2024 Weekly Update

Market update

The S&P 500 closed the week at 6,032.38, +1.06% higher. The Dow Jones closed at 44,910.65, +1.39%, with the Nasdaq higher by +1.13%. The volatility index VIX closed the week at 13.51, down from 15.24. The Euro Stoxx 600 rose +0.35%.

The 10-year UST closed at 4.17%, down from 4.40% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -33 bps. US Corporate Bond spreads: Investment Grade spreads remained at 158bps and High Yield spreads widened +10bps at 304bps. German 10-year Bunds yield closed at 2.09% down from 2.24% a week before. In Europe, Corporate Investment Grade spreads widened +2bps at 120bps and High Yield widened +12bps at 370bps.

The US Dollar Index (DXY) depreciated -1.69% last week and closed at 105.74. The Euro closed at 1.0577 (+1.53%); the Yen appreciated +3.24%, closing at 149.77 and the Swiss Franc appreciated +1.44%, closing at 0.881. Gold closed at $2,643.15, depreciating -2.69%. Oil was lower, Brent closed at $72.94 (-2.97%) and WTI at $68 (-4.55%).

Macroeconomy

Household consumption

PCE (Personal Consumption Expenditures) inflation data is the measure the Fed officially targets. Oct. headline PCE came in at a monthly pace of +0.24% (vs. +0.2% expected), which was still its highest in six months. Moreover, the core PCE measure was at +0.27% m-o-m (vs. +0.3% expected) and at the highest in 7 months. Core PCE is growing at 2.8% y-o-y and 2.6% in 3m/6m momentum terms. The core services ex housing measure that Fed Chair Powell has cited was at +0.36% for the month, meaning that the 3m annualized rate is now up to +3.5%, so that’s quite a bit faster than they’d ideally like it. In additional data, Q3 GDP revisions showed that core PCE inflation was running a bit slower than expected over the last quarter, with a downward revision of a tenth to +2.1%.

Fed minutes

The FOMC minutes from the Nov. 6-7 Fed meeting showed that committee members thought that “with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time”. Also, “many” officials noted that ongoing uncertainty around what the neutral rate should be, "made it appropriate to reduce policy restraint gradually.” That represented an increase after the previous minutes referenced “some” officials. The staff upgraded both growth and inflation forecasts from the prior meeting, this can also be seen from fewer members being concerned with the risk of growth slowing. Last meeting, “most remarked that the downside risks to employment had increased,” but this meeting, “some participants judged that downside risks to economic activity or the labor market had diminished.”

Inflation in Europe

Euro area inflation accelerated to 2.3% in Nov. Like last month, the energy component was the main contributor to the rise in headline HICP, as unfavorable base effects are impacting oil prices. Additionally, electricity prices increased in some countries, notably in Spain. Meanwhile, core inflation remained broadly stable at 2.7% y-o-y in Nov. Within the core inflation measure, goods prices drifted slightly higher to 0.7% y-o-y from 0.5% the previous month, while services inflation softened somewhat to 3.9% y-o-y after 4.0%. In Germany, HICP inflation remained at +2.4% in Nov. (vs. +2.6% expected), so that was seen as positive for the prospects of ECB rate cuts and investors dialed up the likelihood of a 50bps ECB rate in December, with the probability moving up from 15% on Wednesday to 18% on Thursday. Moreover, there were also comments from the ECB’s Villeroy that sounded open to a larger 50bps cut at the December meeting. He said that “optionality should remain open on the size of the cut”, so clearly not ruling out a larger move.

France political situation

Political instability in France has led to a gradual, albeit steady re-pricing of the fiscal risk premium with bond spreads on French OATs widening to above 80bps. Negotiations are still going on to find a compromise budget however, the risk of a no-confidence vote bringing down the government has increased as the Rassemblement National is trying to extract more concessions from the Prime Minister. What's next if the Barnier government is toppled in the coming weeks? In theory, Emmanuel Macron would have several options: he could reappoint Michel Barnier as Prime Minister and leave the current government in caretaker mode; he could try and form a new coalition government; or he could form a technocratic government to pass a new budget. The last option may be the most likely if the current government falls. With regard to the adoption of a budget, three options would be on the table: 1) continue with the current draft budget; 2) negotiate a new draft budget; or 3) reconduct the 2024 budget under a special law that would have to be presented to the Parliament before 19 December, for the government to be able to collect taxes and borrow from the markets according to the 2024 budget.

Highlights

Rates

US Treasuries rallied following Scott Bessent’s nomination as the next US Treasury Secretary. The drop in yields was also supported by Q3 GDP revisions which showed that core PCE inflation was running a bit slower than expected over the last quarter and the FOMC minutes which gave slightly more credence to a Fed rate cut in December. The odds of a cut on 12/18 currently stand at ~65%, the most in nearly two weeks. The 10yr Treasury yield ended the week at 4.17%, down -23.2bps, while the 2yr yield closed at 4.16%. In Europe, yields on 10yr bunds fell -15.5bps to 2.09% as German inflation data came in below expectations, reinforcing expectations for an ECB rate cut next month. In France, the political and fiscal situation is becoming increasingly uncertain as the government scrambles to pass a budget without prompting a no confidence vote. The Franco-German 10yr spread widened by +0.4bps to 80.6bps after reaching its widest level since 2012 earlier during the week. France’s 5yr credit default swap also reached its widest level since June 28, right before the first round of the snap legislative elections.

What to watch

• Monday: Switzerland PMI Manuf. (Nov.), Retail Sales (Oct.); Eurozone Unemployment rate (Oct.); US ISM Manuf. (Nov.); China Caixin PMI (Nov.)

• Tuesday: Switzerland CPI (Nov.); US JOLTS Job Openings (Oct.)

• Wednesday: US ADP Employment Change (Nov.), Factory Orders (Oct.), ISM Services Index (Nov.)

• Thursday: Switzerland Unemployment Rate (Nov.); Germany Factory Orders (Oct.); Eurozone Retail Sales (Oct.); US Trade Balance (Oct.)

• Friday: Switzerland Foreign Currency Reserves (Nov.); Germany Industrial Production (Oct.); US Change in Nonfarm Payrolls (Nov.), Unemployment Rate (Nov.), Univ. of Michigan Sentiment (Nov., prel.)