2024 Weekly Update

Market update

The S&P 500 closed the week at 5,995.54, +4.66% higher. The Dow Jones closed at 43,988.99, +4.61%, with the Nasdaq higher by +5.74%. The volatility index VIX closed the week at 14.94, down from 21.88. The Euro Stoxx 600 fell -0.84%.

The 10-year UST closed at 4.30%, down from 4.38% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -24bps. US Corporate Bond spreads: Investment Grade spreads narrowed -11bps at 154bps and High Yield spreads narrowed -13bps at 307bps. German 10-year Bunds yield closed at 2.37% down from 2.40% a week before. In Europe, Corporate Investment Grade spreads narrowed -4bps at 113bps and High Yield widened +5bps at 343bps.

The US Dollar Index (DXY) appreciated +0.69% last week and closed at 105.00. The Euro closed at 1.0718 (-1.07%); the Yen appreciated +0.24%, closing at 152.64 and the Swiss Franc depreciated -0.64%, closing at 0.8756. Gold closed at $2,684.77, depreciating -1.89%. Oil was higher, Brent closed at $73.87 (+1.05%) and WTI at $70.38 (+1.28%).

Macroeconomy

Fed cuts rates

The Fed decided to lower its policy rate by 25bps, as was widely expected. Unlike the prior decision, there were no dissenters – all the voters were in favor of the cut. Powell refused to endorse the Sept. dot plot and opened the door to a Dec. skip, keeping optionality. We will have two more CPI and one NFP (Jobs report) announcements before the Dec. The committee continues to think current policy rate is restrictive but is in no rush to get to neutral. Importantly, Powell noted as rates approach neutral, it may be appropriate to slow cuts and this is something the FOMC is beginning to think about. This suggests a possible change in pace from consecutive to quarterly/pause as early as Jan. Powell upgraded his assessment of the economy given recent data and continues to view the labor market as less tight than before the pandemic in 2019, without sounding too worried like he did in Sept. Regarding the recent US Election, he mentioned: "in the near term the election will have no effects on our policy decisions" and the Fed will be reactive rather than pre-emptive. Powell declined all other questions on election impact. Powell delivered a firm "NO" when asked if he would leave if Trump asked him to step down. He also said it's "not permitted under the law" for the president to fire/demote him or Fed governors.

German politics

German Chancellor Olaf Scholz (SPD) dismissed Finance Minister Christian Lindner (FDP). As a result, the FDP has effectively exited the coalition, leaving the remaining parties in the governing coalition, the SPD and the Greens, with a minority in Parliament. The breakup follows a disagreement within the coalition on how to close a funding gap in the 2025 budget. Scholz indicated that he would call a vote of confidence in Parliament on January 15. Scholz will probably lose that vote of confidence, which will allow President Steinmeier to call snap elections. The exact election date will be confirmed only once Parliament is dissolved, but elections should take place within 60 days, so by the end of March or early April at the latest. Current polls suggest that the most likely option is a grand coalition between the CDU/CSU and the SPD. This would be seen as more stable than the current “traffic light” coalition. It will be particularly important to see whether the FDP will make it back above the 5% hurdle. Regarding potential macro implications, a prolonged period of political uncertainty could weigh on sentiment and activity, but snap elections could also end political paralysis.

BoE

The Bank of England (BoE) lowered its policy rate by 25bps to 4.75%, with a majority vote of 8-1. The committee acknowledged notable progress in the disinflation process, as both headline inflation and services inflation fell below their initial forecasts. However, the minutes also indicate that domestic inflationary pressures are receding slowly. Despite these developments, the BoE's guidance remains unchanged, maintaining a gradual, meeting-by-meeting approach. This cautious stance is largely attributed to the fiscal loosening from the Autumn Budget. As a result, the BoE has revised its 2025 forecasts upward, estimating a 0.75% increase in GDP growth and a 0.5ppt rise in CPI relative to the August forecast. Therefore, the BoE is projecting a four-quarter GDP growth and inflation rate of 1.7% and 2.7% in 2025 Q4. Given the current circumstances, a rate cut in December appears unlikely. The fiscal loosening from the budget is expected to pose upside risks to both growth and inflation in the short term, challenging the BoE's rate-cutting cycle.

China stimulus

At the very end of last week the National People’s Congress announced a debt swap program worth about 10 trillion yuan ($1.4 trillion) to improve local government finances. However, the stimulus package disappointed market expectations as it lacked direct fiscal stimulus and targeted measures to improve the housing market. It seems that Chinese government clearly believes the current measures will help them hit their 5% growth target for 2024 without needing to go further at the moment. Also, they are keeping some dry powder for the potential imposition of tariffs in 2025 and beyond. The next NPC is scheduled for next March. Over the weekend, the Chinese inflation rate rose +0.3% y-o-y in Oct., missing expectations of a +0.4% increase and lower than the +0.4% gain seen in Sept. Inflation fell for the second straight month, dropping to its lowest in four months. The PPI slipped by -2.9% y-o-y in Oct., marking the 25th consecutive month of decline, after a -2.8% drop in Sept. and worse than the -2.5% decline forecast by Bloomberg.

Highlights

Q3 earnings

We are at the final stages of Q3 Earnings season with 84% of S&P500 companies having already reported. 75% of companies have beaten EPS estimates, surprising positively by 7%. EPS growth is coming in at +7% y-o-y. Sector wise, Healthcare, Communication Services, and Utilities posted strong results, recording double-digit EPS growth. Meanwhile, cyclical sectors like Energy, Materials, and Industrials are seeing negative earnings growth. In terms of revenue, 53% of companies are beating sales expectations and top line growth is coming in at +5% y-o-y. In Europe, 75% of Stoxx600 companies have released Q3 results. 62% have beaten EPS estimates, surprising positively by 3%. Overall EPS growth is coming in at -2% y-o-y. At a sector level, Industrials, Healthcare, Utilities and Real Estate are printing double-digit EPS growth, while Energy, Materials and Discretionary are recording negative EPS growth. On top line, 41% of companies are beating consensus. Sales growth is negative at -1% y-o-y, with 5 out of 11 sectors coming in negative.

On rates

The 10yr US Treasury yield was down -8bps to 4.30%, recovering losses from earlier in the week after the US election result became apparent. On Wednesday, yields surged +16.1bps as investors priced in higher tariffs-related inflationary pressures and a worsening deficit in the years ahead due to an extension of Trump tax cuts under a Republican sweep. The front-end of the curve saw a modest sell-off, with the 2yr yield up +4.6bps last week. The 10yr and 2yr spread is back to 5bps, having been as steep as 22bps in late Sept. In credit, US Investment grade and High yield spreads both tightened. On Thursday, German 10yr bunds moved up to their highest level since July, at 2.44% after the federal coalition broke up. Over the week, bund yields were down by -3.9bps and closed at 2.33%.

What to watch

• Monday: no major events
• Tuesday: Germany ZEW Survey (Nov.); US NFIB Small Business Optimism (Oct.), Fed’s senior loan officer survey
• Wednesday: Japan PPI (Oct.); Eurozone Industrial Production (Sept.); US CPI (Oct.)
• Thursday: Eurozone GDP (3Q, preliminary); US PPI (Oct.)
• Friday: Japan GDP (3Q, prel.); UK Industrial Production (Sept.), GDP (3Q, preliminary); US Empire Manufacturing (Nov.), Retail Sales (Oct.), Industrial Production (Oct.); China Industrial Production (Oct.), Retail Sales (Oct.)