Markets Weekly December 14, 2024

Summary

This week's Markets Weekly update covers key developments in global markets. The NASDAQ has reached new all-time highs, and we're entering a seasonally bullish period. The focus shifts to recent actions by central banks, including rate cuts from the Swiss National Bank, Bank of Canada, and the European Central Bank. In China, the government is ramping up stimulus efforts to counter economic struggles, with potential impacts on global trade. Additionally, a BIS study on the relationship between interest rates and housing supply suggests limited elasticity in housing markets, with significant implications for inflation and monetary policy effectiveness.

Takeaways

• 😀 The NASDAQ is reaching new all-time highs, signaling a bullish trend heading into the end of the year.
• 😀 Historical data suggests that the last two weeks of December are typically a bullish period for markets, driven by seasonal trends.
• 😀 Central banks around the world, including the Swiss National Bank (SNB), European Central Bank (ECB), and Bank of Canada, are accelerating the global rate-cutting cycle.
• 😀 The Swiss National Bank (SNB) surprised the market with a 50 basis point rate cut, aimed at controlling deflation and managing the Swiss Franc's appreciation.
• 😀 The Bank of Canada has also cut rates by 50 basis points, responding to rising unemployment linked to a significant influx of immigrants into the country.
• 😀 The European Central Bank (ECB) has cut rates by 25 basis points and is expected to continue with similar cuts due to economic headwinds, including potential tariffs and political unrest in France.
• 😀 China is intensifying its stimulus efforts due to ongoing economic struggles, particularly in the property sector. The People's Bank of China (PBOC) is adopting a 'moderately loose' monetary policy akin to the response during the 2008 financial crisis.
• 😀 China is also considering a yuan depreciation to 7.5 to stimulate exports and prepare for potential trade tensions with the US in 2025.
• 😀 A recent BIS study found that housing supply in developed markets has become less elastic to price changes due to increased regulation, especially in places like California.
• 😀 Despite monetary policy adjustments, rents remain resistant to changes, with inflation in the shelter component of CPI driven more by supply constraints than interest rate changes.
• 😀 To curb shelter inflation, government action on easing zoning laws and increasing housing supply is suggested, as monetary policy has limited impact on housing affordability.

Q & A

What is the market outlook for the week of December 14th?

The market outlook for December 14th is positive, with the NASDAQ reaching new all-time highs. The market is entering a historically bullish period, as the last two weeks of December have tended to show positive performance in previous years.

Why is December historically a bullish period for the markets?

December is considered a bullish period due to seasonal trends. According to data from Scott Ruer at Goldman Sachs, the last two weeks of December have traditionally shown positive market performance, which is attributed to various factors, including holiday spending and institutional investors' year-end positioning.

What actions did central banks take in the past week, and why are they significant?

Several central banks, including the Swiss National Bank (SNB), European Central Bank (ECB), and Bank of Canada, announced rate cuts. The SNB surprised the market with a 50 basis point cut, reflecting deflationary concerns due to currency appreciation. The ECB and Bank of Canada also made cuts, signaling broader global easing and the need to address low inflation and economic sluggishness.

How does currency appreciation affect Switzerland's economy and its central bank's actions?

Currency appreciation, especially of the Swiss franc, poses a problem for Switzerland's economy, as it makes exports more expensive and puts downward pressure on inflation. To combat this, the SNB is using rate cuts to manage inflationary and deflationary pressures while also trying to mitigate the strong currency’s impact on exports.

Why is the Bank of Canada cutting rates despite having low inflation?

The Bank of Canada is cutting rates due to rising unemployment, which has increased to 6.8%. This rise in unemployment is partly due to high immigration levels, which have added more workers to the labor force, leading to excess capacity. Despite low inflation, the Bank is responding to these labor market pressures.

What is the impact of immigration on Canada's unemployment rate?

High levels of immigration in Canada have contributed to an increase in the unemployment rate, as newly arrived individuals often face challenges such as language barriers and lack of professional networks, which can make it harder for them to find work. Research from the Bank of Canada has shown that the unemployment rate for newcomers is notably higher than for native Canadians.

What new measures is China considering to stimulate its economy?

China is considering stronger stimulus measures, including a 'moderately loose' monetary policy, which is seen as significant, as it resembles the policy response during the 2008 global financial crisis. The People's Bank of China has also indicated it may allow the yuan to depreciate to 7.5 to boost export growth amid ongoing trade tensions with the U.S.

What is the significance of the People's Bank of China's 'moderately loose' policy?

The term 'moderately loose' signals a shift toward aggressive stimulus, comparable to the policy adopted during the global financial crisis. This approach suggests that the Chinese authorities are increasingly concerned about the state of the economy and are ready to inject more liquidity to support growth.

How do interest rate cuts affect housing supply and home prices in developed markets?

In developed markets, interest rate cuts have limited impact on increasing housing supply due to stringent regulations and zoning laws. However, they tend to push up home prices. The elasticity of housing supply has decreased, meaning that price increases no longer lead to a proportional increase in the number of homes being built.

What role do rents play in inflation, according to the BIS study?

The BIS study suggests that rents are a significant driver of inflation, especially in the U.S., where shelter inflation has been a major component of CPI growth. However, the study also finds that rents are largely unresponsive to monetary policy, meaning that even though the Fed raises interest rates to curb inflation, it has little effect on slowing rental price growth.