Monthly Investment Committee: «Divergence in monetary policy between Europe and the US continues»
February 18, 2025
Topic of the week:
By Mario Catalá
The U.S. economy continues to show moderate strength, suggesting that financial markets may continue their positive trend, at least during the first half of 2025. The PMIs have maintained their positive trend, especially in the manufacturing sector (51.2), with a figure for January that is in expansionary territory for the first time since last June. Meanwhile, the services PMI continued its slowdown to 52.9, which could be an indicator that wage pressures in the services sector have corrected. GDP in the fourth quarter of 2024 grew by 2.3%, significantly below what was expected by the market (3.2%), so it would not be surprising to see notable increases in the next revisions. In any case, 2024 closed with growth of 2.8% (2.9% in 2023), a sign that the economy has not slowed down, but is not overheated either.
Other data such as retail sales (+0.4% in December), or the Conference Board’s consumer confidence, which came in at 104.1 versus an estimate of 105.7, corroborate the good health of the economy, but without showing euphoria. Employment continues to give us very volatile information depending on the data we take (JOLTS, ADP or Non-Farm Payrolls), but once again they all show that the economy is not close to stopping, quite the contrary, it could maintain the current pace for several more quarters. This positive outlook has one main enemy, the U.S. government and its impulsive decisions, which could end up negatively affecting the balance that the data has consistently shown over the last two years. Tariffs and international conflicts could end up weighing on the economy and the markets.
In Europe, economic growth continues to be sluggish. Provisional figures indicated that there was no GDP growth in the fourth quarter compared to the third, therefore, in 2024 the Eurozone economy would have grown by 0.9%, highlighting the growth in Spain (+3.2%) thanks to consumption and tourism, compared to stagnation in Germany (-0.2%, second consecutive year of decline) and France (+1.1). The PMIs have started 2025 at very similar levels to the previous year. Although the manufacturing PMI has recovered from 45.1 in December to 46.6 in January, it remains clearly in the contraction zone, demonstrating the weakness of the European industrial sector, especially in Germany. At the services level (51.3) it shows a slight deterioration, but remains in the expansion zone. Investor confidence from the ZEW Institute surprised with a greater than expected recovery (18 vs. 16.9), which could be suggesting some possibility of a change in trend. Employment is the most puzzling data in Europe, the economy is barely growing, but employment is not deteriorating. In fact, in December it hit an all-time low of 6.2% vs. 6.3% in January.
On the Asian continent, the Chinese macroeconomic references for December showed a certain recovery in many of its magnitudes, such as GDP, which ended 2024 growing by 5%, or PMIs above 52. But the January data are clearly weaker, with PMIs slightly above 50 or the unemployment rate rising to 5.1%, highlighting the weakness of an economy that is also facing potential sanctions and obstacles in terms of trade relations from the United States. The market will be waiting for more and stronger measures to restore confidence in the Chinese economy.
Last week, the inflation data for January in the United States was published, surprising slightly to the upside, in a context in which there was already uncertainty as to how Trump’s policies would influence the prices of goods and services. The overall CPI came in at 3.0% when it was expected to repeat at 2.9% from the previous month, and at the underlying level the surprise was even bigger, as a drop of one tenth from 3.2% was expected, but they finally published a figure of 3.3%. Transport, food and fuel were the items that increased the most, and on the positive side, there was some relaxation in the increase in housing prices. These upturns in inflation will be very present in future decisions by the FED, which at the first meeting of the year had decided to maintain the monetary policy benchmark interest rate in the 4.25%-4.50% range, showing prudence in a very solid labor market environment and in the face of uncertainty regarding the impact that President Trump’s future decisions may have on inflation and the US economy. As can be deduced from the interest rate curve, the market is discounting between one and two additional rate cuts by 2025, which could leave rates at around 4%. Powell appeared at the beginning of last week stating that they are in no hurry to continue lowering rates, relying on the good performance of the labor market and confirming a growth forecast for 2025 of 2.5%.
In Europe, provisional inflation data for January showed a slight rebound to 2.5% overall and 2.8% for core CPI. Fuel price pressures together with wage increases are weighing on price developments in Europe. The general perception is for inflation to reach 2% by the end of the year, while the United States may take a little longer to reach that target. Given these inflation forecasts, together with the continued economic stagnation on the old continent, the European Central Bank cut its deposit facility rate by 25 bps in January to 2.75%.
Forecasts on both sides of the Atlantic suggest that we will continue to see divergence in monetary policy between Europe and the United States. While the Fed is still in no hurry to move rates, and the market is discounting a single rate cut that will leave rates at 4%, the weak growth of the European economy, with lower inflation levels, would facilitate further adjustments in monetary policy at the next meetings to end 2025 with an interest rate close to 2%.
The beacon of the markets:
We have reached the middle of February and the stock markets are at record highs. Last week, indices such as the Nasdaq 100 at 22,139.27 points and the Euro Stoxx 50 at 5,521.65 points, and commodities such as gold, which reached 2,968.50 USD/Onz, set new record highs. Against this backdrop, there were generalized rises in the stock markets, which in some cases were significant. The S&P 500 rose to 6,114.63 points or 1.47%, the Nasdaq 100 by 2.90%, the Euro Stoxx 50 by 3.11% and the Ibex 35 ended the week up by 2.06% to 12,949.90 points, having surpassed the 13,000 barrier throughout the week.
In the fixed income markets, on Friday we found some stability in sovereign bond yields at the close of the week, which was not free of volatility throughout the week. The 10-year Treasury yield eased by 1 bps to 4.48%, while in Europe, yields rose slightly, +6 bps on the Bono (3.10%) and +4 bps on the Bund (2.38%). The number of potential rate cuts by the ECB was adjusted slightly downwards.
Gold maintained its unwavering upward trend with the USD 3,000 mark already in sight, the precious metal scored a modest gain at the end of the week of 0.45% but traded more than 2% higher. Talk of a potential end to the war in Ukraine could take its toll on one of the main safe-haven assets, which has appreciated by nearly 50% over the past year. Brent remained stable at 74.64 USD/b, the end of the war could favor a downward movement in energy commodities which in turn would be passed on to the market with downward adjustments in inflation.
Macroeconomic references last week were scarce in China and Europe. The former published a higher-than-expected CPI figure, but the +0.5% still reflects the weakness of domestic demand. Europe published its GDP (provisional) for the fourth quarter of 2024, +0.1% was better than the no-growth figure expected by the market, but left annualized growth unchanged at 0.9%, still far from the potential of Europe’s economy at 1.5%.
Throughout the current week macro references will remain limited, on Tuesday President Trump will make some scheduled statements and on Wednesday the minutes of the last FED meeting will be known, which will give us more visibility regarding what the members of the committee think about the future evolution of interest rates. The (provisional) PMIs for February in both Europe and the US will also be released.
At the microeconomic level, as of last Friday, 384 S&P 500 companies had presented their results, and the EPS published represents an increase of 12.7% compared to the 7.5% initially estimated. Positive surprises accounted for 76% of the companies, while those that fell below expectations accounted for 17% of the total.
The quote:
And we leave with the following quote from Chief Joseph, leader of the Wallowa, a group of Nez Perce, a Native American tribe: “The earth is the mother of all people, and all people should have equal rights to it”.
Summary of the behavior of the main financial assets (2/17/2025)
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