11/18/2024

A word from Federal Reserve Chairman Jerome Powell during the interview conducted by CBS News caught the market's attention: "carefully." The head of the Fed literally said, "Well we have a strong economy. Growth is going on at a solid pace. The labor market is strong. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully."

With this message, Powell and other members of the Fed, who expressed a similar opinion throughout last week, are likely intending to pave the way to a pause in rate cuts.
Historically, the word “carefully” in the Fed's vocabulary tends to precede periods of inactivity. The last time Powell frequently used this word was in 2023 and, in retrospect, a one-year pause in rate hikes followed.

It seems evident, in any case, that recent inflation data would justify the decision to proceed with caution. The Federal Reserve's favorite price metric, the private consumption deflator, is likely to accelerate in the next two months, which would highlight the resistance of prices reaching the 2% target. The “last mile” would be, in fact, difficult to cover.

Therefore, if the macroeconomic data that continues to arrive confirm the US economy's resilience, it will become increasingly evident that the Fed could start pausing the monetary easing process at the beginning of 2025. This would continue to be reflected in US bond yields, which are already reaching levels that have historically weighed down investor confidence in risk assets. The dollar would continue to appreciate.

Furthermore, the high US stock market valuations leave little room to absorb negative surprises in economic activity data. This leaves us with an interesting dilemma, where positive macroeconomic surprises could make debt yields rise, shying the Fed away from applying rate cuts, and data pointing to lower economic activity could lead to corrections in the stock markets due to expectations of lower corporate profits. In short, there is a risk that, whatever the macroeconomic data, the market interprets them in a negative way.

In these cases, obviously, the best scenario is one of no surprises of any kind and in which reality perfectly corresponds to market expectations. In this context, we must pay special attention to the data relating to real estate activity, which will be released in the US during the week.

The most interesting data published in Europe this week will be the preliminary PMI indicators for November, which could again show weakness in an environment of political instability in Germany and with the threat of Trump's trade policies on the horizon.

As potentially favorable factors, there is the release of Nvidia's earnings, which tends to report positive surprises, but which has sometimes not met the expectations of very demanding investors. Specifically, in August, following the publication of its accounts, analysts and investors punished the company for concerns regarding the supply chain of its Blackwell chips. However, in recent weeks the company has been hinting at these problems being resolved, which is already being priced in. For this quarter, consensus estimates that sales will reach $39,900 million, exceeding the company's own estimates.

In any case, our position remains unchanged, and we continue to be constructive as far as 2025 is concerned. We want to avoid short-term factors making us deviate from our strategic vision, which continues to be favorable regarding both fixed-income and equity markets, despite the volatility we may experience in the coming weeks.