The Davy Digest - 11th November 2024

US equities rallied last week as the US election captured the market’s attention. The Republicans will control both houses of Congress as well as the Presidency, making an extension of tax cuts, less regulation and tariffs more likely. Initially, the US dollar strengthened, and yields moved higher with a steepening of the yield curve. A Trump presidency will seek to thread the needle of pro-growth policy, whilst keeping inflation contained. The Federal Reserve cut interest rates by 25 bps as expected, to 4.75%. Fed Chair Powell was defiant and said he would not resign if Trump asked him to. Powell stated the strength of the US economy meant they would need to proceed “carefully” and “patiently”. European equities lagged as markets priced in the potential for US tariffs on European exports. In Germany, Chancellor Scholz sacked Finance Minister Lindner, causing the ruling German coalition to collapse. A no-confidence vote will take place by 15 January, paving the way for parliamentary elections by the end of March. In the UK, the Bank of England cut interest rates by 25 bps and said future cuts would be gradual, seeing higher inflation and growth after the government’s budget. Chinese equities performed strongly for the week despite the US election result, thanks to further policy support being announced and some strong economic data. The China Caixin Services PMI rose to 52 from 50.3 the previous month while exports rose 12.7% year over year, the highest jump in 19 months.

Last week's highlights

	Presidential Election (05/11) – Red sweep, leading to US equity rally, stronger dollar, higher yields with steepening of the curve.  Federal Reserve Meeting (07/11) – Cut rates by 25 bps as expected. Powell said he would not resign if Trump asked him to.
	HCOB Composite PMI (06/11) – Came in at 50.0 vs 49.7 expected, sluggish activity in Germany offset expansion elsewhere.
	Bank of England Meeting (07/11) – Cut rates by 25 bps and indicated a “gradual approach” to cuts going forward as labour budget increased inflation forecasts.
	China Caixin Services PMI (05/11) – Rose to 3-month high of 52.0 from 50.3 the previous month.  China Exports (05/11) – Rose 12.7% YoY, highest rise in 19 months.  China National People’s Congress (04/11 – 08/11) – Additional 6 trillion yuan ($840 billion) to local governments for tackling hidden debt issues.

Looking ahead to this week, the Fed will be watching closely as US inflation is released on Wednesday. Last week, Powell stated that inflation was still “somewhat elevated” and that the risks to achieving both low, stable inflation and a healthy labour market were “roughly in balance”. Retail sales for October will be released on Friday after a strong September report that showed a 0.4% increase. German inflation figures for October will be released on Tuesday. The September report showed that German inflation had fallen to its lowest level in more than three years, thanks to falling energy prices. In the UK, investors will receive labour market data on Tuesday after Governor Bailey stated that the labour market is sending mixed signals at the Bank of England’s meeting last week. Q3 GDP figures in Japan are due out on Thursday while Chinese Industrial production and retail sales data will be released on Friday.

What's on the radar

	US inflation (CPI) (13/11) US Producer Price Index (14/11) US October Retail Sales (15/11)
	Germany inflation (CPI) (12/11) Germany ZEW Economic Sentiment Index (12/11) Eurozone Q3 GDP (14/11)
	UK Unemployment Rate (12/11) BOE Governor Bailey Speech (14/11)
	Japan Q3 GDP (14/11) China Industrial Production (15/11) China Retail Sales (15/11)

Chart of the moment

Economic data trumps tariff concerns

Source: Bloomberg as of 07/11/2024

Note: The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.

• China’s Citi Economic Surprise Index turned positive last week for the first time since June thanks to a range of economic data points beating expectations. 
• Trump’s victory has raised concerns about higher tariffs on Chinese exports and put pressure on China to implement further stimulus measures. 
• The standing committee of the National People’s Congress met last week and approved an additional 6 trillion yuan ($840 billion) to local governments for tackling hidden debt issues.
• This comes on top of previously announced stimulus measures including interest rate cuts, lower cash reserve requirements at banks and loosened property purchase rules.  
• China A Shares rose more than 5% last week in the face of the US election results, indicating that investors are placing more weight on improving economic data, than US tariff concerns.