Small businesses are upbeat

The National Federation of Independent Business (NFIB) reported that its Small Business Optimism Index rose by eight points in November 2024, reaching 101.7—the highest level since June 2021 and surpassing the 50-year average of 98. This surge in confidence is largely attributed to the recent presidential election results, which small business owners anticipate will lead to favorable economic policies. Notably, the net percentage of owners expecting the economy to improve increased by 41 points to 36%, the highest since June 2020. Additionally, 36% of owners reported unfilled job openings, indicating ongoing challenges in the labor market.

• Small businesses are often referred to as the lifeblood of the economy
• They employ 61.7 million people, roughly half the private workforce
• They also contribute around 44% of US GDP
• As opposed to large corporations, small businesses can move quickly
• This should serve as a tailwind to the economy heading into 2025

Inflation accelerates

In November 2024, the U.S. Consumer Price Index (CPI) increased by 0.3%, bringing the annual inflation rate to 2.7%, up from 2.6% in October. This rise was primarily driven by higher shelter costs and a notable surge in food prices, including an 8.2% increase in egg prices due to an avian flu outbreak. Shelter increased primarily due to a spike in hotel costs. Similarly, the Producer Price Index (PPI) rose by 0.4% in November, leading to a 3% year-over-year increase—the largest since February 2023.

• Notably, inflation has now been rising above its prior trend for several months
• The 3-month annual rate for core CPI is now 3.7%, above the 6-month annual rate of 2.9%
• It seems getting inflation to the Fed’s 2% target has proven to be stubborn
• As a reminder, inflation is a rate of change calculation, so prices are still rising
• This serves as a headwind to consumers as prices are still significantly higher than before Covid and unlikely to ever go back to prior levels

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Global central banks continue to ease, Fed is on tap

This week, the European Central Bank (ECB) reduced its key interest rate by 25 basis points to 3%, marking the fourth cut this year, in response to subdued economic growth and inflation nearing its 2% target. Similarly, the Swiss National Bank (SNB) lowered its policy rate by 50 basis points to 0.5%, aiming to counter the strengthening Swiss franc and support exporters. Later in the week, the Bank of Canada reduced its key policy rate by 50 basis points to 3.25%, marking the second consecutive half-point cut aimed at bolstering economic growth amid a softening labor market and subdued inflation. Governor Tiff Macklem indicated that while the bank will adopt a more gradual approach to future rate adjustments, it remains prepared to act further if necessary, especially considering potential economic uncertainties such as proposed U.S. tariffs on Canadian imports.

• Global central banks entered an easing regime earlier this year
• The Fed is due to meet on interest rates next week
• The market is currently pricing in a 96% chance that the Fed will cut interest rates by 25 bps at this meeting
• However, the difference is the US economy is doing significantly better than the rest of the world
• As per the NFIB survey and other indicators, this is likely to persist while inflation continues to be sticky and above the Fed’s target
• It will be essential to listen to what the Fed says about potential future rate cuts, given the health of the economy and the inflationary situation

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