Central bank decisions and inflation data headline the week

December 10th, 2024

RECAPPING LAST WEEK

The S&P500 index closed at a record high for a second straight week, rising 1% after U.S. employment data boosted expectations for another interest rate cut later this month. The Nasdaq Composite index surged more than 3% to set a fresh weekly closing high, while the Russell 2000 slipped 1%. S&P500 sector performance titled negative though, as gains in technology and consumer discretionary were more than offset by losses in deep cyclicals like energy, industrials, and basic materials. Spot Bitcoin prices crossed and closed above the 100k threshold for the first time. Crude oil futures fell more than 1% after OPEC+ delayed production increases for a third time amid a looming supply surplus.

Trade tensions between the U.S. and China escalated after the Biden administration announced new restrictions on semiconductor-related exports. China retaliated by banning shipments of high-tech materials such as gallium and germanium to the U.S. Turning to the labor market, U.S. Treasury yields fell after non-farm payrolls rose by 227k last month, slightly above expectations. However, October’s anemic reading was only revised higher by 36k, and the unemployment rate ticked up to 4.2%. All in all, the report reinforced the idea of a gradual slowing in the jobs market and the likelihood of a 25bps rate cut at the December 18 FOMC meeting. On the other hand, the amount of rate cuts for 2025 remains very much up for debate, as wage growth of 4% YoY is still well above the historical average of 3.1%, keeping inflation concerns in play. In a speech delivered Wednesday, Fed Chair Powell said the central bank can be “cautious” as it lowers rates to find the neutral level.

In other economic news, U.S. manufacturing shrank less than forecast in November as new orders expanded for the first time in eight months, while services sector activity eased but remained firmly in growth territory. Consumer sentiment rose in early December, but one-year inflation expectations also accelerated due to potential policy changes such as tariff hikes.

Overseas, Europe’s second-largest economy plunged into deeper political chaos after the divided French parliament voted to oust Prime Minister Barnier over his controversial 2025 budget proposal. French 10-year sovereign yields hit 12-year highs versus Germany’s. Meanwhile, German manufacturing data for October was mixed, as factory orders improved, but industrial production overall was hampered by automotive weakness. In the UK, construction activity in November was buoyed by commercial projects, while residential developments lagged. Finally, China’s recent stimulus measures lifted manufacturing activity into expansion territory, according to the official government and private Caixin PMI surveys. New orders rose the most in three years.

THE WEEK AHEAD

Central bank decisions and U.S. inflation are the main data points on this week’s economic agenda.
The Reserve Bank of Australia has left interest rates unchanged since late 2023, in contrast to most of its global peers that are well into easing cycles. It is expected to keep the status quo when it meets later tonight and stay on hold at least into early 2025 as the country grapples with stubborn inflation despite subpar economic growth.

The Bank of Canada meets Wednesday, and forecasts are divided on whether it will cut by 25 or 50bps. The European Central Bank has cut rates from 4.5% to 3.4% since June with another quarter-point reduction anticipated on Thursday. However, the loosening of monetary policy has only served to weaken the currency while doing little to spur economic activity in the Eurozone. Long-term growth prospects are further hindered by the political uncertainties in Germany and France.

In the U.S., Wednesday’s CPI report may not affect the Fed’s upcoming rate decision, but any upside surprise could drastically alter forecasts for next year given how strong the economy has been. The rest of the U.S. calendar includes Treasury auctions, producer prices, and small business sentiment. On the international side, China is scheduled to release inflation and trade balance figures, while Japan has PPI and the Tankan manufacturing and services surveys on the docket. The UK’s monthly GDP figures and inflation expectations round out the week.

(Schwab)

Definitions

Annualized Return: The rate at which an investment grows each year over the period to arrive at the final valuation.
Bear Market: A decline of at least 20% from the market’s high point to its low.
Beta: A measure of how an individual asset moves when the overall stock market increases or decreases.
Correlation: A measure of the extent to which two variables are related.
Dividend Yield: The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the price per share. It is also a company’s total annual dividend
payments divided by its market capitalization, assuming the number of sharesis constant.
Developed Markets: A country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness
to foreign ownership, ease of capital movement, and efficiency of market institutions.
Emerging Markets: A country that has some characteristics of a developed market but does not fully meet its standards. This includes markets that may become
developed marketsin the future or were in the past.
GrowthFactor Stocks: Growth stocks are companies expected to grow sales and earnings at a fasterrate than the market average.
LargeCap Stocks: Shares of publicly traded corporationswith a market capitalization of $10 billion or more.
LTM: An acronymfor”Last Twelve Months”or the past one year.
NTM:An acronymfor”Next Twelve Months” or the next one year.
Price Return: The rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, not including
income generated in the form of interest or dividends.
Total Return: Return on a portfolio of investmentsincluding capital appreciation and income received on the portfolio.
Small Cap Stocks: Small-cap stocks are shares of companieswith a market capitalization of less than $2 billion.
Standard Deviation: In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates the
valuestend to be close to the historical average of the data set, while a high standarddeviationindicatesthe current value is outside of the historical average range.
Value Factor Stocks: Stocksthat are inexpensive relative to the broad market based on measures of fundamental value (e.g., price to earnings or price to book).

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