Weekly Market Commentary (November 12, 2024)

Muzinich’s weekly take on key developments in financial markets and economies explores the widening gap between governments and central banks.

As he himself could say, the President-elect of the United States, Donald Trump, will be extremely satisfied, not only with the magnitude of the victory of his Republican Party, which seems destined for a red sweep, but also with the immediate reaction of financial markets. This is one of his main indicators for evaluating the success of his policies, as he demonstrated during his first term.

Government bond yields remained unchanged or fell slightly across the curve. Corporate credit spreads tightened, contributing to positive returns across markets, with US high yield bonds the best performers of the week.

On the foreign exchange market, the US dollar has changed little compared to other G10 currencies. The main trend was a weakening of the euro across all markets. In contrast, emerging market currencies performed well, with commodity currencies such as the South African rand, Brazilian real and Mexican peso each appreciating by more than 2% against the US dollar. . Currencies linked to manufacturing in Asia depreciated slightly, but by less than 0.5%.

With the exception of gold, commodities had a strong week, as did digital currencies. US stocks surged, with the S&P 500 gaining more than 4%, while the Bloomberg World Index rose more than 3% and the Shanghai Index more than 5%. Europe was the worst performer.

After recent peaks, volatility has experienced a reversion to the mean, the VIX (stock volatility)[1] and MOVE (bond volatility)[2] both returning to their one-year average.

China feels the force

Chinese assets had a good week, supported by confirmation of additional government measures aimed at boosting growth. The Standing Committee of the National People’s Congress approved a 10 trillion yuan (US$1.4 trillion) program to help local governments integrate off-balance sheet debts into their accounts[3].

It’s just the beginning, with Finance Minister Lan Fo’an saying “more forceful” tax policies will be introduced next year, hinting at measures directly targeting the property market, bank capital and consumption interior[4]. The next big opportunity to announce further stimulus measures will come in December at the annual Central Economic Work Conference, where all 24 Politburo members and policymakers will meet.

The Bank of England keeps its promises

The Bank of England cut its benchmark rate from 5% to 4.75%, as expected[5] Its Monetary Policy Committee’s vote was split 8-1, with Catherine Mann the only vote in favor of keeping rates unchanged. The Committee maintained its guidance from the September meeting, reaffirming that a “gradual approach to lifting monetary policy restrictions remains appropriate.”

The Committee, however, revised its economic forecasts upwards[6]which, as our chart of the week shows, reflects the significant easing of economic policy planned in the government’s budget plans.

As a result, inflation is expected to remain above target through 2027, while neutral policy rates are expected to be reached in the fourth quarter of 2025, at around 3.6% to 3.7%. The one-year overnight interest rate stands at 4.05%[7]suggesting that investors are more concerned about potential inflationary pressures arising from the government’s fiscal plans.

Germany is cracking

With the European Central Bank not meeting until December, the focus shifted to Germany, but for troubling reasons that did not support asset prices. German Chancellor Olaf Scholz dissolved his three-party ruling coalition by firing FDP finance minister Christian Lindner, known for his fiscal conservatism[8].

Tensions within the coalition had increased over next year’s budget and strategies to revive Germany’s flagging economy. Lindner’s refusal to lift limits on additional borrowing may have been the breaking point for the chancellor.

As a result, Chancellor Scholz is now at the head of a government without a majority in the lower house of Parliament, which raises the possibility of early elections as early as January. This development aggravates uncertainty in the euro zone, especially since France, the zone’s second largest economy, has a fragile parliament and a worsening budgetary situation. Recently, both Moody’s and Fitch have revised their outlook for France downwards.

Moody’s said: “The decision to change the outlook from stable to negative reflects the growing risk that the French government will not be able to implement measures to avoid sustained and larger-than-expected budget deficits and a deterioration in debt accessibility »[9].

Given political fragility, weak economic growth and general geopolitical uncertainty, it is perhaps not surprising that European markets underperformed last week.

Fed unanime

The Federal Open Market Committee (FOMC) of the Federal Reserve unanimously lowered its rate target by 25 basis points (bps) to a range of 4.50% to 4.75%.[10] Fed Governor Michelle Bowman, the lone dissenting voice against the 50bp cut at the September meeting, supported this month’s smaller cut.

The most notable change in the Fed’s monetary policy statement was the removal of the phrase stating that the FOMC “has gained greater confidence that inflation is sustainably approaching 2%.” This change could be interpreted as a loss of confidence by the FOMC in the disinflation trajectory under the next administration.

During the accompanying news conference, Federal Reserve Chairman Jerome Powell said he would not resign if Mr. Trump asked him to. He also stressed that the removal or demotion of any Fed board leader, including himself, is not permitted by law[11].

Inflation: Falling, but for how long?

Moving away from the weekly news, it seems increasingly clear that government policies in advanced economies are moving in the direction of inflation. Examples include France’s reluctance to rein in fiscal spending, the UK’s autumn budget, Chancellor Scholz’s dismissal of his finance minister over his resistance to raising borrowing limits, and the President-elect Trump’s campaign, which focused on deportation, increased tariffs, tax cuts and deregulation.

Central bankers will remain reactionary, continuing to emphasize that their approach to rate decisions will be “data dependent.” But the warning signs are there for all to see, with upward revisions to projections and changes in the language of policy statements.

As for 2025, the objectives of governments and central banks do not seem aligned to us. They are polar opposites – let the fight begin!

Chart of the week: Bank of England revises inflation forecast upwards

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