3.3% Ease & Frankfurt Fallout
Yes, it’s Fed Day, and Powell will lower rates, a hawkish ease & higher dot likely. GDP (Q4 est.) & Core CPI are both +3.3% yet the Fed will ease today—go figure. The data dependent Fed (maybe not so much) is staring at 43 straight months of core CPI above 3%. Powell’s tendency is to be transparent and not disappoint markets. Inauguration Day and its pro-growth policies likely means the Fed will take a pause next year as there are 8 Fed meetings per annum but only 2 - 3 more cuts priced in, which means the Fed will be on hold for much of next year. Since the Fed’s first cut 3 months ago, 10yr UST has risen ~75bps. Rates & credit spreads are telling us the U.S economy is strong.
Across the Atlantic, it’s a different picture with a dovish-ECB driven by a sub-1% growth rate. The ECB cut its rate and will keep easing to 1%, I believe (see chart below by Morgan Stanley-- first bank to call for 1% ECB lending rate). ECB Chair Chritine Lagarde eloquently stated "the direction of travel currently is very clear”….indicating that "the pace at which it happens, the data that will determine it” is also clear. While the U.S. economy is vibrant likely forcing the Fed to pause in Q1 of ‘25, the ECB will likely begin speeding up, and at some point, cutting rates in 50bp increments in Q1 of next year. It’s hard for Europe to put forward fiscal stimulus given their deficits and 100% debt-to-GDP ratios; Europe will likely rely on monetary rout. Germany, France, and Italy had growth rates close to zero last quarter as energy costs to run a factory or business is 3x vs. the U.S.
With strict regulations that hamstring development, high energy cost, and lack of confidence (consumer, business, investors), the political backdrop has also taken a turn for the worse with no-confidence votes in Germany & France. Interesting how times have changed as the periphery countries that struggled just 10+ years ago (Ireland, Spain, Portugal, and Greece) are now vibrant, while the largest economies are now struggling. The Swiss National Bank made a surprise half-point reduction to 0.5% and will likely be the first to return to ZIRP. European equity markets offer sub-optimal returns while private credit/special situations becoming particularly interesting as of late.
Big picture: Stay long $ assets.