Thoughts of the Week #7
Weekly Market Recap | Week of November 11, 2024
This Week in Review …
· Red sweep in US Elections
· FOMC and BoE 25bps cut
· NPCSC meeting
The Week Ahead …
· German CPI
· US CPI and PPI
· GBP GDP
Market Rallies on Trump's Re-election, but Fiscal Imbalances and Tariffs Loom
Trump’s re-election and red sweep in the Senate and House signals the potential intensification of pro-business fiscal policies. The administration's commitment to further tax cuts and deregulation, including the expected extension of the 2017 Tax Cuts and Jobs Act (TCJA) beyond 2025, is set to bolster economic growth. Equity markets have responded robustly; the S&P 500 surged 4.7% to close near $6,000, marking its strongest weekly performance in a year. However, elevated valuations, with the price-to-earnings ratio at 23x, raise concerns about potential overvaluation.
These fiscal measures, while supportive of growth, exacerbate fiscal imbalances. Ongoing tax cuts and deregulation risk widening the fiscal deficit, propelling federal debt higher, and increasing pressure on Treasury issuance. Tariff policy remains a significant wildcard. Trump proposed tariffs of 10–20% across the board and up to 60% on Chinese imports. Though substantial in risk, full implementation is uncertain due to opposition within the Republican Party. If enacted, such tariffs could elevate consumer prices by approximately 0.5 ppts, a one-off increase likely to slow disinflation but not likely to trigger re-inflation. The impact on economic growth should be modest. However, abrupt implementation, as seen in Trump's first term, could introduce market volatility. The administration is expected to prioritise domestic policies before addressing trade measures.
Monetary policy remains cautiously accommodative. The FOMC reduced the federal funds rate by 25bps to 4.75%, easing bond yields slightly.[1] The 10Y yield peaked at 4.45% before settling at 4.3% after the announcement. Markets have recalibrated expectations, now anticipating two 25bps cuts in the first half of 2025, down from four. Fed Chair Powell expressed confidence in the economy's resilience but did failed to reaffirm that inflation is on track to reach the 2% target, deviating from the previous meeting. He highlighted the expanding fiscal deficit and fiscal policy as potential headwinds. Yield curves steepened, reflecting heightened inflation expectations and robust growth prospects.[2] ?
Economic indicators present a mixed picture. 3Q GDP growth remained solid at 2.8%, driven by consumer spending growth of 3.7% annualised. However, corporate earnings signal caution. Of the 75% of U.S. companies reporting Q3 results, only 58% exceeded revenue expectations. The S&P 500's profit growth stands at 6.7% year-on-year, but excluding the "Magnificent 7" tech giants, it drops to 2%. Nearly 9% of companies issued downward revisions to guidance. Consensus earnings estimates for 2024 have been reduced by 2% to $239 per share, casting doubt on the projected 10% growth for Q4 and suggesting overoptimism. [3]
International developments add complexity. The Chinese yuan weakened, with USDCNH closed at 7.19. Despite stimulus efforts – including rate cuts, easing property restrictions, and a $340 billion equity support pledge, investor sentiment remains subdued. Fiscal stimulus to date disappoints investors. China's $18T economy faces headwinds; Manufacturing has contracted since April 2023, and U.S. semiconductor restrictions threaten future growth. Domestic confidence wanes, evidenced by the first contraction in bank loans to the real economy in 19 years and youth unemployment rising to 17%.[4] ?Economists suggest that targeting consumer spending could more effectively stimulate demand without worsening overcapacity.
In the UK, the BoE reduced interest rates by 25 basis points to 4.75%, as anticipated. The Monetary Policy Committee voted 8–1 in favour. The BoE warned that the recent government budget could add 0.5ppts to inflation and GDP growth. Monetary policy remains restrictive, aiming for a sustainable return to the 2% inflation target.
Commodity markets reflected global uncertainties. Oil prices fluctuated about $3 amid geopolitical concerns. WTI rose to $72 per barrel before settling at $70; Brent crude reached $76 before easing to $74. Citigroup projects a bearish oil outlook, citing increased U.S. production and potential tariffs dampening China's economy—the world's largest oil importer. Traders are cautious about renewed Iranian sanctions and Middle East tensions. Conversely, stronger U.S. growth in 2025 and supply constraints could support prices. However, a strengthening dollar and increased U.S. oil production present downside risks.
Gold experienced volatility, ending the week down at $2,685 per ounce. The metal gained slightly on Thursday after the Fed cut rates by 25bps, retracing Wednesday’s 3% decline following Trump's victory, which triggered a rally in the dollar. UBS analysts suggest that gold will likely find support as a hedge against inflationary pressures from higher U.S. borrowing, arguing that the post-election price drop was surprising and oversized. Gold has surged by about a third this year, driven by heightened geopolitical and economic risks, leading to increased purchases from both central banks and investors.
[2] https://www.cnbc.com/2024/11/07/fed-meeting-live-updates-traders-anticipate-november-rate-cut.html