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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 16th December 2024
[00:00:00] Nathan Sweeney: Good morning, everybody. It is Monday, the 16th of December. Christmas is fast approaching, so if you haven't had an opportunity to do Christmas shopping, now is probably a good time to do so.
[00:00:09] Nathan Sweeney: Today I'm joined by Andrew Shaw. Andrew is our analyst for fixed income within the multi asset solutions team. Good morning, Andrew.
[00:00:16] Andrew Shaw: Good morning, Nathan.
[00:00:18] Nathan Sweeney: So Andrew, let's start with a quick recap of what was happening in markets last week.
[00:00:23] Andrew Shaw: Equity markets have been relatively flat this week, there's not much volatility out there.
[00:00:27] Nathan Sweeney: So as you can see, not a lot of movement in markets last week, some of that may be down to lower volumes, perhaps people out doing that Christmas shopping, as I mentioned.
[00:00:36] Nathan Sweeney: But Andrew, we did have a meeting at the beginning of the week in China. So we had the Chinese authorities held a big meeting. So was there any news coming out of that meeting?
[00:00:45] Andrew Shaw: In a significant move earlier this week, China's political bureau announced plans to shift its monetary policy stance from prudent to moderately loose.
[00:00:53] Andrew Shaw: This change was announced just before its Central Economic Work Conference and is aiming to stimulate consumption, expand domestic demand, and improve investment conditions. China will also implement proactive fiscal measures and strengthen its unconventional counter cyclical policies.
[00:01:07] Andrew Shaw: On the inflation front, China's core CPI rose by 0.3% year over year in November and it was slightly up from October's 0.2% increase. A headline CPI, which includes food and energy prices, has increased by 0.2%, making it its lowest level since June.
[00:01:24] Nathan Sweeney: Okay, so what we can really see there is that the authorities within China are looking to step up support for the economy.
[00:01:31] Nathan Sweeney: So, you know, we know the economy has been struggling, because of the fact that they've had big issues within their property market, this has impacted consumer sentiment.
[00:01:41] Nathan Sweeney: So consumers aren't feeling really good about the situation, so therefore they're not spending.
[00:01:47] Nathan Sweeney: So what we're seeing here is the authorities just trying to boost consumer confidence and really get that economy going again, so good news on that front, and it did help emerging markets towards the beginning of the week.
[00:01:58] Nathan Sweeney: Now we also had some news out of the Eurozone during the week, so was there anything to point out or highlight from that?
[00:02:05] Andrew Shaw: Yeah, the European central bank has lowered its interest rate this week by 0. 25%, which takes it down to 3%. That's the fourth cut in rates since June.
[00:02:16] Andrew Shaw: This move reflects a more dovish tone from the ECB as there are certain issues in the Eurozone such as weaker growth forecasts and projecting GDP just to be 1.1% in 2025, that projection extends to 1.3% in 2027, so not much growth there.
[00:02:35] Andrew Shaw: Christine Lagarde came out and highlighted downside risks to growth. Markets are now expecting the ECB to reduce rates further next year with swaps pricing and five more quarter point cuts by September 2025.
[00:02:47] Nathan Sweeney: Yeah, so really what we're seeing there is the European Central Bank continuing to cut interest rates.
[00:02:52] Nathan Sweeney: This is the fourth interest rate cut that we've had this year, so they're just looking to support growth within the Eurozone economy. It has been a bit lackluster, but you know, those rate cuts, they'll continue to support the consumer. It'll support businesses and, you know, they start to feed in over time and ultimately that will lead to higher growth.
[00:03:10] Nathan Sweeney: So, you know, it's good news to see the continuation of those rate cuts coming through for consumers and businesses within the Eurozone.
[00:03:17] Nathan Sweeney: Now we did have some news out of the US around inflation, so was there anything to highlight there?
[00:03:23] Andrew Shaw: November's number, the US core CPI, the measure that excludes volatile food and energy prices rose by 0.3% on a month on month basis, matching October's reading and meeting market expectations. Year over year, core inflation has held steady at 3.3%, and when we include food and energy, the broader monthly inflation rate also increased by 0.3%, which brings the annual inflation rate upto 2.7%.
[00:03:49] Nathan Sweeney: So the news there is that inflation is actually ticking up slightly in the US, so coming in at 0.3% for the month, so slightly higher overall for the year.
[00:03:59] Nathan Sweeney: But you have to remember that inflation has come down substantially from the levels that we've seen two years ago where. Inflation in the US topped out at 9.1%.
[00:04:08] Nathan Sweeney: So we're not overly concerned about the fact that we're seeing some marginal pickup in inflation, because we don't think that that really prevents the US from continuing to cut interest rates and we do have a meeting on that next week, so the market will be very much focused on that.
[00:04:27] Nathan Sweeney: Just moving on to some of the other news we had for the week. So there was talks from NATO talking about increasing their defence spending, so what's the news on that side?
[00:04:37] Andrew Shaw: European NATO members are discussing a potential increase in the alliance's defence spending target to 3% of GDP and that's ahead of its annual summit next June.
[00:04:46] Andrew Shaw: This will be a significant increase from the current target of 2%. Only 23 of NATO's 32 members are expected to meet that 2% target this year. Countries like Italy and Spain are falling short of the existing benchmark, which was actually agreed upon over a decade ago.
[00:05:02] Andrew Shaw: The discussions are partly driven by concerns over Donald Trump's returns to the US presidency, as well as the realisation that current defense spending is insufficient to sustain Ukraine's support and deter Russia.
[00:05:14] Nathan Sweeney: Okay, so what we can see there is that NATO members are looking to increase the level of money that they're spending on defense.
[00:05:22] Nathan Sweeney: So they have this target of 2% and Donald Trump has been very critical that a lot of NATO members haven't hit that level. But now you're seeing some NATO members talking about hitting a target of 3%. So looking to bake in some goodwill with the Trump administration before he gets into office next year.
[00:05:39] Nathan Sweeney: Because obviously there'll be talks about tariffs as well. So if they can build up a better relationship, then maybe that will help on the tariff front. So Europe trying to get on the front foot there, and ultimately that would be good for defense companies if we see that increased spending coming through.
[00:05:55] Nathan Sweeney: So I suppose that's covered off quite a bit, so what do we have for the week ahead? What's the big news to look forward to?
[00:06:01] Andrew Shaw: Federal Reserve are due to meet on Wednesday and there's a 98% probability of one cut.
[00:06:06] Andrew Shaw: The Bank of Japan interest rate meeting is on Thursday and we're not expecting any cuts there.
[00:06:10] Andrew Shaw: And the Bank of England interest rate decision is also on Thursday and no cuts are expected there either.
[00:06:17] Nathan Sweeney: So just to recap on that, it looks like we're getting an interest rate cut from the US Central Bank next week, and we're not expecting anything from the Bank of England because they cut back in November or the Bank of Japan.
[00:06:28] Nathan Sweeney: But, you know, it should be a positive step forward in terms of continued rate cuts progressively happening over the course of this year and we expect that to continue into next year.
[00:06:38] Nathan Sweeney: So hopefully that's given you all you need for the week ahead and hopefully you get your Christmas shopping done in time for Christmas and have a great week, everybody.