Over the next two weeks, several major central banks are set to hold their final monetary policy meetings of 2024. In most cases, these institutions are expected to announce rate cuts as a holiday gift for economic agents and investors. This will almost certainly be the case for the European Central Bank (ECB) this Thursday. The economic challenges and political uncertainties weighing on the eurozone's two heavyweights, Germany and France, justify this year-end boost.
The ECB is likely to be followed the same day by the Swiss National Bank. Switzerland's low inflation and the strength of the franc against the euro will be key factors cited for this decision. Finally, the US Federal Reserve is also anticipated to deliver another rate cut. Despite consistently resilient economic data, further normalization of US monetary policy appears justified at this stage, potentially paving the way for a pause in early 2025 as the newly inaugurated President Trump begins rolling out his procyclical agenda. This environment is poised to help markets close 2024 on a high note.
The financial markets have shown little reaction to the fall of the French government, an event widely anticipated. The proposed budget, focused on tax increases rather than spending cuts, has drawn sharp criticism. Consequently, Michel Barnier’s attempt to implement significant fiscal consolidation has clearly failed, leaving fiscal policy now at best neutral (with the rollover of the 2024 budget) or potentially more accommodative. In this context, the appointment of a new Prime Minister, while important, is unlikely to dispel political uncertainties, as the Parliament remains deeply divided into three antagonistic blocs.
From an economic standpoint, indicators have been deteriorating since the conclusion of the Olympic Games. The automotive and consumer sectors have been particularly affected by layoffs and restructuring plans. Meanwhile, households are increasing their savings, signalling weakened confidence. This political instability is likely to continue weighing on both business and consumer sentiment.
In the eurozone, the CAC 40 is the only index to have declined since the start of the year. While many negative developments seem to have already been priced in, it is hard to envisage more than a relief rally on this market. France’s economic outlook remains bleak, with downside risks to growth. Moreover, the threat of increased taxes on profits and dividends persists. Despite significant underperformance, the CAC 40 still trades at a premium compared to its European peers, reflecting weaker earnings revisions relative to the rest of the eurozone markets.
In this environment, our perspective remains unchanged: the most vulnerable companies are domestic-focused ones. A more sustained recovery of the French market may require positive political announcements from the United States or China, which could once again make large exporting companies attractive. However, the timing of such developments remains uncertain.
On Friday, the S&P 500 closed at a new all-time high, marking the 57th such occurrence this year. 2024 is already shaping up to be an exceptional year for US risk assets. The ongoing year-end rally is expected to continue amidst a climate of euphoria, as the Federal Reserve prepares for, yet another rate cut.