Pictet North America Advisors SA
Seasonal rate cuts
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Market update
The S&P 500 closed the week at 6,051.09, -0.64% lower. The Dow Jones closed at 43,828.06, -1.82%, with the Nasdaq higher by +0.34%. The volatility index VIX closed the week at 13.81, up from 12.77. The Euro Stoxx 600 fell -0.77%.
The 10-year UST closed at 4.4%, up from 4.15% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 7bps. US Corporate Bond spreads: Investment Grade spreads narrowed -2bps at 154bps and High Yield spreads widened 3bps at 303bps. German 10-year Bunds yield closed at 2.26% up from 2.11% a week before. In Europe, Corporate Investment Grade spreads narrowed -4bps at 109bps and High Yield narrowed -12bps at 340bps.
The US Dollar Index (DXY) appreciated +0.89% last week and closed at 107. The Euro closed at 1.0501 (-0.63%); the Yen depreciated -2.43%, closing at 153.65 and the Swiss Franc depreciated -1.58%, closing at 0.8927. Gold closed at $2,648.23, appreciating +0.56%. Oil was higher, Brent closed at $74.49 (+4.74%) and WTI at $71.29 (+6.09%).
Macroeconomy
US data
US inflation data was in line with expectations but still running a bit too fast for the Fed to be comfortable, raising fears that inflation might be proving sticky above the Fed’s target. Core CPI came in at 0.308% m-o-m and has been running at 0.3% for four consecutive months, taking the 3m annualized pace of core CPI to 3.7%. The inflation print did have some dovish downticks. Specifically, shelter inflation (both rent and owners’ equivalent rent) slowed to 0.2% m-o-m, which supports the view of continued disinflation from housing. Core goods rose strongly by 0.3% but around 0.2% of that came from vehicle prices. Growth in core services ex-housing prices was in line with the past three months. Headline PPI inflation surprised on the upside, with the y-o-y rate moving up to +3.0% for the first time since early 2023, but core PPI was weaker than expected and PCE-relevant components (airfare, portfolio mgmt etc.) were on the weaker side. On the labor front, US initial jobless claims rose more than expected to the highest level since early Oct., but this could be due to the timing of Thanksgiving. Continuing claims stayed within their recent range.
ECB
The European Central Bank (ECB) decided to cut its deposit facility rate by 25bps to 3.0%, as widely expected. Importantly, the ECB removed the sentence about the need to keep monetary policy “sufficiently restrictive.” Lagarde mentioned that the 25bps cut decision was unanimous but said that a bigger cut was discussed. The new staff projections showed lower growth and headline inflation in the near term (2024 and 2025). The broad contour of the macro scenario was left unchanged, with the ECB keeping its consumer-led recovery narrative. Risks to the growth outlook remained tilted to the downside. On inflation, while Lagarde showed more confidence in the disinflation path and on the ‘wages-productivity-profits’ nexus bringing inflation back to target, she stressed that risks are two-sided: short-term tariffs are net inflationary, but the impact over the medium term is more uncertain. Referring to the future path, she said “the direction of travel is very clear” and the overall communication paves the way for interest rate cuts at least to neutral. She emphasized again that the ECB is data-dependent, deciding meeting-by-meeting.
SNB
The Swiss National Bank (SNB) surprised markets by lowering its policy rate by 50bps to 0.50%. In the press conference, Schlegel stated that the SNB “still [has] ammunition left” after December’s jumbo cut and that policy rate cuts “remain the SNB’s primary policy tool should monetary policy have to be eased further”. He mentioned that "nobody likes negative interest rates, but that “we cannot exclude [them] in the future”. He also said that "with the December jumbo cut, the likelihood of negative rates has become smaller". Importantly, on inflation, Schlegel mentioned that the “SNB might tolerate inflation in negative territory if temporary”. These comments followed a sharp downward revision to the inflation forecasts in 2025 by the SNB. The new forecasts remain within the range of price stability over the entire forecast horizon. The SNB now puts average annual inflation at 1.1% for 2024, 0.3% for 2025 and 0.8% for 2026. Finally, the language on FX intervention was left unchanged, with the SNB mentioning that it “also remains willing to be active in the foreign exchange market as necessary.”
Other central banks
As widely expected, the Bank of Canada cut rates by 50bps again, bringing the main policy rate to 3.25% which is at the upper end of their own estimate of the neutral rate. Importantly, their communication now suggests they are likely to shift back to "a more gradual approach" (i.e., 25bps steps on a meeting-by-meeting basis), "if the economy evolves broadly as expected". Meanwhile, the Reserve Bank of Australia (RBA) held its cash rate at 4.35%. The RBA adopted a surprisingly dovish stance, expressing increased confidence that inflation is on a sustainable path toward its target. The board indicated that just one favorable quarterly inflation report could prompt a rate cut. Finally, Brazil’s central bank hiked its benchmark rate by 100bps to 12.25%, accelerating the pace of tightening from 25bps in September to now 100bps. Importantly, it reintroduced forward guidance, pre-committing to another 200bps of hikes as the country battles with rising inflation. The week ahead will be another busy week on the central bank front. The FOMC interest rate decision will take place on Wednesday while the Bank of England (BoE) and Bank of Japan (BoJ) are meeting on Thursday. Markets expect a 25bps rate cut from both the Fed and BoE while the BoJ is expected to keep rates unchanged.
France downgrade
Moody’s downgraded France’s credit rating from Aa2 to Aa3 with a stable outlook. Although the decision was unscheduled and surprised markets, it follows the country’s degrading political and fiscal situation. In fact, last Friday Macron announced Francois Bayrou as his new Prime Minister after the collapse of Barnier’s government. In the week ahead, Bayrou will meet with opposition leaders to draft a budget for 2025.
Highlights
Rates
Concerns about the inflation outlook contributed to a selloff among US Treasuries. The 10yr yield ended the week at 4.40%, up +24.4bps, its biggest weekly jump since October 2023. The 2yr yield was also up +14.2bps to 4.25%. The market is placing 100% odds on a 25bps rate cut at the 12/18 meeting, but there are only ~50bps worth of reductions assumed in 2025. Over in Europe, government bond yields also moved higher after the ECB Governing Council (GC) meeting. The ECB cut rates by 25bps as expected, but there was some disappointment among investors that the tone wasn’t more dovish, with President Lagarde describing inflation risks as “two-sided”. Yields on 10yr bunds were up +15.0bps to 2.26%, their biggest rise since March. Similarly, yields on 10yr Italian BTPs were up +20.0bps, their biggest weekly jump since July 2023.
What to watch
- Monday: US PMIs (Dec); Eurozone PMIs (Dec); UK PMIs (Dec); China industrial production and retail sales (Nov)
- Tuesday: US retail sales (Nov), US: industrial production (Nov); Eurozone ZEW economic sentiment (Dec); Germany IFO survey (Dec)
- Wednesday: US FOMC interest rate decision, building permit and housing stars (Nov); UK CPI (Nov)
- Thursday: UK BoE interest rate decision; Japan BoJ interest rate decision; US initial jobless claims, Philly Fed business conditions (Dec)
- Friday: Japan CPI (Nov)