News of the week summary - 17/11/2024
US Inflation hits 2.6%: Fed’s interest rate debate intensifies
In October, US inflation rose to 2.6%, up from 2.4% in September, as reported by the Bureau of Labor Statistics. This aligns with economists' expectations but highlights persistent price pressures in the economy. Core inflation, which excludes volatile food and energy prices, remained steady at 3.3% year-over-year but increased by 0.3% monthly for the third consecutive month. Housing-related costs accounted for half of the monthly rise, while energy prices remained flat.
The Federal Reserve has lowered its benchmark interest rate to a range of 4.5%-4.75% in recent months, aiming to reach a "neutral" level—one that curbs inflation without stifling demand. Officials hope to achieve a "soft landing," avoiding a recession while bringing inflation down to the 2% target. However, progress has slowed, with inflation dropping significantly from its 2022 peak of over 9%, but only marginally in recent months.
Markets interpreted the latest inflation figures as a sign that the Fed might reduce rates further. Futures markets now predict an 80% chance of a quarter-point rate cut in December, compared to 60% before the report. Treasury yields fell, reflecting expectations of easing monetary policy. Two-year yields dropped to 4.27%, while the S&P 500 rose 0.1%, signaling cautious optimism.
Economic resilience persists, with steady retail sales and a robust labor market despite disruptions like hurricanes and strikes. However, uncertainty looms as Donald Trump’s recent electoral win raises concerns about policies that could fuel inflation, such as proposed tariffs and tax cuts. Federal Reserve Chair Jay Powell emphasized that inflation is likely to decline gradually but unevenly over the coming years.
The latest data underscores the challenges of combating inflation’s “long tail,” especially in the service sector, while maintaining economic growth. Decisions by the Fed in the coming months will be critical in shaping the trajectory of inflation and broader economic stability.
Trump appoints Musk and Ramaswamy to lead bureaucracy reform initiative
Donald Trump has announced the creation of a "Department of Government Efficiency" (Doge) and appointed entrepreneurs Elon Musk and Vivek Ramaswamy to spearhead efforts to streamline U.S. federal operations. Their mission is to dismantle bureaucracy, reduce regulations, and cut government spending, in collaboration with the Office of Management and Budget, until July 4, 2026. This effort coincides with the 250th anniversary of the Declaration of Independence.
Musk, known for his leadership at Tesla, SpaceX, and X, has been a vocal Trump supporter throughout the 2024 campaign, rallying for regulatory rollbacks and fiscal austerity. Similarly, Ramaswamy, a biotech entrepreneur and former Republican primary candidate, has championed deregulation and endorsed Trump after exiting the race. The duo will work as external advisors, reflecting Trump’s broader strategy of involving private-sector leaders in shaping federal governance.
The appointment has already impacted markets, with Tesla shares surging nearly 50% over the past month, partially attributed to Musk’s alignment with Trump’s deregulation agenda. The initiative aligns with Trump’s campaign promise to cut $2 trillion from the $6.7 trillion federal budget, an ambitious goal that underscores his focus on reducing government intervention in the economy.
The move comes amid ongoing debates about the scope of regulatory authority. During the Biden administration, agencies like the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) introduced sweeping rules on climate disclosures, cybersecurity, and anti-competitive practices. However, many of these measures faced legal challenges and were constrained by a conservative Supreme Court, which has increasingly limited the power of federal regulators.
UK Economy stalled last quarter
The UK economy grew by a modest 0.1% in the third quarter of 2024, a marked slowdown from the 0.5% growth recorded in Q2, according to the Office for National Statistics (ONS). The services sector, accounting for about 80% of the economy, expanded by only 0.1%, while the construction sector performed better, growing 0.8%. In September, the economy contracted by 0.1%, driven by a decline in manufacturing output.
The figures underscore the challenges facing the Labour government, which has made economic growth a central objective. Chancellor Rachel Reeves recently introduced a budget aimed at repairing public finances, with increased taxes and borrowing to fund public services. However, businesses have raised concerns about higher national insurance contributions, warning they could deter job creation and investment.
The UK’s GDP growth lags behind other major economies, including the US (0.7%) and the Eurozone (0.4%), for the same period. Despite a rise in consumer spending (+0.5%) and business investment (+1.2%) during Q3, these gains were insufficient to offset broader economic stagnation.
The Bank of England (BoE) predicts weak growth for the final quarter, forecasting a 0.3% expansion. Earlier this month, the BoE reduced interest rates to 4.75%, citing easing inflation pressures, though further rate cuts are unlikely before early 2025.
China's October data reveals soft economic growth
China's industrial output growth slowed in October, rising by 5.3% year-on-year, down from 5.4% in September, and missing the 5.6% forecast. Despite this, retail sales showed improvement, up 4.8%, the fastest growth since February. The uptick was largely due to the Singles' Day shopping festival, which kicked off earlier this year.
The property sector remains a major concern, with property sales declining by 15.8% year-on-year in the first ten months of 2024, although the rate of decline slowed compared to previous months. Despite some stimulus measures aimed at boosting the housing market, economists caution that it is too early to call a turnaround in the sector, which remains weak.
The looming return of Donald Trump to the White House has raised concerns in China. Trump's administration has threatened to escalate tariffs on Chinese goods, which could slow recovery efforts and prolong economic uncertainty. Goldman Sachs forecasts that China may need to implement substantial fiscal stimulus in 2025, including interest rate cuts and increased government spending, to mitigate the effects of a potential trade war with Trump.
Chinese authorities have introduced a range of stimulus measures, including tax incentives for the property market and fiscal support for local governments. However, economists argue that these efforts are likely to have a modest impact in the short term. Capital Economics predicts that China's economic slowdown will persist into the second half of 2025, further hampered by external pressures like trade tensions with the US.
Global Stocks drop as Fed signals slower rate cuts
Global equity markets saw significant declines this week, with the MSCI World Index posting its largest weekly drop in two months. This downward movement stemmed from reassessments of Federal Reserve monetary policy and mixed economic data that shifted market expectations.
Federal Reserve Chair Jerome Powell indicated that strong economic growth, a healthy labor market, and inflation remaining above the 2% target reduce the urgency for aggressive interest-rate cuts. Market expectations for a December rate cut dropped to 58.4% from 72.2% just a day earlier. Slower rate cuts mean higher borrowing costs for longer, which can weigh on corporate earnings and equity valuations.
Retail sales in the US rose by 0.4% in October, exceeding economists' expectations of 0.3%. This suggests consumer spending remains resilient, further supporting the Fed’s cautious stance on easing policy. However, higher-than-expected import prices, driven by fuel costs, added inflationary pressures, complicating the outlook for monetary policy.
Equities had initially rallied after President-elect Donald Trump’s re-election, with investors expecting pro-growth policies like tax cuts and deregulation. However, optimism has waned as markets recalibrate the Fed’s trajectory and potential fiscal implications, such as higher tariffs increasing inflation and fiscal deficits.