US Inflation Not Seen As Preventing Fed Cut

For the week ending 13 December 2024

As of midday Friday, global equities were slightly lower on the week. The yield on the US 10-year note rose 0.2% from last Friday to 4.36%. The price of a barrel of West Texas Intermediate crude oil rose $3.40 to $70.70 on the threat of US sanctions on Russian oil exports. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), edged down to 14.15 from 14.4 a week ago.

MACRO NEWS

US CPI ticks up but not seen derailing December Fed cut

Consumer prices in the US rose 2.7% year over year in November, up from 2.6% in October while the core rate held steady at 3.3%. While the data suggest that inflation risks getting stuck at levels the US Federal Reserve may find intolerable, markets expect an additional 0.25% at next week’s meeting of the Federal Open Market Committee, though the outlook beyond that is less certain. One bright spot in the data was that owners’ equivalent rent, a measure of shelter inflation, showed the smallest monthly increase since April 2021, rising 0.2%.

China ramps up stimulus but details lacking

This week, China’s Politburo and Central Economic Work Conference (CEWC) laid the groundwork for substantial monetary and fiscal policy easing in 2025. The Politburo changed its stance on monetary policy from “prudent” to “moderately loose” for the first time since the global financial crisis and pledged to stabilize property and stock markets. The CEWC said domestic demand is insufficient and vowed to make lifting consumption its top priority for 2025. Policymakers said they will raise the fiscal deficit target next year and cut interest rates and banks’ reserve requirements at an appropriate time. While policy details will likely remain scant until the meeting of the National People’s Congress in March, investors are encouraged by the government’s increased focus on lifting consumption.

ECB trims policy rate, signals more to come

The European Central Bank cuts its deposit rate 0.25% to 3% on Thursday. The ECB indicated that while the direction of travel for interest rates is clear, the pace of cuts is still to be decided. ECB President Christine Lagarde said that the disinflation process is on track and the central bank is determined to stabilize inflation sustainably at 2%. Risks to the outlook are to the downside, she said, and trade friction will make it less certain.

Israel destroys Syrian military assets

Rebel factions took control of Syria with minimal opposition after President Bashar al-Assad fled the country for Moscow on Sunday. Taking advantage of the power vacuum resulting from Assad’s departure, Israel launched strikes on Syrian military assets, destroying most of the country’s air defenses, navy, stores of chemical weapons and conventional weapons production facilities. Meanwhile, US forces struck Iranian-backed militia groups and weapons storage depots. Iran is increasingly on the defensive as its proxies across the Middle East are being depleted  

QUICK HITS

While the S&P 500 is trading less than 1% below all-time highs, breadth has been negative every trading day this month, with more issues declining than advancing. Bloomberg reports that the nine-day run of negative breadth is the longest since they began collecting data on the metric in 2004.

The Sentix measure of eurozone investor confidence reached its lowest level in over a year, falling to -17.5 in December.

Q3 GDP in Japan was revised up to a 1.2% annualized pace from 0.9%.

In an interview with NBC News, US President-elect Donald Trump said he has no plans to remove US Federal Reserve Chair Jerome Powell.

Canadian Prime Minister Justin Trudeau said this week that Canada will respond if Trump imposes a 25% tariff on the country’s exports, noting that retaliatory tariffs had ended Trump’s previous levies.

Sentiment among US small business owners soared in the wake of November’s presidential election, according to the National Federation of Independent Businesses. The organization’s sentiment index rose 8 points, the largest monthly gain on record, to101.7, the highest level since June 2021.

US unit labor costs were revised down to an annualized rise of 0.8% in the third quarter from an earlier 1.9% advance. Nonfarm productivity held steady at 2.2%.

In a post on Truth Social, Trump said he will give expedited approvals and permits to any person or company investing $1 billion or more in the United States.

Trump said he will elevate Federal Trade Commissioner Andrew Ferguson to chair of the commission.

German Chancellor Olaf Scholz on Wednesday filed a request for a confidence motion on 15 January, the outcome of which is expected to trigger a snap election in March.

The Swiss National Bank cut interest rates by a more-than-expected 0.5% on Thursday to 0.5% in order to weaken the franc on foreign exchange markets.

South Korean President Yoon Suk Yeol faces a second impeachment vote on Saturday. Yoon narrowly escaped impeachment a week ago, days after imposing, then lifting, a martial law declaration.

The Wall Street Journal reported that Trump’s team is exploring pathways to shrink, consolidate or eliminate US bank regulators.

Germany’s Bundesbank expects German GDP to expand just 0.1% next year but warns that a 10% US tariff on German exports could shave 0.6% off next year’s growth.

French President Emmanuel Macron appointed centrist François Bayrou as prime minister on Friday. Bayrou faces the daunting task of passing a 2025 budget acceptable to a majority of the fragmented National Assembly.

THE WEEK AHEAD

Monday: Global preliminary purchasing managers’ indices

Tuesday: UK unemployment rate, Canada CPI, US retail sales and industrial production

Wednesday: UK and eurozone CPI, US Fed meeting, housing starts

Thursday: Bank of England meeting, Q3 US GDP, existing home sales

Friday: Bank of Japan meeting, UK retail sales, US PCE inflation