Global indices struggled to make gains last week as bond yields rose on inflation data. The softer trading occurred despite the prospect of more Chinese stimulus and several central banks cutting policy rates.
The RBA held rates steady and altered the language of the statement to suggest that the next move is likely to be a cut. A surprisingly strong jobs report then followed on Thursday.
The Federal Reserve is widely expected to cut interest rates this week, with investors likely to focus on the 2025 outlook in the “dot plots”. The monthly Chinese activity data and the global flash PMI surveys will be released later today.
Bond yields rose last week, weighing on all asset classes. The Nasdaq Composite index was the only major American index to finish the week higher, ending up +0.3% in US dollar terms after briefly crossing the 20,000 level for the first time.
The technology sector was supported by earnings from Broadcom, with the share price advancing by +25.2%, and Alphabet’s announcement that it had made a breakthrough in the development of a quantum computing chip, finishing up +8.7% over the week. The Nvidia share price slipped by -5.8% after more chip export restrictions to China were announced.
In the Australian market, ANZ announced the recruitment of an outsider to replace Shayne Elliot as CEO after nine years at the helm. Nuno Matos joins the bank from HSBC, where he recently missed out on the top job, according to Bloomberg.
Reuters reported that “China will adopt an "appropriately loose" monetary policy next year, the first easing of its stance in some 14 years, alongside a more proactive fiscal policy to spur economic growth’. Chinese CPI (+0.2% yoy) undershot expectations for November, while PPI remains in deflationary territory (-2.5% yoy). The local CSI300 index slipped by -1.0%, while the Hong Kong Hang Seng index reacted more positively, adding +0.6% over the week.
US headline CPI increased by an annual +2.7%, up from +2.6% yoy last month. Core CPI ex-food and energy rose by +3.3% yoy for the third consecutive month. Both consumer price series were in line with estimates, but Thursday’s producer prices were surprisingly strong and could perhaps lead to upward pressure on CPI in 2025. The final demand PPI series increased to +3.0% yoy, much more than the anticipated +2.6% yoy. October’s figure was upwardly revised from +2.4% yoy to +2.6% yoy. The core ex-food and energy series also exceeded forecasts and saw an upward revision for October to the same level of +3.4% yoy.
Worryingly for bondholders, the upward revisions to pre-election figures suggest that the increases were not due to the threat of tariffs prompting a temporary increase. PCE inflation is also expected to rise by +0.2% to +2.5% yoy when released on Friday this week.
Despite the firmer inflation data, the market is still pricing a more than 90% chance the FOMC will cut US interest rates by -0.25% this week, bringing American and Australian interest rates into line. However, the bond market moves suggest that the accompanying “dot plots” may include fewer cuts in the 2025 outlook. The market is only expecting one or two more cuts next year.
After a surprisingly strong employment report on Thursday, the Australian dollar weakened against the US dollar but strengthened against the other majors. Economists had been expecting unemployment to rise from 4.1% in October to 4.2% last month. Instead, the headline rate dropped to 3.9%. Some of the fall was due to a -0.1% drop in the participation rate to 67.0%. But the economy also added +53k new full-time jobs, losing -17k part-time roles for a net gain of +36k.
The stronger employment data dominated a softer NAB business survey on Tuesday and a significant modification to the statement released after the December Reserve Bank meeting.
The RBA left the cash rate on hold at 4.35%, but the governor abandoned the phrase that the Board is not ruling anything in or out. Instead, the crucial paragraph in the policy outlook read: "While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high. The November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint. Recent data on inflation and economic conditions are still consistent with these forecasts, and the Board is gaining some confidence that inflation is moving sustainably towards target".
The change in language indicates that the Board now expects the next move in the cash rate to be a cut. After the meeting, the market moved to price in the first rate reduction as soon as the next meeting in early February. However, following the stronger employment report, the market now sees a February cut as a coin toss and is assigning an 89% probability to a cut by the end of April.
On Thursday, the ECB cut the policy rate by -0.25% to 3.0% in response to disinflationary pressures. The Europeans expect the growth outlook to improve gradually next year but stated that the risks are still skewed to the downside. The Canadians and the Swiss were less optimistic. Both central banks cut rates by -0.50% to 3.25% and 0.50%, respectively.
The Bank of England, the Bank of Japan and the Norges Bank are expected to keep rates on hold this Thursday, while there is a 50% chance of a -0.25% cut by the Swedish Riksbank according to market pricing.
There is a slight chance that the Bank of Japan could raise rates as national CPI is expected to accelerate to +2.9% yoy when released a day later. Nevertheless, a quarter-point rise to 0.4% is expected by the end of January.
The flash PMI surveys and monthly Chinese activity data are due out later today, with US retail sales and production figures tomorrow.
Chancellor Scholz faces a difficult confidence vote in Germany this week, while President Putin will hold his annual news conference. The Russian leader will face the nation after the sudden collapse of the Russian-backed Assad regime in Syria last week. Russia had supported the Syrian government in return for blocking the proposed Qatar-Turkey gas pipeline, which would have introduced an alternative energy source into Europe to compete with Russian supply. The embarrassing loss would weaken Russian bargaining power in peace negotiations with Ukraine and the NATO members.
Weekly earnings
Tuesday 17th: Heico (HEI), Amentum Holdings (AMTM), Worthington Enterprises (WOR)
Wednesday 18th: Micron Technology (MU), Lennar (LEN), General Mills (GIS), Jabil (JBL), Toro (TTC)
Thursday 19th: Accenture (ACN), Nike (NKE), Cintas (CTAS), FedEx (FDX), Paychex (PAYX)
Friday 20th: Winnebago (WGO)
Significant Upcoming Data:
| Monday | Tuesday | Wednesday | Thursday | Friday |
Australia | S&P Global Flash PMIs;
| Westpac Cons. Conf. | Westpac Leading Index | Cons. Infl. Exp. | Private Sector Credit |
US | S&P Global Flash PMIs; Empire (NY) Manuf. Survey
| Retail Sales; Ind. Prod.; Bus. Inventories; NY Fed Services Activity; NAHB Housing Mkt. Index
| FOMC Meeting; Housing Starts; Building Permits.; Curr. Acc.; MBA Mortgage Apps | Leading Index; Philly Fed. Bus. Outlook; Kansas City Fed Manuf. Activity; Existing Home Sales; TIC Flows; Q3 GDP (3rd Est.); Weekly Jobless Claims
| PCE Inflation; Personal Income & Spending; Kansas City Fed Serv. Activity; UMich Cons. Sent.
|
Europe | S&P Global & HCOB Flash PMIs; EZ Labour Costs; Danish PPI; Italian CPI & Gen. Govt. Debt; Norwegian & Irish Trade; Spanish Home Sales; UK Rightmove House Prices
| IFO & ZEW Surveys; UK Unempl.; EZ & Italian Trade Swiss KOF Inst. Winter & SECO Forecasts; Spanish Labour Costs | EZ & Austrian CPI; UK CPI, PPI, CBI Trends & House Prices; EZ Constr. Output; Irish Property Prices | BoE, Riksbank & Norges Bank Meetings; ECB & Italian Curr. Acc.; German GfK Cons. Conf.; French Manuf./Bus. Conf. & Prod. Outlook; Swiss & Spanish Trade; Dutch Unempl.; Belgian Cons. Conf.; EU27 New Car Reg.
| EZ & Belgian Cons. Conf.; German, Swedish & Finnish PPI; UK Retail Sales & Public Finances; French Ret. Sales; Italian PPI, Ind. Sales, Cons./Manuf. Conf. & Econ. Sent.; Swiss M3 Money Supply; Danish Ret. Sales, GDP (F) & Cons. Conf.; Norwegian Unempl. & Cred. Growth
|
Japan | Jibun Bank Flash PMIs; Core Machine Orders; Tertiary Industry Index
|
| Trade | BoJ Meeting; Tokyo Condos. For Sale | National CPI |
China | Ind. Prod.; Retail Sales; Surveyed Jobless Rate; Property & Fixed Asset Inv.; Home Prices; Resi. Property Sales; [1yr Med. Term Lending Rate]
|
|
|
| 1yr & 5yr Prime Loan Rates |
Disclaimer
The contents of this communication is prepared by Brerona Capital Asset Management Pty Ltd (A.C.N. 627 650 293; AFSL 520526). The information contained in this communication is general in nature and does not take into consideration any investors personal objectives, goals, needs and financial situation. You should not rely on the information contained in this document to make any investment decisions without first consulting an investment professional such as your financial adviser. Any unauthorised use of this document is prohibited. This document (including any attachments) is intended only for the addressee, it may contain information of a privileged and confidential nature. If you are not the addressee of this communication, you must not copy, reproduce, disseminate or use this email and its contents. If this communication has been received in error by you, please inform us immediately and securely delete. Sharing, transmitting, copying, disseminating all or part of the contents of this document may result in a breach of the Federal Privacy Legislation and or copyright and trademark infringement of Brerona Capital Asset Management Pty Ltd and its related entities.