Global Economy & Markets, Weekly Roundup 16/12/24
Central banks will continue to lower policy interest rates from restrictive levels
Risk asset prices moved higher in 2024 across the board due to strong economic growth and profitability, as well as due to less restrictive monetary policy. In the past week, policy decisions were roughly as expected and main economic data announcements came out as anticipated (US CPI).
The European Central Bank on December 12th, cut the policy interest rates by -25 bps as expected, to +3.0% for the Deposit Facility Rate (DFR), as the disinflation process appears well on track.
The overall ECB signaling (quarterly macro projections, press-conference), did not contain meaningful surprises, policy is restrictive and as a result, the ECB is expected to continue to lower rates in Q1:2025. Markets, according to overnight index swaps, price-in back-to-back cuts of -25 bps each, in the next four meetings up to June 2025, with another one following during H2:2025, for the DFR to settle at 1.75% in the medium term.
The euro was down by -0.7% wow against the US Dollar to $1.049 in the past week, albeit with a muted reaction to the ECB meeting. Another such reaction took place on Monday December 16th following (i) a downgrade by one notch of France’s sovereign credit rating to Aa3 with a stable outlook from Moody’s (in an unscheduled assessment) and (ii) December’s euro area PMIs.
The latter continue to suggest anemic economic activity, with the composite index at 49.5 (expansion/contraction threshold of 50.0). Having said that, the composite index improved from 48.3 in November and modestly exceeded consensus for 48.2, due to the services PMI coming out at 51.4 from 49.5, whereas its manufacturing peer was stable at 45.2.
The Swiss National Bank reduced its policy rate by -50 bps to +0.5%, the most profound increment decided since 2015, in view of inflation standing at +0.7% in November, versus a target range of 0% - 2%. The move was unexpected (consensus economic analysts’ estimates called for -25 bps).
The appreciation of CHF recently (c. +5% against the euro and c. +2% against the US Dollar since past July), which also has possible downside ramifications for consumer inflation, via lower import prices in nominal CHF terms, played a role in the SNB’s decision.
The interest rate cut put a brake in CHF’s rise, with a -0.4% against the euro following the meeting, to CHF/EUR 0.93 and -0.5% versus the USD to CHF/USD 0.89.
Attention now turns to the meetings of the Bank of England (December 19th – consensus suggests that the Bank Rate will be maintained at 4.75%, albeit a -25 bps reduction cannot be ruled out), the Bank of Japan (December 19th – short-term rate of +0.25%, with officials having left the door open for an increase) and, more so, the US Federal Reserve on December 18th.
A -25 bps cut to the Federal Funds Rate (FFR) to a range of 4.25% - 4.5% is widely anticipated both by investors and analysts. Nevertheless, with inflation demonstrating stickiness (the core CPI has been stable at +3.3% yoy in the past three months) and with the economic activity impetus remaining solid, led by the consumer), a cautious outlook appears on the cards for the speed of future monetary policy easing.
Risk asset prices moved higher in 2024 across the board due to strong economic growth and profitability, as well as due to less restrictive monetary policy. In the past week, policy decisions were roughly as expected and main economic data announcements came out as anticipated (US CPI).
The European Central Bank on December 12th, cut the policy interest rates by -25 bps as expected, to +3.0% for the Deposit Facility Rate (DFR), as the disinflation process appears well on track.
The overall ECB signaling (quarterly macro projections, press-conference), did not contain meaningful surprises, policy is restrictive and as a result, the ECB is expected to continue to lower rates in Q1:2025. Markets, according to overnight index swaps, price-in back-to-back cuts of -25 bps each, in the next four meetings up to June 2025, with another one following during H2:2025, for the DFR to settle at 1.75% in the medium term.
The euro was down by -0.7% wow against the US Dollar to $1.049 in the past week, albeit with a muted reaction to the ECB meeting. Another such reaction took place on Monday December 16th following (i) a downgrade by one notch of France’s sovereign credit rating to Aa3 with a stable outlook from Moody’s (in an unscheduled assessment) and (ii) December’s euro area PMIs.
The latter continue to suggest anemic economic activity, with the composite index at 49.5 (expansion/contraction threshold of 50.0). Having said that, the composite index improved from 48.3 in November and modestly exceeded consensus for 48.2, due to the services PMI coming out at 51.4 from 49.5, whereas its manufacturing peer was stable at 45.2.
The Swiss National Bank reduced its policy rate by -50 bps to +0.5%, the most profound increment decided since 2015, in view of inflation standing at +0.7% in November, versus a target range of 0% - 2%. The move was unexpected (consensus economic analysts’ estimates called for -25 bps).
The appreciation of CHF recently (c. +5% against the euro and c. +2% against the US Dollar since past July), which also has possible downside ramifications for consumer inflation, via lower import prices in nominal CHF terms, played a role in the SNB’s decision.
The interest rate cut put a brake in CHF’s rise, with a -0.4% against the euro following the meeting, to CHF/EUR 0.93 and -0.5% versus the USD to CHF/USD 0.89.
Attention now turns to the meetings of the Bank of England (December 19th – consensus suggests that the Bank Rate will be maintained at 4.75%, albeit a -25 bps reduction cannot be ruled out), the Bank of Japan (December 19th – short-term rate of +0.25%, with officials having left the door open for an increase) and, more so, the US Federal Reserve on December 18th.
A -25 bps cut to the Federal Funds Rate (FFR) to a range of 4.25% - 4.5% is widely anticipated both by investors and analysts. Nevertheless, with inflation demonstrating stickiness (the core CPI has been stable at +3.3% yoy in the past three months) and with the economic activity impetus remaining solid, led by the consumer), a cautious outlook appears on the cards for the speed of future monetary policy easing.