower pace. Powell said inflation is not where the central bank wants it to be and that the economy is “in a really good place,” which raises the question of why the Fed is cutting at all. Indeed, one member of the FOMC voted to hold rates steady, and three nonvoters held their 2024 fed funds forecasts steady, suggesting that they would have voted against a cut. Powell said that since the Fed has cut rates by 100 basis points, it needs to see progress on inflation to cut further. Committee members now see two quarter-point cuts in 2025, down from four in their September projections —  markets had zero cuts priced in the first half of 2025 on Thursday — and policymakers raised their outlooks for both inflation and economic growth while lowering their collective unemployment forecast. The FOMC’s median forecast suggests inflation will not reach its target until 2027. The Fed chair said that some policymakers had begun to game out the potential impact of policy proposals from President-elect Donald Trump while others had not. Powell said he is very optimistic on the economic outlook and expects another good year in 2025. However, good news for the economy is bad news for bonds, and yields spiked Wednesday afternoon, jumping over 20 basis points in the hours after the meeting. Equities sold off sharply on Wednesday before steadying Thursday.

Q3 US growth revised higher

The third quarterly revision of Q3 US GDP data showed the economy expanded at a 3.1% pace last quarter, up from an earlier 2.8% reading. Personal consumption rose 3.7%, a sign that consumer finances remain in good health. Other US data released this week included a 4.8% rise in existing home sales, which puts them at their highest levels since March. While housing starts fell 1.8% in November, building permits, a forward-looking indicator, rose 6.1%.

US government shutdown risk rises

Congressional leaders are scrambling to put together a continuing resolution that would allow the US government to continue operating past midnight on Friday. A deal worked out by the leaders of both houses earlier in the week was torpedoed at the 11^th hour when President-elect Trump objected to the bill’s inclusion of billions of dollars of fresh government spending. Trump demanded that any stopgap funding measure extend or eliminate the nation’s debt ceiling and expressed support for about $10 billion in assistance to farmers and $100 billion in disaster relief but no further expenditures. That proposal was put to a vote on Thursday evening and failed to win approval. As lawmakers work on Plan C, the odds of a short government shutdown have increased dramatically since midweek.

Fed not only game in town this week

It was a busy week for central banks, with the Bank of England and the Bank of Japan holding rates steady while the Bank of Mexico and Sweden’s Riksbank both cut rates a quarter point. The BOE was more dovish than expected, focusing more on downside risks to growth than on sticky inflation readings. The Bank of Japan held rates steady at 0.25%, a surprise to some who expected a quarter point rate hike. The BOJ cited high uncertainty surrounding Japan’s economy and inflation. The Bank of Mexico cut rates to 10% and said that larger cuts than Thursday’s 0.25% reduction might be considered at future meetings given recent progress on disinflation. The Riksbank cut rates 0.25% to 2.5% and said policy rates could be cut again in the first half of 2025 if its economic outlook remains unchanged. 

QUICK HITS

The Fed’s preferred price measure, the personal consumption expenditures price index, rose 0.1% in November from the month before, with the core measure rising by the same amount. Both indices rose less than expected. On a year-over-year basis, PCE rose 2.4%, up from 2.3% the month before, while the core rate held steady at 2.8%. Yields eased after the data.

Trump this week reiterated his support for the creation of a US strategic bitcoin reserve.

New and used home prices in China continued to decline in November while residential property sales fell 20% from year-ago levels. Industrial production rose 5.4% year over year last month, up marginally from 5.3% in October. Retail sales rose 3%, falling well short of forecasts. China is said to be planning a record 4% deficit ratio (compared with the current 3% ratio) while maintaining its GDP growth target at around 5%.

Preliminary purchasing managers’ indices for December were published this week. The table compares this month’s flash estimate with the final November reading. The strong US services sector reading helped lift the US composite to a solid 56.6.

Canadian Deputy Prime Minister and Finance Minister Chrystia Freeland and housing minister Sean Fraser resigned this week from Prime Minister Justin Trudeau’s cabinet. Trudeau named Dominic LeBlanc finance minister and is expected to shuffle his cabinet further on Friday.

The South Korean parliament impeached President Yoon Suk Yeol and suspended him from exercising presidential powers. Prime Minister Han Duck-soo has assumed the role of acting president.

Moody’s downgraded France’s credit rating from Aa2 to Aa3, citing political instability that makes it harder to rein in the nation’s debt.

Donald Trump and SoftBank Group CEO Masayoshi Son jointly announced Monday that SoftBank plans to invest at least $100 billion in US projects over the next four years. The Japanese company estimates that its US-based investments will create 100,000 jobs focused on artificial intelligence and emerging technologies.

US retail sales rose 0.7% from the month before November, led by autos.

The Conference Board’s Index of Leading Indicators rose 0.3% in November, the first rise since February 2022

Business sentiment in Germany continued to contract as the Ifo survey declined to 84.4 in December from 87 in November. Conversely, investor sentiment jumped as the ZEW expectations gauge surged to 15.7 from 7.4 in anticipation of a shift to looser fiscal policy after snap elections in February.

Argentina emerged from recession in Q3, the first quarter of growth since late 2023, as reforms undertaken by President Javier Milei gain traction. The economy expanded 3.9% quarter over quarter.

Japanese exports rose 3.8% in November on the back of a weak yen and solid foreign demand.

The French parliament passed a stopgap funding bill to allow the government to operate come January. Prime Minister François Bayrou will try to shepherd a 2025 budget through the legislature in the new year.

On Friday, Trump warned the European Union that unless the bloc closes its trade surplus with the United States by buying large amounts of US oil and natural gas, it’s “tariffs all the way!!!”

The Canadian government announced this week that it will spend $900 million on helicopters, drones and new border agents to strengthen security at the US border in an effort to stave off the threat of a 25% tariff on exports to the US.

The US 2s-10s Treasury yield curve steepened to 24 basis points on Friday, its steepest level since June 2022, as inflation jitters push up longer-term yields. The metric started the week at around 15 basis points. 

THE WEEK AHEAD

Monday: UK final Q3 GDP

Tuesday: Australia RBA minutes, US durable goods orders, new homes sales

Wednesday: Christmas

Thursday: Boxing Day in UK

Friday: Japan retail sales, US trade balance