12/09/2024

Global monetary authorities will continue advancing in their process of rate cuts, with significant nuances. So far, central banks have acted slowly and cautiously, with a much slower pace of easing than the pace at which they increased interest rates in 2022 and 2023.

In the upcoming meetings, however, we will see certain differences between countries and geographical areas in spite of maintaining a course with few changes. In fact, the Federal Reserve has plenty of reasons to proceed carefully, given the robust economic activity across the Atlantic. In Europe, activity is much weaker, and, as a result, the European Central Bank is likely to issue a softer message. Meanwhile, the Bank of Japan will continue hiking rates.

As regards the Fed, which is meeting next week, the November jobs report has come with more uncertainties than certainties: it provided evidence of strong job creation with 227,000 new jobs, which together with an upward review of previous data, increased the three-month moving average job growth to a very healthy 173,000. However, the unemployment rate rose to 4.2% and would have reached 4.4% if the percentage of labor force participation would have remained stable. The market consensus is that the rise in the unemployment rate will weigh more on the Fed's decision than the strong job creation data; therefore, the market sees more likely another rate cut of 25 basis points.

Albeit, we will have to wait for this week's inflation data to fine-tune expectations, as the members of the Fed who have spoken in recent days kept their options open. In this regard, Chair Powell reaffirmed that interest rates should maintain a downward path, as monetary policy remains restrictive, although he also said that the strength of the economy allows the Fed to approach this path with caution.

The European Central Bank, on the other hand, will deliver a softer speech on Thursday, and it is likely that its statement will temper its intention of maintaining rates in restricted territory. Surely, it will cut rates by 25 basis points for the fourth time in 2024, probably based on new macroeconomic forecasts that will moderate inflation expectations and economic growth in 2025 due to greater economic, political and commercial uncertainty. At the subsequent press conference, Lagarde will face journalists' questions about the trade risks posed by Trump's presidency and the governability crisis in France.

On another note, the global political situation could not be more complex. In France, Prime Minister Barnier's government collapsed following Marine Le Pen's National Rally no-confidence vote together with the left block, which followed the approval of the Social Security budget for 2025 by decree. However, contrary to expectations, the French sovereign yield spreads substantially contracted last week, after President Macron made it clear that he had no intention of resigning and Le Pen expressed her willingness to work with the next government.

Political events also became the media's focus of attention in South Korea, after President Yoon unexpectedly declared martial law. A few hours later, the National Assembly voted in favor of lifting the measure and the President assumed the mandate. The turbulence was short-lived, and it is unlikely that it will have caused any damage to the economy.

The other two sources of political uncertainty are in Syria and Romania. In the Eastern European country, a surprising decision by the Constitutional Court annulled the first round of the presidential elections and cancelled the second, due to suspicions of Russian interference in the electoral process. The extraordinary measure could lead to additional support for the Eurosceptic candidate Georgescu, who was the winner of the first round. In Syria, Bashar al-Assad's government fell, who sought asylum in Russia, and the rebels took control of the country. The overthrow of the regime is impacting the entire Middle East region and will be a serious blow for Russia and Iran, its main foreign allies.

Lastly, politics will be the main focus of attention in China, as the country will hold its Central Economic Work Conference on December 11 and 12. The growth target for 2025 and different tax-related matters will be discussed at this event. With Trump's tariff threat on the horizon, it is likely that the meeting's statement will leave the door open to implementing further fiscal stimuli, although without establishing any specific measures yet in the absence of significant economic and financial turbulence. However, China is responding to Trump's threats and Biden's restrictions on exports of semiconductors by prohibiting the export of critical raw materials to the United States.

We hope this podcast has been of interest to you and you will be back in future episodes.