Please note that this is the last weekly publication until next year.
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The FED sounded more dovish and the ECB more hawkish than expected, in a wild week for financial markets. These meetings came at a time when it is common wisdom that interest rates have peaked and the next question to be answered is when and how much interest rates will be cut, as the market has already priced them in. Under this premise, the FED's Chairman, Mr. Powell, did not explicitly declare victory, but he revealed that rate cuts were indeed discussed in last week's meeting. More importantly he also said that the FED would not wait until inflation is back to 2% to start lowering rates, as policy would be unnecessarily restrictive at that point. The FED also provided new interest rate forecasts, which now call for 75bp cuts next year, more than the 50bp which were penciled in at the September meeting. On the contrary, Mrs. Lagarde was crystal clear that rate cuts were not discussed and that their strategy is to maintain rates at restrictive levels in order to make sure that inflation does not move higher again.
The ECB kept interest rates unchanged and mentioned that "while inflation has dropped in recent months, it is likely to pick up again temporarily in the near term". According to the latest Eurosystem staff projections for the euro area, inflation is expected to decline gradually over the course of next year, before approaching the Governing Council’s 2% target in 2025. Overall, headline inflation is expected to average 2.7% in 2024, which is 50bp lower than the previous forecast and 2.1% in 2025, which is the same as before. The new, 2026 inflation forecast is slightly lower to 1.9%. The growth forecast for 2024 was also cut, to 0.8%, down 20bp.
The Swiss National Bank (SNB) said that current interest rates are appropriate and cuts were not discussed. SNB's Chairman, Mr. Jordan said that there is currently great uncertainty and in fact, in the very near term, it remains likely inflation will actually pick up. The biggest change in the SNB meeting was that the focus is no longer on the sale of foreign exchange. According to the Chairman: "that should be considered a major change in communication from the last couple of quarters". He also clarified thar the SNB could be active either way, as the decision process would be to consider what the appropriate economic and policy decisions are, and then respond with either rates or FX intervention, depending on which was deemed the better tool. We remain of the view that the longer-term direction of travel for the Swiss currency is higher, despite short-term moves.
The November US inflation numbers were in-line with expectations. The headline CPI, rose moderately (+0.1%) on a monthly basis, as gasoline prices declined strongly (-6.0%). The yearly change dipped to 3.1% from 3.2% in October. The core CPI increased 0.28% which shows a very small acceleration compared to the 0.23% October increase but is still consistent with slowing inflation. We should note the monthly November Core CPI increase was the 5th increase in the past 6 months, which was below 0.30%. Prior to that period, core CPI increases had been above 0.3% for 20 months in a row. The yearly Core CPI number remained unchanged compared to October, at 4.0%.
The US macro economic data of the week added support to the "soft landing" scenario as labor market and consumer spending remain more resilient than expected. November Retail Sales were up 0.3%, a surprise increase against consensus for -0.2%, while annualized retail sales rose by 4.1% y/y, up from 2.2% in October and the highest since February. The weekly initial jobless claims were announced at 202K, a much better number than the 223k forecast and down from last week's 221k print. Continuing claims were more or less in line with expectations, coming in at 1.87mn from 1.85mn last month and compared to the 1.88mn forecast.
The Eurozone data of the week showed, however, a worsening macroeconomic environment. According to the preliminary data, the Eurozone PMI fell to 47.0 from 47.6 last month and against expectations for an improvement to 48.1. Both Manufacturing and Services were down, but Services fell much more (48.1 from 48.7), which is more worrying as these industries have been holding up the economy for most part of this year, as Manufacturing was already in recession. On a country level, German Manufacturing PMI improved to 43.1 from 42.6 in November, while in France it fell further to 42 from 42.9. Services were weak for both countries. All figures remain deeply below 50.0, which marks whether there are recessionary conditions or not.
Equities rallied to a new cycle high, boosted by the FED's new worry about growth. US indices added almost 3% on average and Europe underperformed this time, as the ECB dissapointed the bulls. The Swiss market managed to slightly outperform with a 1% rise, while German equities were volatile and ended the week flat. The economic sensitive sectors in the US rallied (Financials, Materials, Industrials up by more than 3%) while small caps exploded by almost 7% for the week.
Bonds continued to rally after the central bank meetings confrmed that interest rate hikes belong to the (recent) past. The 10-year US yield dropped below 4% for the first time since August and fell to 3.90%. It is now more than 110bp lower from the October high, offering to the investors gains of more than 7% since then. German yields also moved lower, despite the ECB disappointment, as the macro-data continue to negatively surprise, as outlined above. The 10-year Bund is flirting with the 2% level, also down about 100bp from the October high of 3%.
Chart of the Week : Can this year's laggards outperform next year?
As we are preparing ourselves for the holidays, we are also looking forward to what 2024 might bring for investors. The above chart shows the performance by sector/industry in the Eurozone year-to-date. We see that Retail and Technology have posted gains of more than 30%, while Energy, Telecommmunications and Healthcare have gained less than 10%. Even worse, Basic Resources and Food&Beverage companies have fallen by more than 5% in the same period. Although "sticking with the winners" usually makes sense in equity investing, we do see opportunities in the laggard sectors to perform much better next year and end-up higher in the rank of this performance table, same time next year. To this end, we have recently increased our exposure to Energy and Healthcare, while adding some names (like AngloAmerican) in the Basic Resources sector, which is trading at very attractive valuation and dividend yield. Food & Beverage should also do much better next year, as the destocking in the US is reaching its final stages, a problem which put a lot of pressure on companies' margins and volumes in 2023.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
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• Sources: Chart of the Week : UBS, Photo: