Ear to the Ground

13 December 2024

We saw two prominent central banks cut interest rates this week.  The European Central Bank (ECB) made their fourth cut of 2024, reducing the deposit rate by a further 0.25% to 3%.  This was in line with market consensus.  Whilst it was reiterated that there is no pre-determined path for interest rates moving forward, with future moves determined by economic data, the market appears to be of the belief that there are more in the offing. 

Despite the cuts already made this year, some commentators are now questioning whether the ECB are moving quick enough to support an economy which has shown weakness, including the traditional powerhouse of Germany.  A 0.5% cut had been discussed this time around before 0.25% was settled on.  With the central bank predicting inflation will be comfortably at target next year, it is feasible to expect that there is more to come from the ECB.

Making that larger than expected cut, however, was the Swiss National Bank (SNB).  The consensus forecast was for 0.25% but instead they went for 0.5%, taking its policy rate down to only 0.5%.  With inflation comfortably within range, the focus and perhaps concern appears to have shifted to economic growth.   The SNB acknowledged that rising unemployment, weaker production and global uncertainties pose a threat to this outlook.

In the US we saw the release of the much anticipated consumer price inflation data.  Whilst the year-on-year rate notched a little higher to 2.7%, this was in line with the consensus forecast.  The core inflation rate, meanwhile, which excludes the more volatile food and energy components, posted a year-on-year rise of 3.3%.  This was again in line with expectations.  Opinions were mixed on these outcomes.  Whilst some pointed out that inflation remains sticky and the final leg to 2% is proving the most difficult, others pointed to falls in key categories which had proven to be the most resistant, such as shelter (or housing costs).  Some commentators are of the opinion that the US Federal Reserve will take comfort from this.

Finally, in the US we also saw the release of a small business optimism index, from the National Federation of Independent Businesses.  After the election win by Donald Trump an improvement here was expected and this proved to be the case.  The index level was not only the highest reading since mid-2021 but also beat the consensus forecast.  The promise of deregulation to help economic growth proved to be one of the largest factors.  Could this be a catalyst for the broadening out of gains within the US stock market?