US economics, inflation, and the Fed
The US economy continues to perform well, and a recession is highly unlikely in the short run. GDP (gross domestic product) expanded at an annualized rate of 3.1% during the third quarter, and similar progress was most likely achieved during the final quarter of 2024 according to Value Line. The nation’s labor market remains healthy, with 227,000 jobs added to the economy in November, and the unemployment rate hovering just above 4.0%. Nonetheless, inflation remains a challenge. The PCE (Personal Consumption Expenditures) Price index, which is closely monitored by the Federal Reserve, showed prices rising 2.4% in November, year over year, exceeding the Fed’s 2.0% target.
The Federal Reserve has shifted its monetary policy a bit. At its December meeting, the Fed lowered interest rates by 25 basis points, bringing the fed funds rate to 4.25%-4.50%. However, the central bank also expressed concerns about inflation and projected fewer rate cuts for 2025. The stock market reacted negatively. Meanwhile, the strong economy and current interest-rate outlook have sent the yield on the 10-year Treasury to around 4.5%, a level that could prove challenging for equities in the short-run.
Nevertheless, corporate profits have been encouraging and could provide necessary support for the markets. While most of the improvement will likely come from mega-cap technology companies that have benefited from the excitement surrounding AI (artificial intelligence), analysts are calling for healthy earnings advances in 2025. However, some of this optimism may already reflect in current equity valuations.
Global economy
More than 20 central banks met this month. With eight banks easing and only one raising rates, a trend of declining policy rates continues. However, the actions and guidance by central banks this month highlight three emerging themes.
- Rising importance of local business cyclical conditions in policy rate decisions: As global influences promoting synchronized inflation outcomes fade from the stage, the persistent growth gap between the US and the rest of the world and the near-term slowdown in European growth have become more prominent in policy rate decisions. These divergences help explain the contrast between the relatively hawkish guidance delivered by the FOMC this month and the more dovish guidance from the Bank of China and European central banks according to JP Morgan.
- Divergent local conditions in emerging markets: Brazil’s Monetary Policy Committee tightened this month against the backdrop of sustained strong growth and political concerns fueling inflation expectations. But the broader message from this month’s meetings is that external factors are beginning to constrain emerging markets (EM) central banks. Further easing is warranted in most EM economies as there remains substantial slack and policymakers have been slow to respond to disinflation. But financial market pressures linked to rising global bond yields and the US dollar limit their ability to act. Mexico eased less than anticipated this week and EM central banks elsewhere were generally on hold. With the notable exceptions of Turkey and China, minimal EM easing is anticipated in 1H25.
- Gradualism in developed markets: The European Central Bank maintained its 25bp pace of easing in the face of a significant loss of growth momentum and improving inflation prospects. In a divided decision, the Bank of England held rates steady due to growth concerns, reiterating that “a gradual approach to removing monetary policy restraint remains appropriate.” The Bank of Japan also remained on hold despite clear signs of progress on both its growth and inflation objectives. For its part, the Fed dot plot showed a more gradual path of rate normalization with a median of two rate cuts expected next year.
JP Morgan anticipates global growth to increase this quarter and the overall trend data supports this view. November US consumption and China’s industrial production gains confirm that the two largest economies are on track deliver strong GDP gains of 3% and 7% per annum, respectively. Notably, Chase card data suggests continued US consumer spending gains this month.
Stock market
The S&P 500 has made notable progress over the past year. That said, stocks sold off following the Fed’s interest-rate announcement, and the CBOE Volatility index jumped over the 25 level, which suggests increased investor anxiety. The situation has since stabilized, but caution is probably warranted.
We, at Signet, are super excited about the prospects of Artificial Intelligence and its potential impact on every aspect of our lives and productivity. Economic growth depends on labor multiplied by productivity. If AI improves productivity, while our population remains stable, we should have a nice economic trajectory over the next few years.
Happy New Year and stay tuned!
The information and opinions included in this document are for background purposes only, are not intended to be full or complete, and should not be viewed as an indication of future results. The information sources used in this letter are: WSJ.com, Jeremy Siegel, Ph.D. (Jeremysiegel.com), Goldman Sachs, J.P. Morgan, Empirical Research Partners, Value Line, BlackRock, Ned Davis Research, First Trust, Citi research, HSBC, and Nuveen.
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