(Repetition without change of a dispatch sent on Friday)
If the end of the year is almost in sight, the home stretch will be far from calm for investors.
The week before Christmas promises to be busy: after the European Central Bank (ECB), the American, Japanese and British central banks must announce their decisions on interest rates in the coming days, while the government in Germany will face a confidence vote that should pave the way for snap elections in February.
1/ A REDUCTION IN DECEMBER, AND AFTER?
The US Federal Reserve (Fed) is expected to announce another 25 basis point interest rate cut on Wednesday, the third in a row, as the latest consumer price index rose in line with estimates and left the outlook unchanged operators for the December meeting.
Investors, however, have lowered their expectations regarding the extent of reductions in borrowing costs next year. Operators expect rates to fall to around 3.7% by the end of 2025, from 4.5%-4.75% currently, about 90 basis points lower than expected in September.
The focus is therefore on the Fed’s own projections and comments from its Chairman Jerome Powell regarding his expectations for future easing. The head of the US central bank said the economy was stronger than the Fed had anticipated in September, and appeared to support a slower pace of rate cuts going forward.
2/ SUSPENS IN JAPAN
The pendulum of the Bank of Japan’s (BoJ) monetary policy expectations has swung wildly over the past two weeks, causing confusion among investors, but as the December 19 decision draws closer, the signal is becoming clearer. even if the outcome remains uncertain.
A majority of economists polled by Reuters believe the central bank will keep interest rates at 0.25%.
The day before, Bloomberg reported that BoJ policymakers saw “little cost” in delaying further tightening.
Market volatility could undoubtedly be high. One risk is that the Fed surprises by not cutting rates on December 18, which would send the dollar/yen higher.
Analysts point out, however, that it is very rare for the Fed to go against expectations when the market’s conviction in favor of a cut is so strong.
3/ THE DAX: THE DEVIL IS HIDING IN THE DETAILS
The Frankfurt Stock Exchange’s DAX .GDAXI was the best-performing European index of the year, breaking one record after another with a 22% rise in 2024.
Defense, technology and construction stocks more than compensated for the poor performance of the automotive sector, which was in the doldrums. German businesses appear to be resisting weak growth and political gridlock.
The vote of confidence in the lower house of the German Parliament scheduled for Monday, in which Chancellor Olaf Scholz is unlikely to obtain a majority, will pave the way for early elections in February, following the breakup of the coalition government.
But the devil is in the details. According to Goldman Sachs, only 18% of the turnover of DAX groups comes from Germany, compared to 33% for MDAX companies
.MDAXI, which is down 1.1% this year. German corporate profits fell 5.4% year-on-year in the third quarter, compared with 8.2% profit growth for STOXX companies, LSEG data shows.
German stock markets may therefore soon begin to align themselves a little more with underlying economic and political realities.
4/ AN ACCELERATION OF THE BOE?
When it comes to rate cuts, the Bank of England (BoE) is taking its time.
Traders expect the BoE to keep rates at 4.75% on Thursday and not make a third cut of 25 basis points until February.
The increase in employer charges in the October budget presented by Keir Starmer’s Labor government led major companies to announce price rises, fueling inflation fears and helping to push the pound to double highs. and a half years against the euro GBPEUR= , while the ECB relaxes its policy more quickly than the BoE.
But bond markets are questioning this divergence and the yield on two-year gilts GB10YT=RR, which moves according to rate forecasts, has fallen to around 4.38%, compared to more than 4.5% ago. a month.
At the same time, UK job growth is slowing as tax rises discourage hiring plans, and consumer confidence is weak.
5/ SERVICES ARE RUNNING OUT OF POWER
November PMIs show that the once-robust services sector in major economies is losing steam, ending a divergence from sluggish manufacturing activity.
December figures, to be released next week, are expected to show whether the slowdown is deepening.
The euro zone’s composite PMI, considered a good indicator of overall economic health, fell to 48.3 in November from 50.0 in October. In the UK, the cross-sector PMI fell to its lowest level of the year, 50.9, just above the threshold that separates contraction from expansion. Even service sector activity in the United States has slowed.
Concerns over tariffs promised by US President-elect Donald Trump and political unrest in France and Germany are also likely to further affect business activity.
However, for some observers, the PMI data paints an overly pessimistic picture of underlying activity, with falling interest rates helping to bolster sentiment.
(Graphiques Prinz Magtulis, Pasit Kongkunakornkul, Vineet Sachdev; compiled by Dhara Ranasinghe, Kirsten Donovan; French version Diana Mandia, edited by Blandine Hénault)
