Please see the below article from Brooks Macdonald detailing their thoughts on global markets. Received this morning 12/12/2024.
What has happened
Equity markets had a decent day yesterday, patently satisfied with the latest in-line-with-expectations reading for US consumer inflation and raising hopes that the US Federal Reserve (Fed) will next week cut interest rates one last time for 2024. The US S&P500 equity index was up +0.82% and sitting less than 0.1% below its recent all-time high, whereas the ‘Magnificent 7’ group of US megacap technology stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla), was up +3.08% hitting a fresh record high. Over in Europe, the pan-European STOXX600 equity index rose +0.28%, while the UK FTSE100 equity index rose +0.26%, all in local currency price return terms.
Markets overlook still-sticky US inflation
On the face of it, both the annual headline ‘all-items’ and core (excluding energy and food) US Consumer Price Index (CPI) readings of +2.7% (vs +2.6% in October) and +3.3% (flat on October), respectively, were as expected. Markets certainly reacted that way, and derived from Fed Funds futures interest rate contracts, expectations for a Fed cut of 25 basis points (bps) at next week’s meeting decision day (Wednesday 18 December) rose to an almost certain outcome of 99% implied probability by the close yesterday. However, dig into the latest 3-month-annualised rate of change, and there is a slightly ‘sticky price pressures’ interpretation perhaps – the latest 3-months annualised US core CPI inflation rate to November was higher, at +3.7%, and up from +3.6% for the 3-months annualised to October.
European Central Bank meets today
Before we get to the Fed next week, later today sees the turn of the European Central Bank (ECB) to set interest rates, due out at 1.15pm UK time. The ECB are widely expected to cut their deposit interest rate by 25bps, taking it down to 3%. If that happens, then the ECB would have made a total of 100bps of cuts to the deposit rate in 2024, since they began their rate-cutting cycle back in June. On the subject of central banks, over in Canada yesterday the Bank of Canada delivered a 50bps interest rate cut, the second such-sized cut in a row, and taking rates there down to 3.25%, and making a total of 175bps of cumulative cuts this year.
What does Brooks Macdonald think
Over the past 6 months or so, there has been on balance a growing interest-rate-cut narrative develop – in broad terms, it has been the acknowledgement by central banks in most developed economies around the world that with inflation not yet sustainably at target but clearly moderating none-the-less, there is enough room for previously tight monetary policy settings to be eased back. Even a key hold-out, Australia’s central bank earlier this week, while again leaving rates unchanged, hinted at a possible interest rate cut to come next year, saying that they were “gaining some confidence that inflation is moving sustainably towards target”. All in all, while there is still much debate around where interest rates will eventually settle at, this developed-economies broadening interest rate cutting backdrop should be supportive for risk assets as we look forward to next year.
Bloomberg as at 12/12/2024. TR denotes Net Total Return.
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Alex Clare
12/12/2024