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17 Dec 2024 | 3 minutes to read
Last week the annual inflation rate in the US, as measured by the Consumer Price Index (CPI), rose for the second consecutive month, ticking up from 2.6% in October to 2.7% in November, in line with expectations. On a monthly basis, the CPI rose by 0.3%, the strongest increase since April because of an unfavorable base effect of its calculation.
The annual Core CPI rate, which excludes more volatile prices including food and energy costs, remained stable from October at 3.3%, but stubbornly higher than target. Shelter costs rose by 0.3% month-on-month and 4.7% since November 2023. Continuing pressure from housing-related costs has been an enduring driver of inflation since 2021. It is encouraging to see shelter pricing pressures cool, given that they account for a sizeable proportion of the CPI reading.
November’s CPI readings should keep the US Federal Reserve on track to cut interest rates at its December meeting with markets indicating at least a 95% probability of a quarter-point reduction. The trajectory of US inflation for 2025 is much less certain. Although forecasts indicate CPI inflation will remain at circa 2.5% over the next 12 months, President-elect Trump’s proposed tax cuts and pro-growth policies could be inflationary. Futures markets are currently expecting three interest rate cuts over the next 12 months.
After the CPI data release came in as expected, we saw US stocks advance with the tech-heavy Nasdaq Composite up 1.8% to close above 20,000 points for the first time and the S&P 500 up 0.8%. In the US government bond market, the policy-sensitive two-year benchmark Treasury yield remained flat.
China’s deflation concerns persist with its inflation rate easing to 0.2% year-over-year (YoY) in November, falling short of market expectations of 0.5%. In November, CPI fell by -0.6%, the most since March 2024 and worse than forecasts of a -0.4% decline. Food inflation was the main driver, falling -2.7% month-on-month. Despite reporting a 26th consecutive monthly decline, on an annual basis Producer Price Inflation declined by -2.5% beating expectations of a -2.8% fall. Policymakers in Beijing will likely need to introduce further stimulus measures to improve demand and counteract any impact of a potential trade war with the US.
China trade data was also weak with exports growing by 6.7% in November, behind expectations of 8.5%. The total cost of exports did, however, reach its highest level since September 2022 (c.$312billion), with many Chinese manufacturers beginning to front-load their orders in anticipation of further US tariffs. Unexpectedly, imports dropped by -3.9% YoY instead of growing by 0.5% as a result of weaker domestic demand.
Chinese leaders also gathered in Beijing last week to discuss economic priorities for 2025 at the annual Central Economic Work Conference, acknowledging a need to boost consumption, improve investment efficiency and expand domestic demand. Investors appeared underwhelmed: the Shanghai Stock Exchange ended the week down c.-0.5%.
The UK economy shrank for the second month in a row in October. Official figures from the Office of National Statistics (ONS) indicated a -0.1% month-on-month contraction, as had been the case in September. While monthly GDP is prone to revision, this reading was notable as the first consecutive drop in monthly output since March and April 2020, when the initial Covid-19 lockdowns were enforced in the UK. Chancellor Rachel Reeves said the figure was "disappointing", but reiterated her view that the government had put in place policies which will ultimately deliver long-term economic growth.
The latest data indicated that the services sector flatlined, while manufacturing and construction output declined as companies were anticipating Reeves' budget statement on 30 October. Despite the large tax increases imposed on businesses by the Budget, many forecasters believe the corresponding boost to public investment and spending will stimulate economic growth in 2025.
The GDP data will give the Bank of England’s (BoE) interest rate setting Monetary Policy Committee (MPC) food for thought ahead of its final meeting of 2024, with the drag from higher interest rates potentially weighing on the economy for longer than previously anticipated. Most economists believe the Bank will be insufficiently concerned to cut rates again at this juncture, while market participants continue to price in approximately three 25bps cuts by the end of 2025.
The European Central Bank (ECB) implemented an additional interest rate cut last week, with the 25bps reduction bringing the eurozone deposit rate to 3% from 3.25%. The rate had been as high as 4% as recently as June. The ECB also indicated a willingness to cut further during this cycle by removing the reference to “keeping interest rates sufficiently restrictive for as long as needed” in the comments released after the latest meeting.
As ever, the decision represented a balancing act for the ECB, which revised down its growth forecast and inflation outlook for the years 2024 – 2027. European economic confidence indicators have weakened in recent months, while headline inflation has accelerated. The potential knock-on effects of US economic policy following Donald Trump’s inauguration in January, coupled with political instability and public finance challenges in the two largest eurozone economies of France and Germany, has dampened sentiment somewhat. The latest ECB projections are for eurozone GDP growth to be 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. These projections are slightly less optimistic than those last forecast in September.
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