Pictet Group
Weekly house view | Central Bank Divergence
The week in review
Although they staged a comeback late in the week thanks to relatively benign inflation data, stock indexes did not appreciate the hawkish tone struck by the Fed last week, even as it cut rates by 25 bps. Fears of another US government shutdown also played on investors’ minds, although volatility eased back at the end of the week. The S&P 500[i] dropped 2% on the week (in USD), with the more rate-sensitive Russell 2000[ii] down 4.4%. There was red ink in non-US markets too, with the Stoxx Euro 600[iii] down 2.7% (in euros), not helped by disappointing test results from an important Danish drugmaker. China’s CSI 300 Index[iv] managed to limit its falls to 0.3% (in USD) as hopes increased of further monetary easing in response to weak domestic data. These same hopes led to a drop in Chinese bond yields—the opposite of what happened in US Treasuries, as markets reduced their expectations for Fed rate cuts. The USD popped higher, while the euro and yen tumbled, the latter suffering from the Bank of Japan’s reluctance to provide a firm indication that it will raise rates in January.
Monetary policy
“We can…be more cautious as we consider further adjustments to our policy rate.”
- Chairman Jerome Powell after Fed meeting, 18 December
Key data
The S&P Global’s flash estimate of the composite purchasing managers’ index (PMI) for the euro area rose to 49.5 this month from to 48.5 in November. The composite PMI for the UK was unchanged at 50.5. The flash composite PMI for the US rose to 56.6 in December from 54.9 in November, with a decline in the manufacturing PMI (to 48.3) offset by a rise in the services PMI to a 33-month high (58.5). US GDP growth in Q3 was raised to an annualised 3.1% from an initial estimate of 2.8%. The Personal Consumption Expenditure (PCE) index of inflation was an annual 2.4% in November, up from 2.3% in the prior month. Core PCE inflation was unchanged at 2.8%. Chinese retail sales grew 3% y-o-y in November, down from 4.8% in October. Industrial production rose 5.4% y-o-y, up from 5.3%. Japan’s core consumer price index rose an annual 2.7% in November (2.3% in October).