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3 Dec 2024 | 3 minutes to read
The minutes from the Federal Reserve’s (Fed) rate setting Federal Open Market Committee (FOMC) meeting in November were released last week, and reiterated the intention to ‘gradually’ reduce interest rates given the strength of the US economy and labour market. The Fed is still expected to cut rates by an additional quarter-point at its December meeting, though incoming data will be closely monitored by officials.
October’s Personal Income and Personal Spending data were also released and came in ahead of expectations, highlighting the strength and resilience of the US consumer. Personal Income was reported at +0.6% month-on-month (MoM) beating expectations of +0.3%, while Personal Spending came in at +0.4%, exceeding the expected +0.3% MoM increase.
The US Core PCE Price Index (the Fed’s preferred measure of underlying inflation) rose by +0.3% MoM, in line with the previous month and expectations. This led to the year-on-year figure rising to a 6-month high of 2.8%. The Fed will be monitoring this figure closely whilst they await Trump’s inauguration. The new President’s policy agenda is expected to stoke inflationary pressures and could well delay any return to the Central Bank’s 2% inflation target.
The state of Europe’s largest economy went from bad to worse last week. Germany’s Ifo Business Climate Index (BCI) fell further in November, leaving it even deeper in contractionary territory and underlining the prevailing view that the economic outlook into 2025 is challenging.
The BCI is a closely followed leading indicator of economic activity in the country, and the fall from 86.5 in October to 85.7 in November left it weaker-than-expected (consensus of 86.0). The disappointment was driven by Germany’s crumbling coalition government and the threat of US trade tariffs from the incoming Trump administration weighing on confidence.
Business sentiment in Germany’s core manufacturing sector deteriorated, with companies more sceptical about the future. In the services sector, the business climate index fell sharply, as companies took a much more negative view of the prevailing macroeconomic and geopolitical backdrop and adopted a more pessimistic outlook. On the other hand, the retail sector has nevertheless seen an improvement - but any optimism here is far from widespread.
In recent weeks some of Germany’s biggest industrials, particularly in the automotive sector, have announced significant job cuts and restructurings of their businesses.
Volkswagen plans to cut tens of thousands of jobs domestically, close three factories (for the first time in its history) and reduce wages by 10%. Continental, a major supplier to the automotive industry, is planning to reduce its workforce by 7,000 and close several sites. And Thyssenkrupp, the German giant, plans to cut 11,000 jobs by 2030 in its steel division. Other notable German industrial firms which plan to scale back their operations include Bosch, the automotive supplier; Miele, the household appliance manufacturer; and ZF Friedrichshafen, an engineering company.
Germany’s recognised motor brands are clearly a heavy presence within the German economy, and facing several headwinds - including trade tariffs, weak Chinese consumer demand, electric vehicle competition and increased regulation - the automotive sector is likely to remain a drag on growth.
The interest rate spread between French and German government 10-year bonds reached levels not seen since 2012 last week. Investors are currently demanding a premium of 90bps to hold French over German debt amid concerns over the former’s finances. France is moving further away from the official target of reducing the public deficit from 6.1% of GDP in 2024 to 5% in 2025, and political machinations mean the country’s coalition government could face collapse.
New prime minister, Michel Barnier, is battling political turmoil, with the minority government teetering amid severe opposition to its strict budget plans. Barnier’s new budget involves €60bn of spending cuts and tax rises, leading to threats from the French far-right leader Marine Le Pen, as well as those on the radical left, to bring down the government in a no-confidence vote.
Credit ratings agency, Standard & Poor’s (S&P), maintained France’s AA- debt rating last Friday. S&P had already downgraded France’s credit rating six months ago but has stated its belief that France can maintain a “stable outlook” for the time being.
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