European Headwinds Strengthen

For the week ending 22 November 2024

As of midday Friday, global equities were higher on the week while the yield on the US 10-year Treasury note retreated from 4.50% level last week to 4.41% on Friday. The price of a barrel of West Texas Intermediate crude oil edged up to $70.35 from $68.10 a week ago. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 16.45 from 15 last Friday.

MACRO NEWS

Aggressive ECB cut more likely

The euro slumped to a two-year low against the dollar on Friday morning after preliminary purchasing managers’ indices for November contracted more than expected. The eurozone manufacturing PMI fell to 45.2 from 46 in October while the services component fell from 51.6 to 49.2. That dragged the composite reading down to 48.1 from 50.0. The data fueled concerns that the European economy is stagnating and upped the odds that the European Central Bank will cut rates by a half-point when it meets on 12 December. Swaps markets now imply about a 45% chance of a 50-basispoint cut next month, up from 15% before the figures were released. With economic storm clouds on the horizon as US President-elect Donald Trump mulls broad-based trade tariffs, and with political instability in both France and Germany, markets anticipate that European policymakers will act early to shore up economic growth while warding off an inflation undershoot.

Biden unshackles Ukraine, Russia ups ante

US President Joe Biden cleared the way for Ukraine to use US-produced long-range missiles to strike military targets deep inside Russia this week. In response, Russia lowered the threshold for its use of nuclear weapons. The new doctrine allows for a nuclear response to what it deems aggression by non-nuclear states that are supported by other nuclear powers. On Thursday, Russia ratcheted up pressure on Ukraine by using a long-range ballistic missile capable of carrying a nuclear warhead for the first time in its conflict with Ukraine. On Wednesday, Reuters reported that Russian President Vladimir Putin is open to discussing a Ukraine ceasefire deal with President-elect Trump but ruled out making any major territorial concessions and insisted that Kyiv abandon ambitions to join NATO.

Xi willing to work with Trump

China’s President Xi Jinping told Biden at last weekend’s APEC summit in Peru that Beijing is prepared to work with the Trump administration to manage difference in the relationship between the two countries. Xi said, however, that China has redlines that the United States should not cross. Chinese state media listed the redlines as Taiwan, democracy, human rights and the country’s economic development. Trump campaigned vigorously on imposing tariffs of as much as 60% on US imports from China. At a subsequent G-20 summit in Brazil, Xi said that China is ready to consolidate its strategic partnership with Germany and that it will cooperate with the European Union to foster steady ties. The overture is seen as a hedge against fraying China-US trade ties.

Fed’s Williams: We’re not there yet

Federal Reserve Bank of New York President John Williams, one of the most influential members of the FOMC, said in an interview with Barron’s released Thursday, that while inflation in the US has fallen, “it’s not quite there yet,” though he expects the deflationary process to continue. The ed funds rate will fall closer to neutral, he said, and will be lower a year from now. He was upbeat on the outlook for the economy, saying potential growth has risen from prior to the pandemic and is now around 2.25% to 2.50%. He sees a steady labor market next year.

QUICK HITS

A preliminary reading of the S&P Global US services sector PMI jumped to 57 in November from 55 in October while the manufacturing gauge edged up to 48.8 from 48.5 last month. The two readings combined to lift the composite index to a robust 55.3 in November, up from 54.1 in October.

In its annual stability review, the European Central Bank warned Wednesday that sovereign debt risks are growing in the eurozone at a time of heightened political uncertainty and muted economic growth. Already heavy debt burdens could limit the ability of some eurozone governments to respond to adverse shocks, the ECB said.

Trump announced the nomination of Howard Lutnick, CEO of Cantor Fitzgerald and co-head of the president elect’s’ transition team, to lead the US Department of Commerce. Lutnick had been in the running for Treasury secretary before being appointed to head the Commerce Department, where he will play a pivotal role in tariff policy.

Germany’s Bundesbank reported that wage growth hit a 30-year high in Q3, with negotiated pay jumping 8.8% from a year ago. Despite the wage bump, the central bank forecasts continued German economic weakness.

National Rally leader Marine Le Pen has warned that her party will vote to bring down the French government led by premier Michel Barnier if he blocks the amendment of his draft budget. 

On Thursday, Canadian Prime Minister Justin Trudeau, who is trailing in opinion polls, unveiled a mini–stimulus package to aid households struggling with high debt payments. The government will send C$250 to Canadians earning less than C$150,000 and will waive the sales tax on prepared foods, beer and wine, children’s clothing, diapers and toys for two months. The price tag for the action is approximately C$6.3 billion.

Bank of Japan Governor Kazuo Ueda said Thursday that the central bank factors in the possible impact of a weak yen in its price forecasts, although the stability of the currency market isn’t one of its mandates. The yen strengthened on the comment though markets see a December BOJ rate hike as a 50-50 bet.

US Securities and Exchange Commission Chair Gary Gensler, appointed by President Biden, announced he will resign his post on inauguration day, 20 January 2025.

US existing homes sales rose 3.4% in October, reversing a 1.3% drop in September.

Bitcoin continued its rally, reaching $99,500 this week.

A work of art that features a banana duct-taped to a wall sold at auction for $6.24 million on Wednesday, in what contrarians might call a sign of irrational exuberance.

UK inflation rebounded in October amid rising energy costs, gaining 0.6% from the month before and 2.3% from a year earlier. Inflation was flat on the month in September and rose 1.7% year over year.

The US filed criminal and civil charges against Gautam Adani, founder of India’s Adani Group, for bribery. The moved sparked some foreign outflows from Indian equities.

Russian sabotage is suspected after two underseas fiberoptic cables in the Baltic Sea were cut, one between Sweden and Lithuania and another between Finland and Germany. 

Tight spreads may be obscuring corporations’ high borrowing costs and strained debt sustainability, marking signs of a possible bubble in US credit, according to a report from S&P Global Ratings.

Canadian consumer prices rose more than expected in October, going up 2% from a year ago. The data reduced the odds of a half-point rate cut at the 11 December meeting of the Bank of Canada.

THE WEEK AHEAD

With US markets closed for Thanksgiving on Thursday, the highlights for next week include Wednesday’s release of revised US Q3 GDP data along with durable goods orders and the personal consumption expenditures price index, the last piece of the US monthly inflation puzzle. On Friday, preliminary CPI data for the eurozone will be released, along with Canadian Q3 GDP.

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.