Welcome to the fifth issue of the Bocconi Student Asset Management Club newsletter!
Global Economy
U.S.
U.S. consumer spending rose 0.4% in October, showing a solid economic momentum early in Q4, though inflation remains above the Federal Reserve's 2% target. Adjusted for inflation, spending edged up 0.1%, pointing to a 2.5% annualized growth rate this quarter. While the Fed is expected to deliver a third rate cut in December, policymakers remain divided on future cuts. Incoming tariffs under the Trump administration could further complicate inflation control and interest rate decisions. Growth was driven by strong service demand, including healthcare, housing, and dining, while goods spending remained flat due to cheaper gasoline and lower durable goods purchases. The Atlanta Fed predicts 2.7% GDP growth for Q4.
The U.S. economy expanded at an annualized rate of 2.8% in Q3 - the Commerce Department confirmed on Wednesday - driven by robust consumer spending. While consumer spending was revised slightly down to 3.5%, other upgrades in business investment and local government spending offset declines in exports and government outlays. This growth follows a 3.0% increase in Q2, exceeding the Federal Reserve's estimated non-inflationary rate of 1.8%. Domestic demand rose 3.2%, unchanged from initial estimates, while after-tax profits remained flat from the previous quarter but grew 9.6% year-over-year. Gross domestic income (GDI) increased by 2.2%, and the average of GDP and GDI, considered a more accurate economic measure, rose 2.5%, matching Q2 growth.
Canada
Canada's economy grew at an annualized rate of 1% in Q3, below the Bank of Canada's (BoC) 1.5% forecast. While consumer spending and government expenditure supported growth, declines in business investment weighed on the economy.
GDP per capita fell 0.4%, marking the sixth consecutive quarterly decline in living standards. Kyle Chapman, an FX analyst, noted, "Living standards are falling, policy is restrictive, and inflation is at target-there’s little reason for the BoC not to continue cutting rates by 50 basis points in December." Since June, the BoC has cut rates by 125 basis points to 3.75% as inflation nears its 2% target. Markets now see a 44% chance of a 50-basis-point cut in December, up from 31% before the GDP data release.
StatsCan revised Q2 growth to 2.2% and reported Q3 monthly growth at 0.1%, with October’s preliminary estimate also at 0.1%. Slower growth may prompt the BoC to lower its Q4 growth target and adjust earlier projections. Following Donald Trump’s election, potential U.S. tariffs and immigration curbs keep growth prospects muted.
Europe
Based on preliminary data from Eurostat released on November 29th, inflation in the eurozone rose to 2.3% due to cited rising food costs and smaller-than-expected drop in energy prices. With the European Central Bank’s (ECB) upcoming meeting on December 12th, the question now shifts to whether it will opt for a 25 or 50 basis point rate cut.
The case for a rate reduction has been effectively closed upon examining the correlation between consumer prices, core inflation, service costs, and the overall economy. With its largest monthly decline since January, consumer prices fell 0.3% from October, core inflation hit 3.0%, and service costs increased. The combination of these three indicators with weakening economic activity demonstrates that disinflationary forces remain intact, pressuring the ECB to provide monetary stimulus.
Despite the growing push for a rate cut, markets remain cautious and have only priced in a 10% likelihood of a 50-basis-point cut. Supporters of a larger cut claim its necessity to prevent a downward spiral of layoffs, protect jobs, and stabilize demand amidst an already challenged economy. However, a majority of the markets support a smaller reduction given Trump’s upcoming potential tariffs against Europe’s export-driven economy. Policymakers are advocating for a measured rate cut to avoid overreacting in an already contracting economic environment before Trump takes office in January.
As the ECB weighs its options before the December 12th meeting, it must balance the need for immediate stimulus in the eurozone against long-term geopolitical implications.
APAC
Due to hotter-than-expected inflation readings, markets have increased bets on an interest rate hike from the Bank of Japan (BoJ). This speculation has caused the yen to briefly strengthen past ¥150 against the US dollar, reflecting broader concerns about the rising cost of living. Indeed, core inflation beat forecasts by 0.1% and rose to 2.2%, impacting rent, utility bills, and food prices. This has heightened the need for the government to intervene and ease the burden on households.
The BoJ is central to this decision making given its meeting on December 18th to discuss interest rates. However, geopolitical uncertainties are clouding the potential for a rate hike given the possibility of new tariffs under President-elect Trump. As Japan is an export-reliant economy, the timing of monetary tightening is integral to avoiding further economic struggles.
In parallel, Prime Minister Fumio Kishida proposed a 13.9 trillion yen ($90 billion USD) fiscal stimulus package to support the economy amid rising inflation. The proposed measures include direct payments of 30,000 yen to low-income households and additional spending to stimulate growth. However, critics question the necessity of the stimulus package given signs of improvement in private consumption and real wage growth. Furthermore, Japan’s national debt is twice the size of its economy, so the long-term fiscal implications are a key consideration when looking at methods of inflation reduction.
Balancing short-term relief for households with the country’s long-term fiscal stability is key. With Japan’s recent inflation-linked currency strengthening, household inflation struggles, and policy responses, it is evident how the challenges facing its economy are interconnected on a geopolitical level.
Equity Highlights
U.S.
Stocks posted another week of gains, pushing the Dow Jones Industrial Average, S&P 500 Index, and S&P 400 MidCap Index to record intraday highs. The small-cap Russell 2000 Index also reached a new high on Monday, briefly touching 2,466.49 before pulling back to close at 2,462.52. This marked a new record, surpassing its previous high set over three years ago.
Domestic policy and geopolitical developments were significant drivers of market sentiment throughout the week. On Monday, investors appeared encouraged by President-elect Donald Trump’s nomination of Scott Bessent, a seasoned hedge fund manager, as Treasury secretary. According to traders, Bessent is seen as bringing a Wall Street-oriented perspective to the role, focusing on economic stability and inflation control while approaching tariffs with caution, which helped ease concerns about a potentially unconventional choice.
Europe
European stocks closed higher Friday afternoon after a mixed morning as investors digested the latest Eurozone inflation data.
The pan-European Stoxx 600 index provisionally closed up 0.58%, with almost all sectors and major bourses in the green.
Technology stocks led Friday's gains, adding 1.8%, while telecoms fell 0.19%. Mining stocks also gained momentum, adding 1.47%, with Anglo American leading the way, up 5.4%.
The pan-European benchmark also closed the month with a gain of 0.96%, according to LSEG data. This rebounded from October, when the index had posted the worst monthly performance seen in a year.
On Friday, November 29th, Eurostat released flash data revealing that inflation in the Eurozone had risen from 2% in October to 2.3% in November, surpassing the 2% target set by the European Central Bank (ECB).
Following the inflation data, markets are now pricing in more than an 80% chance of the ECB cutting rates by 25 basis-points at its upcoming meeting on 12 December.
The major European indices closed in positive territory on Friday, with the FTSE 100 ending the day up 0.07% at 8,287, the French CAC climbed 0.78% closing at 7,235 and the DAX added 1.04% ending the session at 19,628 and Italy's FTSE MIB also gained 0.46% to 33,414.
Asia
Hong Kong’s Hang Seng increased slightly by 0.60% this week. While ongoing trade scrutiny between China and the U.S. continues, news that the Biden administration's restrictions on chip sales to China could be less harsh than previously expected prompted generally positive expectations from investors for now.
Between news that Yen reached a six-week high and expectations that the Bank of Japan will raise short-term interest rates by 25 basis points next December, the Nikkei 225 decreased by 1.22%. Technology stocks, like Rakuten and Panasonic, saw the biggest decreases as the Yen spike pressured export-oriented securities. In addition, hopes that pay bumps will rejuvenate consumption in Japan remain volatile as the Bank of Japan failed to reach its inflation target of 2%.
Lastly, the BSE Sensex remains stable with a 0.47% decrease, amidst concerns that the stocks traded in Indian equity markets remain overvalued, according to a Reuters poll.
Fixed Income Focus
US Treasuries
Treasury yields slid on Wednesday, when the PCE index - a measure that FED favors as its main inflation gauge - increased to 2.8% from 2.7%, meeting market expectations.
A summary of the Fed’ meeting minutes from November showed that officials are confident on inflation decreasing, and further interest rate cuts are almost certain, but the timing is not.
There is another news that has helped pushing yields down during the week: the announcement of the Treasury Secretary, Scott Bessent. Before the announcement the market was clearly worried about future Trumponomics’ policies, which could bring up inflation in the future, yet Bessent has reassured the participants by advocating a balance between Trump’s stimulative wish list and fiscal reality. Tariffs are now more far away than before, while tax cuts are probable to be delivered.
Significant changes, relatively to last week, can be observed for all the yields on bonds with a maturity of more than 1-year with an average of 0.22% decrease.
The market is now more sure than last week about a rate cut in November, discounting it at a 66.0% probability (we remember that last week we were at a rough 53%). In the meantime, we wait for further evolutions in the bond world next week when important data will be released (November jobs report).
French turmoil and Eurozone situation
For the first in history, on Thursday 28th November, France’s borrowing costs have surpassed Greece. This came after Michel Barnier’s government had failed to pass a belt-tightening budget.
The perceived riskiness of Eurozone borrowers has increased in recent days, after Barnier struggled to push a €60bn of tax increases and spending cuts, a difficult maneuver considering his lack of working majority in Parliament.
The 10-year yield on French government debt briefly reached 3.02%, crossing above the 3.01% yield of Greece.
Moreover, bonds out on loan – a measure of hedge fund short selling, or bets on a falling price – are now higher than in September 2008.
Nevertheless, voices calling for a bond market crisis are refuted by data: France’s current yield is back under Greece’s borrowing costs and the spread above German yields has dropped back to 0.805% from a 0.90% earlier in the week.
However, this is a clear sign of a reclassification by investors, who see Paris as one of the Eurozone’s riskier borrowers.
Despite the French turmoil, the Eurozone long-dated government bond yields fell for a fourth straight week, after CPI for November assessed at 2.3% a slight increase from the previous 2%, but in line with the expectations.
Finally, we want to signal that Europe has surpassed the Pandemic record of bond issuing, reaching an outstanding amount of 1.705 trillion euros. Last week we put a focus on the forecasted astonishing bond emission for the next year, remarking Europe’s increasing debt trend, issued to face challenges such as the war in Ukraine and the stagnating economy.
Investors are doubtful over BoE
English inflation has been recently hovering around the 2% target, however, the financial markets do not believe that the BoE will succeed.
Investors are demanding an inflation risk premium for the UK, which they do not for US, Germany or even France (despite the recent turmoil). The market expectations of UK inflation are close to 4%, while very long-term market expectations hover around 3%. This can be derived from the nominal and real returns of UK government bonds and then calculating the break-even rates of inflation, explains economist Chris Giles.
These inflation estimates are based on the Retail Prices Index (RPI), which has averaged 1.1% above the CPI inflation measure targeted by the BoE. If we remove that amount from the market expectations, we fall back to the 2% target.
However, this argument can be fair for the short-term, but not for the long-term, since by February 2030, the calculation of the RPI will be very similar to the CPI, and market participants are aware of this.
Inflation swaps market pricing shows that, after the change in the computation method, expected RPI inflation will fall just over 0.4%, therefore the change in inflation calculation methodology is not fully priced. A question now may arise: is the market really mispricing or data interpretation is really leading to a higher-than-usual long-term inflation?
With the current interest rate at 4.75%, the BoE is now on a slippery ground: 10-year-highest interest rates could have a significant impact on the economy in the future, especially if market expectations keep fueling inflation.
A high premium on the inflation by Gilts is something interesting for bondholders.
Wrap up for the AM Division
U.S. equity markets have led with strong growth over the past 12 months, trailed by tech innovations and economic resilience, while Canadian stocks, driven by financials and materials, have also posted solid gains. Nevertheless, despite lagging, international equities still delivered strong double-digit returns.
However, these strong returns may not be sustainable if economic data begins to show signs of weakness. As equities might return to more typical levels, it’s crucial for investors to rebalance their portfolios. With stocks having outperformed bonds recently, rebalancing to maintain the right allocation (especially with a focus on fixed income) will help ensure portfolios remain aligned with long-term goals as market conditions shift.
Bonds, though still negative over a 3-year horizon, have made progress after the challenging interest-rate environment, with lower-quality bonds outperforming investment-grade ones.
Credits:
Andrea Zito (Team Leader)
Lavinia Catalano (Global Economy analyst)
Mahek Dodani (Global Economy analyst)
Pablo Ruiz (Equity analyst)
Vladimir Pashov (Equity analyst)
Filippo Caselli (Equity analyst)
Mattia Caiti (Fixed Income analyst)
References
Mutikani L. November 27, 2024. US economy holds firm in early Q4; inflation stuck above Fed's target. Reuters.
Reuters team. November 27, 2024. US third-quarter economic growth unrevised at 2.8%. Reuters.
Mukherjee P. November 29, 2024. Canada's economy expands by just 1%, chances of big rate cut jump. Reuters.
Reuters. (2024, November 29). Euro zone inflation edges up, underlying price growth steady. Reuters.
EU News. (2024, November 29). Eurozone inflation rises to 2.3 percent in November: All eyes on the ECB. EU News.
Euronews. (2024, November 29). Eurozone’s inflation rate rises to 2.3%: Should the ECB be concerned? Euronews.
Reuters. (2024, November 21). Japan eyes $141 billion fiscal spending under new stimulus package, NHK says. Reuters.
Financial Times. (2024). Yen jumps on rate hike bets as Japan’s inflation accelerates. Financial Times.
Reuters. (2024, November 28). Core inflation in Japan’s capital accelerates in November. Reuters.
Investing.com. (2024, 11 30). Japan’s Nikkei index slides from record high as BOJ pivot looms large. Microsoft Network.
Kihara, L., & Sugiyama, S. (2024, 11 29). Core inflation in Japan's capital perks up, yen jumps on rate hike bets. Reuters.
Sathyan, D., & Chandak, A. (2024, November 27). India stocks to see slow recovery as Adani indictments weigh, analysts say- Reuters poll. Yahoo Finance.
Yun Li, Alex Harring, Sawdah Bhaimiya. (2024, November 27). 10-year Treasury yield slides as key inflation report comes in as expected. CNBC.
Wells Fargo Advisors (2024, November 29). Bond Market Commentary. Wells Fargo Advisor.
Ian Smith, Leila Abboud. (2024, November 27). French markets hit by threat of government collapse. FT.
Ian Smith, Laurence Fletcher, Philip Stafford , Leila Abboud, Adrienne Klasa. (2024, November 27). French bond yields surpass Greece’s for first time as budget worries swirl. FT.
Stefano Rebaudo. (2024, November 29). Euro zone long-dated government bond yields head for weekly fall, focus on data. Reuters News.
Chris Giles. 2024, November 29). Financial markets do not trust the BoE to deliver low inflation. FT.
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