The week in review, and a new French PM

UK GDP unlikely to sway BoE, for now  

The October growth figure for the UK ecoomy defied expectations for a 0.1% rise, and instead registered a 0.1% decline in growth. Services were the biggest drag on growth, especially consumer facing services. If we don’t go out to eat and drink, then the UK economy can’t grow. There are ways to explain this: consumer concerns around the budget, bad weather etc. However, it means that Q4 got off to a bad start and is unlikely to meet the BOE’s forecast for 0.3% QoQ growth for the final months of the year. It also poses a political challenge, the Labour government’s plans to boost the economy are yet to materialize. If weak growth persists and unemployment rises, even at a gradual pace, the government needs to be aware of discontent among the electorate. We have already experienced riots this year in the UK, if the unemployment rate rises and the economy does not improve in 2025, then more civil unrest could follow.

For now, the market is still not expecting the BOE to cut rates at next week’s meeting. No change is expected, and the GDP data has not shifted the dial on this, the market is still only pricing in an 8% chance of a cut. However, next week’s meeting will still be important, are we getting close to arch hawk, Catherine Mann’s, threshold for shock and awe rate cuts? In a recent speech she argued for bigger, one-off cuts as this could have a better economic outcome compared to gradual cuts over a more prolonged period. This point of view could gain some traction if the economy remains in the doldrums during the important Christmas period.

The pound has declined 0.3% on the back of the GDP figures, and it has slipped below the $1.27 mark for now. Overall, we think that sterling remains vulnerable in Q1 2025. If the economy does not pick up in the new year then the chance of a mega cut to rates from the BOE in February will increase. This could weigh on sterling on a broad basis. EUR/GBP is also higher today.

Stock markets and inflation

Stocks are higher in Europe at the end of this week, and US futures are also pointing to a stronger open. European shares are no doubt basking in the glow of the potential for more rate cuts from the BOE, and the dropping of the hawkish bias by the ECB on Thursday. Tech stocks continue to lead the market rally in the US, as the dream of a broadening out of the stock market rally in the US fades as we move towards year end. Tech stocks declined on Thursday but are expected to move higher once more on Friday.

This week has been a tail of two US inflation reports. The CPI on Wednesday was seen as benign enough to almost guarantee a rate cut at next week’s Fed meeting. There is a 96% chance of a cut priced in by the market right now. However, the stronger than expected PPI report on Thursday and the surge in jobless claims muddied the waters on the outlook for Fed rate cuts and the outlook for future US growth. The latest GDPNow estimate from the Atlanta Fed is 3.3% annualized rate in Q4, far eclipsing growth in Europe.

However, Europe’s stock markets have got the ECB’s expected rate cuts in their favour for next year. If US growth does continue to expand at this elevated rate, then the Fed will have to carefully consider its monetary policy path in 2025.

For now, strong growth, even if there is a question mark over the future direction of monetary policy, is good news for mega cap tech stocks and we expect them to dominate through to year end.

French politics

The French prime has been announced as centrist politician Francois Bayrou. French bond yields are marginally higher on Friday, however, the spread with Germany has narrowed again at the end of this week.

However, the French 10-year bond yield has moved higher this week, and is hovering around 3%, as the European yield curve steepens on the back of expected ECB rate cuts at the short end of the curve. We doubt that the announcement of the new PM will have a big impact on the bond market. However, the French stock index, the Cac 40 has fallen more than 0.6% this week and has underperformed other indices in the region. The Dax is the best performer in the European stock market space so far this year, followed by Spain. This regional diversity in performance could continue as France wrestles with its budget deficit. The Cac 40 is set to underperform the Dax this year by the widest margin in 31 years. With France still mired in political turmoil, narrowing this gap is an uphill struggle, even with a new PM.