ECB Cuts Rates, China’s Targeted Stimulus Disappoints

For the week ending 18 October 2024

As of midday Friday, global equities were modestly firmer on the week, holding at near record levels. The yield on the US 10-year Treasury note dipped 3 basis points from a week ago to 4.07% while the price of a barrel of West Texas Intermediate crude oil declined $6 to $69.35 as fears of Israeli attacks on Iran’s oil infrastructure ebbed. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 18.7 from 19.5 a week ago.

MACRO NEWS

ECB speeds up rate-cut pace

Having lowered rates at its June and September meetings, the European Central Bank accelerated its pace, cutting its deposit rate 0.25% to 3.25% on Thursday. ECB President Christine Lagarde said downside risks to inflation are larger than upside ones and that growth is somewhat weaker than expected, fueling expectations of at least another 0.25% cut at the December meeting. Lagarde expects the eurozone to avoid recession but said that potential US trade restrictions are a downside risk.

China’s rally runs out of steam

Chinese equities continued to lose ground this week as officials made clear that the government’s efforts to boost the economy will be concentrated on restoring the finances of local governments and on shoring up the property market while steering clear of large-scale efforts aimed at boosting consumption. Since peaking on 8 October, the Shanghai-Shenzhen Index has declined about 8.5% as of Friday’s close but is still up 23% over the past month. A series of press briefings from China’s housing and finance ministries this week provided incremental details on the government’s plans, but these did not satisfy market hopes for more sweeping reforms. A key government priority is to provide about $560 billion in funding to property developers to finish homes that have been sold but left unfinished. The package of reforms is seen bolstering growth moderately. For example, Goldman Sachs forecasts stimulus will add 0.4% to the country’s growth next year and raised its 2025 GDP forecast to 4.7%. Data released Friday showed that growth was slightly firmer than expected in Q3, rising 4.6% year over year amid firmer industrial production and retail sales. However, residential property sales plunged 24% from year-ago levels. On Friday, China’s central bank pledged to ease monetary policy further and to swiftly implement expansive financial policies.

Israel says it won’t attack Iran’s oil, nuclear facilities

The Washington Post reported that Israeli Prime Minister Benjamin Netanyahu told the Biden administration that Israel is willing to strike military rather than oil or nuclear facilities in Iran, according to two officials familiar with the matter, suggesting a more limited counterstrike, thus helping to prevent a full-scale war. Israeli Defense Minister Yoav Gallant vowed Tuesday that Israel would respond to the Iranian attack, saying its response would be “precise, painful and surprising,” but, he added, “we are not interested in opening additional fronts or new conflicts.” Oil prices fell on the report. On Thursday, Israel announced the killing of Hamas leader Yahya Sinwar in southern Gaza, further degrading its military capabilities. US President Joe Biden said Sinwar’s death removes an obstacle to peace.

QUICK HITS

US retail sales rose a stronger-than-expected 0.4% in September after rising 0.1% in August. Core sales rose 0.7% compared with August’s 0.3% rise. After the release of strong US economic data, the Federal Reserve Bank of Atlanta’s GDPNow model is projecting that the US economy will grow at a 3.4% pace.

Amid higher spending by governments, the International Monetary Fund is projecting that global public debt will reach $100 trillion in 2024 and 100% of global GDP by 2030.

China launched sea and air drills around Taiwan early this week, days after Taiwan’s president reaffirmed the island’s sovereignty.

Late last Friday, Fitch Ratings reduced France’s credit outlook to negative while affirming its AA- rating, citing increased fiscal risks and political fragmentation that make reform difficult to deliver.

Producer prices in China fell 2.8% from a year ago in September after dropping 1.8% in August, raising fears that deflation is becoming entrenched.

US Federal Reserve Governor Christopher Waller said Monday that the central bank should proceed cautiously on rate cuts and that data warrant moving to neutral at a deliberate pace. Waller warned that hurricanes and strikes could reduce October payrolls by 100,000.

Canada expelled six Indian diplomats and consular officials over a targeted campaign against Canadian citizens by agents linked to the government of India, Canada’s foreign ministry said in a statement on Monday.

The United States warned Iran that any attempt on former President Donald Trump's life would be considered an act of war.

UK Chancellor of the Exchequer Rachel Reeves seeks to fill a fiscal hole of more than ￡25 billion in the budget to be revealed on 30 October, about ￡3 billion more than earlier projections, suggesting taxes may have to be raised more than expected.

Germany’s DAX Index closed at a record high 19,583 on Thursday.

Year-ahead inflation expectations, as surveyed by the Federal Reserve Bank of New York, held steady at 3%, the bank said on Monday. However, consumers’ fears of becoming delinquent on a loan rose to their highest level since 2020. The anticipated probability of missing a minimum debt payment over the next three months rose to 14.2% in September, marking the fourth straight month of increases.

Canada’s consumer price index rose just 1.6% year over year in September, increasing the odds of a half-point rate cut from the Bank of Canada at next Wednesday’s meeting.

In an interview at the Economic Club of Chicago, former US President Donald Trump defended his proposals to dramatically increase tariffs on foreign goods, saying the approach would protect “the companies that we have here and the new companies that will move in.”

UK consumer prices were flat in September and rose1.7% year over year, falling below the Bank of England’s target for the first time since April 2021. Investors are pricing in about 43 basis points of cuts before the end of the year. To date, the Bank of England has been among the world’s more cautious central banks when it comes to easing monetary policy.

Italy plans to impose a €3.5 billion levy on banks and insurers to fund health and social measures.

With Japan’s Liberal Democratic Party at risk of failing to secure an outright majority in next weekend’s parliamentary elections, an upcoming stimulus package will be bigger than last year’s measure, a government spokesperson said on Wednesday.

In a meeting of Ukraine’s parliament this week, Ukrainian President Volodymyr Zelensky outlined a plan that he said could end the war with Russia in 2025, though the proposal relies on a great deal of support from Ukraine’s international partners, which may be difficult to secure.

Following on the heels of the ECB rate cut Thursday, Denmark cut its policy rate to 2.85% from 3.10%.

Japan’s exports fell in September for first time in 10 months amid drops in exports of autos and China-bound shipments.

On Wednesday, US B-2 stealth bombers struck weapons storage sites linked to Houthi rebels in Yemen.

EARNINGS NEWS

With about 11% of the constituents of the S&P 500 Index having reported for Q3 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings rose around 2.8% compared with the same quarter a year ago, according to data from FactSet. This was slower than the 11.2% pace set in Q2. Sales growth is up 4.4% year over year.

THE WEEK AHEAD

Monday: The IMF’s annual meeting kicks off in Washington.

Wednesday: The Bank of Canada is expected to cut rates 50 basis points, the US reports existing home sales and the Fed releases its Beige Book.

Thursday: Preliminary purchasing managers’ indices are released globally.

Friday: Canadian retail sales, US durable goods orders.

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Sources:?MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.