The year ends with the European and U.S. economies moving at very different speeds
December 17, 2024
Topic of the week:
By Mario Catalá
Just a year ago, leading market analysts were showing – we were showing – our concern about the future of the economy, considering that the tightening of monetary policies in the main Western economic areas could take its toll on corporate profits and consumption. However, the predicted soft landing scenario seems to have faded into oblivion, and the fact remains that (at least) the U.S. economy is still going strong. The GDP data for the third quarter of 2024 (+2.8% vs. 3.0% previously) corroborates this, growth remains stable, and forecasts for the coming years are along the same lines. Other data such as the Conferendce Board’s consumer confidence, which rose from 109.6 to 111.7, or the manufacturing PMI reinforces the same idea. Specifically, the PMI for November returned to contraction levels (below 50) for the eighth consecutive month, however, the improvement is notable, with a rise from 46.5 to 48.4. The services figure remains in the expansion zone, although with a decline from 56.0 to 52.1.
On the employment front, November nonfarm payrolls increased by 227,000, and September and October data were revised upward (monthly average of 172,000 jobs since summer). The unemployment rate rebounded from 4.1% to 4.2%, but part-time employment declined for the third consecutive month, and the layoff rate returned to multi-month lows (1%).
Inflation rebounded slightly in November in the United States, with personal consumption expenditures (PCE) rising from 2.1% to 2.3% overall and from 2.7% to 2.8% at the core level, while the CPI published last week also rose by one tenth of a point (from 2.6% to 2.7%), marking the second consecutive rise after six months of decline (at the core level it remained at 3.3%). The base effect could be influencing these latest upward readings, as the data for the end of 2023 were very good. However, the fall in inflation stabilized at the beginning of 2024, so barring a price spike from January onwards, inflation is likely to return to its downward path in search of 2%.
Fed Chairman Powell announced after the summer that if economic conditions and the evolution of inflation remained unchanged, it was most likely that we would see two additional 25 bp cuts until the end of the year. In November they already lowered by 0.25%, so after the latest employment, GDP and inflation data, the market is discounting that at the last meeting in December we will see a further cut that will leave the benchmark rate at 4.25%. In fact, Powell himself appeared a few days ago assuring that the economy is still in very good shape, with an increasingly strong labor market and better-than-expected GDP growth. Recent upturns in inflation would not worry the Fed too much (they continue to see improvements in this area), so the odds of a 25 bp cut in December are already around 85%.
Europe continues to experience complicated political and economic times. The manufacturing PMI has been in clear contraction for more than two years, with a latest figure for November of 45.2 (46.0 previously). Germany (43.0) and France (43.1) are the main causes of this economic deterioration, and both are also going through a very complicated moment at the political level, which will clearly slow down the possibility of adopting measures to reactivate the economy. The breakdown of the coalition government in Germany has been compounded for several weeks by the collapse of the French government. The lack of consensus on the 2025 budget triggered a series of events that culminated in a motion of censure against Prime Minister Michel Barnier after three months in office. The main issue revolves around different views among the different political parties on cutting the country’s current budget deficit, which stands at 6% of GDP. All this political noise caused the credit rating agency S&P to threaten to downgrade France’s rating (it finally kept it at AA-), and the country’s risk premium soared to its highest level in more than ten years, surpassing Spain’s, and at the time of writing even Greece’s! (France 10-year bond 3.04%, Greece 10-year 3.02%, Spain 10-year 2.93%).
Inflation estimates for November point to mixed data, with a cut from 2.8% to 2.7% at the core level, and a rebound from 2.0% to 2.3% at the headline level. In any case, taking into account the clear growth deficit the old continent is going through, with growth of less than 1%, it was assumed that the European Central Bank would have to lower rates again at its meeting last week. With this latest cut of 25 basis points, the official interest rate is now fixed at 3.15%. In subsequent statements, Lagarde announced that growth expectations for the Euro zone were revised downwards: +0.7% in 2024 vs. +0.8% previously, +1.1% in 2025 vs. +1.3% previously and +1.4% in 2026. There was also an important change from previous press conferences, as after many months, they have removed from their speech the commitment to “keep rates in the tight zone for as long as necessary”. This gives a clue as to the intentions of the ECB, which could undertake several additional rate cuts in the coming months. In fact, Lagarde herself acknowledged that a 50 bp cut was even considered at this last meeting.
Beacon of the markets:
With a fortnight to go before the end of the year, the markets maintain the same complacent tone seen in 2024. The stock markets experienced small changes, with a sideways market whose only notable exception was the Ibex 35, which lost -2.65%, affected by Inditex’s results. Despite posting the best quarter in its history, the textile company did not meet analysts’ forecasts. In the United States, the S&P 500 closed at 6,051.09 points, dropping -0.65%, while the Nasdaq 100 rose to 21,780.25 points, scoring +0.73%, which also set a new all-time high at 21,886.74 points. The Euro Stoxx 50 performed very similarly to the S&P 500, -0.20% to 4,967.95 points.
In fixed income we saw a generalized rise in bond yields. Following the ECB’s decision to tighten monetary policy by 25 bps (some investors expected 50 bps), the rebound in yields led the Bund to close at 2.25% and the Bond at 2.92%, up 14 and 16 bps respectively. This week it is the Fed’s turn, and the market is discounting a 25 bps drop, precisely the rise experienced by the 10-year Treasury (24 bps) in the last week to 4.39%. Macro data remains strong and could be taking its toll on investors’ forward interest rate expectations.
In the alternative markets, we saw rises in both gold and Brent. Gold appreciated by 0.61% on the back of increased purchases by the Chinese central bank, despite the increase in debt yields. Oil prices rose by 4.73% as a result of geopolitical uncertainty, as the main reason for a relatively low oil price is the weakness of the Chinese economy, which was corroborated last week when its CPI stood at +0.2% compared to the estimate of 0.5%. In addition, at the trade level, both exports and imports fell short of forecasts.
Of the other macroeconomic variables known last week, in Europe we highlight the industrial production data for the month of November, which remained at 0% as expected; the economy of the old continent shows no signs of recovery, and this is not expected in the short term. In the US, the CPI rose slightly to 2.7% with the underlying figure anchored at 3.3%, as well as the weekly employment demand, which was slightly higher than expected and with unit labor costs growing less than expected, by 0.8% compared to the 1.9% estimated by analysts.
Throughout the week, the most important macroeconomic references that we will know will be the industrial production in China, which will grow at 5.8%, unchanged from the previous month, the provisional PMI data in Europe for November, which will remain in the contraction zone, the ZEW index of investment confidence in the euro zone and the final CPI for November, which will remain at 2.3% as expected. Finally, in the US, the provisional PMIs for November will be published, the retail sales data for which a growth of +0.4% is expected compared to +0.1% in the previous data, and on Friday, the PCE data will be published for which the market expects a slight increase. Previously, on Wednesday, the US Federal Reserve is expected to meet, where the market is discounting an interest rate cut of 25 bps, which would leave the reference rate in the 4.25/4.50% range, 100 bps below the highs of the last cycle.
The phrase:
And we say goodbye with the following sentence by Doris Lessing, who also published under the pseudonym of Jane Somers, British writer and winner of the Nobel Prize for Literature in 2007: “You have fewer needs the more you feel the needs of others”.
Summary of the behavior of main financial assets (12/16/2024)
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