Market Update: 16th December 2024

What happened last week?

Big questions for the UK government! Gross Domestic Product (GDP) unexpectedly shrank by 0.10% in October, versus a market expectation of 0.10% growth. The UK labour market is also looking in poor shape with many of the recent big economic growth initiatives announced by the new Government, such as a big increase in home building, reportedly not having the workforce to deliver it. Despite these poor conditions, the pound is almost at a post-brexit high against the euro, and not doing too badly against the dollar. Let’s hope things improve!

The Swiss National Bank’s (SNB) dropped the central borrowing rate by 0.50% last week, from a previous 1.00% to 0.50%. This represents the largest reduction in interest rates by the SNB for nearly a decade. This move was to counter the lower inflationary pressure, with Swiss inflation sitting at 0.70%, well below the SNBs target rate.

As expected, the European Central Bank (ECB) reduced borrowing rates last week from 3.40% to 3.15%, and the deposit rates from 3.25% to 3.00%. This is a sign of confidence from the ECB as they move to normalise interest rates for the eurozone. Such confidence cannot be said for individual member states, with many experiencing political instability, such as in France, Germany and now Italy. Many of these problems have arisen from disagreement between coalition governments, such as that seen in France and Italy where the main political parties working in coalition have struggled to push through fiscal reform budgets. To provide a bit more context, governments around the world racked up large debts from borrowing during covid when interest rates were low. And now that interest rates have increased, mixed with economic growth stagnation, government budget cuts must take place so as to not cause the government debts to spiral to uncontrollable levels. It is these necessary reform budgets that coalition governments find almost impossible to agree upon.

Inflation data from the US showed a small uptick in the annual Consumer Price Index (CPI) from 2.06% in the month ending October, to a higher 2.70% for November. The last interest rate decision for 2024 from the Federal Reserve will take place this week, however this small uptick in inflation is unlikely to change the expected reduction in borrowing rates.

The dollar remains strong against the backdrop of Trump’s incoming narrative around the US’ frontrunning position in global trade. With the dollar being at multi-decade highs, Trump may soon change his tune as a weaker dollar would be preferable for his America First agenda.

The Bank of Canada (BoC) reduced central borrowing rates from a previous 3.75% to a lower 3.25%. During this press conference the head of the BoC warned Trump’s supposed trade war with Canada could have serious effects on the country’s already weakening economy. Trump has said recently he will impose a 25% tariff on Canadian imports.

Argentina’s President Javier Milei seems to have proved his critics wrong, reporting another public sector fiscal surplus in the month of October. Popularity data also suggests Argentinians are happy across the board with the incumbent, with approval ratings remaining at relatively high levels.

South African officials criticized a $122 million settlement with McKinsey for its role in a bribery scandal involving state-owned companies Eskom and Transnet. They argue the settlement is insufficient and demand stronger action against widespread corruption. McKinsey allegedly bribed officials to secure consulting contracts between 2012 and 2016 during the "state capture" era under former President Zuma.

The Reserve Bank of Australia decided to keep interest rates at 4.35% last week, in an expected move because of inflationary pressures continuing to haunt the Australian economy. This is a tough pill to swallow as growth is still faltering, and a reduction in borrowing rates could have gone some way in spurring a welcomed rise in economic activity.

What to watch out for this coming week?

• Eurozone Core Price Index (CPI) - (18/12) - Inflation data for November will be released for the eurozone on Wednesday. It is forecast to come in higher than previous, rising from 2.00% year-on-year (YoY) in October, to 2.30% for November.
• UK Core Price Index (CPI) - (18/12) - Inflation data for November to be released for the UK. It is forecast to come in higher than previous at 2.60% for November.
• Bank of England (BoE) Interest Rate Decision (19/12) - The BoE is set to keep interest rates at 4.75%, which is likely due to inflationary pressures.

• US Manufacturing and Services Purchasing Managers Index (PMI) (16/12) - Manufacturing and Services PMI data for December to be released, forecasted to show expansion in the service sector, and contraction in manufacturing.
• US Retail Sales (17/12) - Retail sales data to be released on Tuesday will outline how the retail sector held in the month of November.
• Federal Reserve Interest Rate Decision (18/12) - The Federal Reserve will be announcing their final interest rate change for 2024. The Market expects a fall by a quarter of 1 per cent, from 4.75% to 4.50%. Any further easing could cause the dollar to devalue. The press conference afterwards will be closely watched by the markets for any hints on what's to come in 2025.

• South Africa National Holiday (16/12) - Monday will be a national holiday in South Africa for the Day of Reconciliation.

• Bank of Japan Interest Rate Decision (19/12) - The Bank of Japan (BoJ) will be meeting to discuss changing their central interest rates on Thursday. Markets do not expect any changes, however with the Japanese Yen at multi-year lows against the dollar, any movement in the USD/JPY off the back of the Fed's decision just hours before could change things.