Get ready for December rate cuts
Monday, 9 December 2024 13:36
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Long gone are the days of inflation worries. Amid the political transition in the US and instability in the euro area, central banks will meet in the coming days for another round of rate cuts. This will likely be the fourth rate cut for both the ECB and the Swiss national Bank this year. As Christine Lagarde said last week, “the fight against inflation is approaching its end but hasn’t been won yet”. While her comments still justify some degree of monetary tightness at present, they also point to additional rate cuts in 2025, which will leave the ECB deposit rate at 2% by year-end in our view.
- Meanwhile, the Fed and the BoE are also likely to cut rates next week. In the US, the Trump election brings uncertainties, but as long as the Fed remains data dependent and inflation does not creep higher, the Fed will keep cutting rates, albeit more cautiously. Any trade tariff hike will likely not materialise in inflation data before H2-2025 and, for the time being, we show in the report that a flurry of indicators points to additional easing of price pressure. The US CPI release this week will set the tone for the Fed meeting next week. We expect the EUR/USD to regain strength in this context, towards 1.07-1.08.
In France, political instability is here to stay but market implications are limited. The French government fell last week and a new Prime Minister has yet to be nominated. We believe Macron will try again with another moderate PM and will keep avoiding the extremes from the far-left or the far-right, although they just demonstrated their ability to overthrow any future government. From an investment perspective, we see no reason for the sovereign spread versus Germany to tighten further after the recent pullback. However, we also believe that the current uncertainties are priced in and there is no additional spread widening to expect. French banks, among the most sensitive to political stability, actually rebounded in the wake of the non-confidence vote, as did the Euro/USD. We expect the next government to be quite unstable and see no silver linings at least until July 2025 when another legislative election is likely to take place.
- In equities, we remind our readers that the CAC 40 does not reflect France. On a market cap-weighted basis, the CAC 40 generates 60% of its revenues outside Europe. The problem is that they have an outsized exposure to China via the Luxury sector, on which we remain cautious for the time being. We maintain our cautious stance on French equities as a result.
Diversify your European equity portfolio with stocks exposed to the US. For several months, we have been advocating the benefits of geographical diversification in portfolios, in favour of the US, which is experiencing strong growth. For European equity investors, the implementation of this view consists of buying sectors and stocks that have an elevated exposure to the US, such as Travel & Leisure, Media, Medtech, Pharma, and Aerospace and Defence. These sectors, on which we are Overweight, generate 30-50% of their profits in the US.
This week, we focus on the Pharma sector, which has been under pressure since the nomination of Robert F. Kennedy Jr. as health secretary under the Trump administration. He is quite controversial (a vaccine sceptic) and will be potentially disrupting the sector, which is actually quite inefficient in the US. He dragged global pharma stocks lower in recent months as he supposedly aims to cut drug prices in the US. Despite the uncertainties, we continue to find the sector attractive. On the one hand, EPS growth and corporate activity remain highly supportive. On the other hand, it is unclear whether Robert F. Kennedy Jr. will be confirmed by the Senate and, even if he is confirmed, it is quite unclear what he will actually do. Many administrations have attempted to lower US drug prices, at least closer to drug prices in Europe, but it has never actually happened. The views from pharma management teams, including from Novartis at their CMD in late November, seem to be that radical negative changes are not likely to materialise in the end. Checks and balances in the legislative system, as well as often very slow timetables for regulatory change, all point to outcomes that are likely to be less severe than investors fear at the moment.
Week ahead: US CPI and PPI, as well as the ECB monetary policy meeting, will be the key market movers.
Cross-asset performance (last week, %)
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