Gilles Moec Macrocast: Plotting a Skip
- 16 December 2024 (10 min read)
Forward guidance is very much the central banks’ main issue as the year is drawing to a close. The ECB provided some, breaking away from a pure “data dependent” mantra, but in a convoluted way: the ECB no longer thinks monetary policy will need to remain “sufficiently restrictive” to bring inflation back to target, but considers that even after last week’s cut, monetary policy is still restrictive; ergo, more cuts are in the pipeline. Christine Lagarde mentioned a range for the neutral rate (1.75% to 2.50%), lower than the estimate provided by Isabel Schnabel the week before. For our part, we think the ECB will ultimately have to go into properly accommodative territory, below the market’s current pricing, at 1.5%, in 2H 2025. The SNB surprised the market with a 50bp cut, but their language expressed a reluctance to go back into negative territory if more is needed – which is highly likely. Given the specific situation of Switzerland, a return of substantial FX intervention is lurking.
This week, it will be the Fed’s turn. Rather than the widely expected 25bp cut, focus will be on the new “dot plot”. We think the Fed will point to a slower pace of return to neutral, beyond the “one cut per quarter” implied by the September forecasts, endorsing the market view that it will “skip” at least one of those quarterly cuts (we expect only one cut in 2025, in March). How Powell discusses “Trumpnomics” is another point of focus. While the Chairman does not need to explicitly comment on Trump’s policies, he can re-use the Fed’s approach of December 2016 and point to a more expansionary fiscal policy as an input in the new forecasts, as suggested by Bill Dudley.
France has a new Prime Minister, but the arithmetic of power has not changed. If a “pact” emerges where the government pledges to stop using the 49.3 procedure against a pledge by some parliamentary groups outside government not to support a motion of no confidence, a “proper” political agreement on the budget will be needed.
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