Central Banks Remain Helpful
Gary Dugan, Chadi Farah, Mohammad Iravani, Bill O'Neill
The Global CIO Office
Fed on track to affect another rate cut – unless this week’s CPI report springs a surprise
NASDAQ 100 now up 32% year-to-date, leading broad markets higher
Bitcoin breaches $100,000 mark
Indian central bank’s dovish comments cement the recent recovery in the Indian equity market
France’s political and debt problems need a benevolent ECB – but just a 25bps cut likely this coming week
This week’s US inflation report could prove to be the only hurdle to an almost-certain Fed rate cut later this month.
The Fed is scheduled to meet on 17-18 December and the market is shaping its view of whether the US central bank will follow through on a much-anticipated additional 25-bp rate cut. The market prices an 85% probability of a rate cut at the meeting, followed by a likely stand pat at the Fed’s subsequent meeting in late January.
Moreover, last week’s US employment report wasn’t really eventful enough for the Fed to delay a rate cut. The November inflation data due out week this week could prove to be a hurdle, though. Economists estimate headline and core CPI, which excludes food and energy, to have risen 0.3% in the month. In addition, the headline producer price index, due out Thursday, should be up around 0.3% month-on-month.
Nevertheless, the equity market remains on a hot run, recording a third straight week of gains and bringing the post-election rally to 7%. Technology remains the sector of choice of investors with the tech-heavy Nasdaq up a further 3% on the week, taking the year-on-year gains past 30%.
The momentum in the US Technology sector appears to have been in part aided by the ongoing rally in cryptocurrencies.
Bitcoin finally closed above the $100,000-mark last week. Cryptocurrencies all gained in the wake of the announcement that President-elect Tump would propose crypto advocate Paul Atkins to head the market watchdog Securities & Exchange Commission.
Chart 1: NASDAQ 100 Tracking Bitcoin?
Source: Bloomberg
After the agressive sell off in the Indian equity markets in October/early November that saw equities tumble more than 10% in a matter of weeks, the market has found its poise again. Last week’s RBI meeting, which although leaving the policy interest rates unchanged, did help sentiment by opening the door to a probable February rate cut – something that the market had hoped for. Q3 GDP growth was weaker than expected (current market estimates put it at 6.6%, down from 7.2% previously). However, inflation has disappointed the market recently with ‘noisy’ food price inflation surprisng to the upside.
Chart 2: Indian Equity Markets Rally but Corporate Profit Forecasts Drift Lower
Source: Bloomberg
Challenges in France with Government Debt, but ECB to Provide Some Help
As we await next week’s European Central Bank (ECB) decision on interest rates, market expectations lean toward a modest 25-bp rate cut, with a potential commitment to further easing in early 2025. While hopes for a more aggressive 50-bp cut remain, the cautious approach reflects broader economic and political challenges within the Eurozone, particularly in France, which is witnessing significant political turmoil.
One silver lining from the political turbulence is the diminished likelihood of a significant fiscal tightening by the government. Like many nations globally, France faces substantial hurdles in orchestrating the political will or economic capacity to implement spending cuts. This reluctance – or perhaps inability – exacerbates high debt-to-GDP ratios and perpetuates unsustainable fiscal deficits—a scenario that raises long-term economic risks.
France’s Debt Dilemma: Rising Spread Risks
A key question for investors is whether French debt spreads will rise further, reflecting concerns over the government’s lack of commitment to addressing its debt issues. The stakes are high given France’s heavy reliance on foreign investors, who own approximately 50% of the country’s overall government debt. This contrasts with other major economies: foreign ownership accounts for about 28% of Italy’s debt, 30% in the US, 40% in Spain, and 45% in Germany, according to data from Barclays and the US Treasury.
France’s high exposure to foreign investors increases its vulnerability to shifts in market sentiments. A perceived lack of fiscal discipline could lead to higher borrowing costs, compounding the government’s financial challenges and heightening scrutiny of its fiscal strategy.
ECB: The Road Ahead
With the ECB expected to maintain a cautious monetary stance, the onus is on national governments to demonstrate fiscal responsibility. For France, navigating the fine line between economic growth and fiscal consolidation remains critical. The coming months will reveal whether political leaders can address structural debt issues—or if rising spreads signal a deeper erosion of market confidence. Investors will be watching closely.
Chart 3: French Government Debt Wider Spreads over Spain!
Source: Bloomberg
