economics

Authored by Andrew Latham via RealClearWorld,

Russia’s 2015 military intervention in Syria was a bold assertion of its great power ambitions, rescuing Bashar al-Assad’s regime and projecting influence in the Middle East. However, recent rebel advances and Assad’s sudden deposal threaten to isolate Russia’s Khmeimim airbase and Tartus naval facility, undermining both the practical and symbolic foundations of Moscow’s global power status.

The fall of Assad promises to be a major blow to Russia, which is already bogged down in Ukraine. Its ramifications are likely to be felt across Moscow’s foreign policy, which could soon face some stark and unenviable choices.

The Russian presence in Syria is central to the Kremlin’s broader strategy of force projection. Its Mediterranean bases allow Moscow to sustain military operations in the Levant, North Africa, and beyond, countering U.S. influence. With the key city of Homs having fallen to the rebels, supply routes to Khmeimim and Tartus have been severed, forcing reliance on vulnerable air and sea routes. This will weaken Russia’s operational readiness and its ability to influence events in neighboring theaters, including Africa.

Khmeimim also serves as a logistical hub for Russian private military contractors (PMCs) like the Wagner Group, active in Libya, Mali, and the Central African Republic. These contractors are central to Moscow’s efforts to expand its influence in Africa, providing security and securing lucrative economic deals. With Khmeimim isolated, sustaining these operations would become costly and inefficient, reducing Moscow’s ability to achieve its geopolitical objectives on the continent.

The isolation of Khmeimim and Tartus will severely constrain Russia’s ability to sustain military operations in Syria and beyond, undermining its ability to conduct airstrikes, reconnaissance, and rapid-response missions. PMCs, reliant on robust logistics, will face disruptions, emboldening opposition forces and exposing the fragility of Russia’s African partnerships. These setbacks will ripple through Moscow’s strategic calculations, undercutting its influence and economic goals.

The symbolic consequences of a rebel victory will be even more damaging. Moscow has portrayed its intervention in Syria as a demonstration of its reliability as an ally and its ability to uphold the sovereignty of client states. The loss in Syria will puncture this narrative, exposing the limits of Russian power and credibility. Regional actors, including Iran, Turkey, and the Gulf states, will recalibrate their perceptions of Moscow’s influence, while African partners might pivot toward more reliable alternatives such as China or the West.

Domestically, the repercussions of a diminished role in Syria will be significant. President Vladimir Putin has marketed the Syrian intervention as a triumph of Russian statecraft, portraying it as a cornerstone of Russia’s resurgence on the global stage. While critics of Russia’s foreign interventions have questioned their costs for years, the fall of Assad could amplify these doubts in ways the prolonged conflict in Ukraine has not. Syria’s collapse would symbolize a failure of Russia’s ability to safeguard allied regimes, striking at the narrative of strategic competence that Putin has worked to project. Public perceptions of Russian strength, carefully curated through state-controlled media, could falter, creating broader political vulnerabilities. Moreover, Syria has served as a testing ground for Russian weapons systems, and reduced visibility in the region would weaken their appeal to buyers, further diminishing Russia’s geopolitical leverage and economic gains from arms exports. The rebel victory in Syria will resonate globally. For the United States and its allies, it will validate strategies to contain Russian influence and embolden further countermeasures. NATO could leverage Russia’s difficulties to underscore the limitations of its global reach, while China might accelerate efforts to dominate regions like Central Asia and Africa, further sidelining Moscow in regions where it traditionally competes.

Russia now faces a stark choice: escalate its military commitment to protect its strategic interests, such as its naval facility in Tartus and airbase in Khmeimim, or accept a diminished role in the region. Escalation would aim to preserve these assets and reassert influence but risks clashes with other regional powers and would strain resources already stretched by commitments in Ukraine and Africa. Retrenchment, however, would signal a devastating blow to Russia’s credibility as a reliable guarantor of allied regimes worldwide, sending a clear message to its partners in Africa, the Middle East, and beyond that Moscow cannot be counted on to defend its allies in times of crisis. This erosion of trust would undermine Russia’s broader global strategy and invite further challenges to its influence elsewhere.

Already there is evidence Russian warships have left Tartus, raising questions about Russia’s commitment to its Syrian bases. As Russia navigates this crisis, it must confront the limits of its resources and the fragility of its aspirations. Great power status requires not just military might but strategic resilience. The outcome of the Syrian conflict will shape the future of Russia’s role in the evolving international order. For Moscow, the stakes could not be higher.

Andrew Latham is Professor of Political Science at Macalester College and a Non-Resident Fellow at Defense Priorities.

In the fourth quarter of 2023, online shopping was a record-breaking 17% of all retail sales. Put another way, one out of every six dollars was spent online.

This graphic from Visual Capitalist’s Jenna Ross, in partnership with BGO, highlights the spike in ecommerce that occurs every year during the holiday season.

The Growing Popularity of Online Shopping

Over the last 15 years, the percentage of money consumers are spending online has more than tripled. The most online shopping always occurs in the fourth quarter due to Black Friday and holiday spending.

In the table below, we show online shopping as a percentage of total retail sales over time.

Source: U.S. Census Bureau. Data accessed November 19, 2024.

With people stretched for time during the busy holiday season, many opt for quick online orders and home deliveries. 

Beyond convenience, deals also draw people to their screens. For instance, Amazon’s October Prime Day and Cyber Monday both offer deals catered to online shoppers. In 2024, Cyber Monday drew over 64 million U.S. shoppers—nearly three times higher than the 23 million people who shopped in stores.

To handle the increase in online shopping orders, U.S. retailers will need to have a plan for storing their products and transporting them to customers.

The Logistics of Online Orders

Free and fast shipping are top priorities for online shoppers. Nearly 40% would abandon a retailer with high shipping costs, while 32% would stop buying because of late deliveries. These high expectations, and the increase in ecommerce, is driving demand for real estate that can process online orders.

BGO’s industrial warehouse and logistics properties are strategically located to help reduce expenses and transport goods to consumers more quickly. During the busy holiday period, these properties run at full efficiency to meet the surging demand.

Learn what’s moving markets in BGO’s The Chief Economist newsletter.

Submitted by QTR’s Fringe Finance

I was happy to welcome my friend Peter Schiff back on to Fringe Finance this past week, where I was able to get his take on a couple of the items I wrote about on the blog last week – most importantly, whether or not he thinks markets will crash up (hyperinflation) or down (deflationary depression).

Schiff and I also talked about his perspectives on markets, government policies, and the future of Bitcoin and gold. I also asked Schiff about his miscalculations, primarily underestimating the length of time it would take for economic reckoning and on bitcoin.

Speaking from his residence in Puerto Rico, Schiff painted a dire picture of the U.S. economy, marked by excessive debt, misguided monetary policies, and misplaced optimism.

Schiff’s outlook on the markets remains grim. “The market is already very expensive,” he observed, highlighting that “the optimism factored in is misplaced.” He warned of an impending reckoning, exacerbated by years of deficit spending and inflationary policies: “We have a $36.2 trillion debt that’ll soon reach $40 trillion. This is unsustainable.”

“The market is already very expensive. It’s hard to see parabolic upside when optimism is misplaced. The markets are expecting good things to happen that aren’t going to happen.” – Peter Schiff

On whether markets are set to “crash up or crash down,” Schiff remarked, “Higher inflation is baked in, but that’s not good for the dollar. The markets are wrong to think it is.” His skepticism extends to the Federal Reserve, which he accused of sacrificing long-term economic health for short-term stability: “The Fed is a one-trick pony. Its solution to every problem is to inflate, mask the problem, and hope it goes away.”

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Schiff remains an unwavering advocate for gold, dismissing Bitcoin as a speculative bubble. He criticized Bitcoin’s lack of utility, stating, “It’s not digital gold; it’s not digital anything.” Contrasting it with gold, Schiff argued, “Gold has intrinsic value and has been a store of wealth for millennia. Bitcoin has failed to be money for 15 years.”

Taking aim at Michael Saylor’s proposal for the U.S. government to sell its gold reserves to buy Bitcoin, Schiff called it “a horrible idea” and dismissed Saylor’s comments as “self-serving.” He continued, “Bitcoin is not a reserve asset; it’s a speculative tool that has concentrated risk.”

Schiff also lambasted the speculative frenzy surrounding Bitcoin ETFs and institutional purchases: “Bitcoin ETFs and MicroStrategy have cornered 8% of Bitcoin’s total supply. That’s a bubble waiting to burst.”

“Bitcoin ETFs and MicroStrategy have already cornered 8% of Bitcoin’s supply. That’s concentration risk in a speculative bubble,” Schiff said. “Michael Saylor’s proposal for the U.S. to sell its gold for Bitcoin is not just a bad idea—it’s delusional. It’s putting all your eggs in one highly speculative basket.”

Schiff highlighted the worsening state of the U.S. economy: “People are working harder for less real income, drowning in debt, and paying 25% interest on credit cards. This is the reality behind the so-called recovery.” He lambasted the bipartisan reluctance to address deficits: “Trump promised to cut deficits but signed every debt-busting bill put on his desk. Nothing will change under his leadership.”

We also discussed:

• Market outlook: Speculation on whether markets will experience an inflationary rise or deflationary crash
• Federal Reserve policies: Predictions about the Fed’s actions concerning inflation and interest rates
• Inflation expectations: Discussion about how inflation impacts the economy and the U.S. dollar
• Government deficits: Criticism of rising budget and trade deficits under various administrations.
• Trump’s economic policies: Evaluation of Trump’s promises versus the reality of government spending and deficits
• Impact of tax cuts: Debate over whether tax cuts would stimulate the economy or worsen the deficit
• Military and welfare spending: Criticism of increases in military and welfare spending despite calls for fiscal restraint.
• Gold and currency: The comparative value of gold versus the U.S. dollar and other assets.
• Bitcoin and cryptocurrency: Analysis of Bitcoin’s perceived value, speculative nature, and potential risks.
• Comparative risk of assets: Comparison between speculative investment in Bitcoin and traditional markets.
• Historical trends in gold ETFs: Analysis of gold’s stability and its market dynamics versus Bitcoin.
• Government intervention in Bitcoin: Concerns over potential government involvement in Bitcoin markets
• Critique of modern monetary theory (MMT): Dismissal of MMT as a sustainable economic approach
• Economic bubbles and malinvestment: Concerns over the allocation of capital into unproductive sectors
• Debt servicing crisis: Warnings about rising interest payments on national debt
• Future economic predictions: Forecasts of a potential dollar crisis or significant inflationary period

You can watch the entire hourlong interview here. 

QTR’s Disclaimer: Please read my full legal disclaimer on my About page here. This post represents my opinions only. In addition, please understand I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have been hand selected by me, have not been fact checked and are the opinions of their authors. They are either submitted to QTR by their author, reprinted under a Creative Commons license with my best effort to uphold what the license asks, or with the permission of the author.

This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. I may or may not own names I write about and are watching. Sometimes I’m bullish without owning things, sometimes I’m bearish and do own things. Just assume my positions could be exactly the opposite of what you think they are just in case. If I’m long I could quickly be short and vice versa. I won’t update my positions. All positions can change immediately as soon as I publish this, with or without notice and at any point I can be long, short or neutral on any position. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.

Authored by Vijay Jayaraj via RealClearWire,

The climate movement’s annual showpiece, the United Nation’s Conference of Parties (COP), held this year in Baku, Azerbaijan, has been exposed to an unprecedented level of disinterest—even dissent—from developing nations.

Leaders of some of the world’s most resource-rich, economically aspiring countries have opted to sit this one out, sending only low-level delegates, if any. This is the latest signal of a growing resistance to an anti-fossil fuel “gospel” advanced by the United Nations.

Last year’s COP28 in the Middle East, where oil wealth underpins entire economies, forced the climate community to confront its contradictions. Today, COP29 in central Asia continues this reckoning and presages the demise of an unscientific and anti-developmental policy framework wrecking global economies.

Host of COP29 Educates Climate Woke Delegates

The tone of COP29 itself is a marked departure from prior gatherings. In Azerbaijan, where oil and gas production are integral to the national economy, the summit’s host, Azerbaijani President Ilham Aliyev, called fossil fuels “a gift from God,” lauding their contribution to global prosperity and stability.

Fossil fuels have moved from being a taboo “elephant in the room” to a subject of open discussion at COPs. The leaders of countries in Africa and Latin America are freely questioning the premise of banning their use of fossil fuels while much of the developed world continues to consume record amounts of coal, oil and natural gas. The notion that high-income nations can dictate the energy agenda is seen as a remnant of a power structure that primarily serves the interests of the world’s most privileged.

The International Energy Agency projects that developing countries will see substantial growth in energy demand over the next decade, an expansion that cannot be met by renewables. Leaders in these regions understand that hydrocarbons are critical to achieving their development goals.

Unprecedented Pullout From COP Conference and Resistance From Global South

In a surprising move, Argentina’s newly elected president, Javier Gerardo Milei, withdrew his country’s 80-person delegation from Baku less than a third of the way into this year’s 11-day COP. He cited the need for pragmatic energy policies that encourage development rather than stymie it.

For Milei, whose presidential campaign was based on a pro-business, anti-bureaucracy platform, the message is clear: Policy must serve the economic needs of his country first. Argentina’s ongoing energy crisis, its untapped shale gas reserves and a crippling economic situation demand a level-headed approach that prioritizes national interests over global climate ideals that are both batty and corrupt.

Milei’s political philosophy resonates with a growing number of leaders in the Global South who view economic growth as paramount and recognize that access to energy is fundamental to achieving it.

Argentina’s departure from COP29 is a turning point that should serve as a wake-up call to the U.N. and its allies. The time for one-size-fits-all mandates is over. The rigid orthodoxy of fossil fuel divestment pushed by the U.N. and wealthy nations is losing ground, challenged by leaders who refuse to sacrifice their national interests to a destructive agenda.

For much of the Global South, the idea of an immediate energy transition remains, at best, aspirational and, at worst, profoundly out of touch. The reality is that fossil fuels still power 80 percent of global energy consumption. This isn’t just an inconvenient truth; it’s an inescapable basis of modern civilization that developing nations understand viscerally.

As the COP29 circus concludes in Baku, the world is seeing the crumbling of the long-held illusion that a global transition to green energyis feasible, much less fair and desirable. Developing nations are proclaiming that they will not be deprived of necessary energy sources by nations that continue to feast on the very fossil fuels they frown upon. The disconnect between rhetoric and reality is stark, and developing countries are calling attention to it.

Fossil fuels are not a relic of the past; for many countries, they are the key to a prosperous future—truly “a gift from God.”

The key logistical hub of Ukraine’s eastern front, Pokrovsk has been under steady contention for the past three months. Russian forces have spent the better part of that time pushing westward to flank just south of the city.  They have now taken Kurakhove and cut off supply routes coming from Pokrovsk to a large portion of the front line.  Some reports indicate that Ukrainian troops trying to leave Kurakhove may be cut off.  The slow motion flanking maneuver has set the stage for Pokrovsk to be enveloped from the south.  

Since the beginning of the war the area has been the primary staging ground for resupply of Ukrainian troops across the east.  After Pokrovsk is cut off or taken, it is expected that Russia will then be able to gain significant ground across the entire front and move closer to controlling all of Donetsk.  

Losses for Ukraine have been stacking up in 2024 and lack of manpower has been the overarching theme.  Though numerous western officials and think-tanks (including The Institute For The Study of War) claim that Russian gains have been paid for with “massive casualties”, they’ve provided no concrete proof so far to support their stats.  The “Russian meat grinder” narrative is beginning to sound like a coping mechanism or propaganda as it becomes clear that Russia is gaining troop strength instead of losing momentum.

(There has been similar propaganda surrounding mass casualties of North Korean troops in Kursk – There are still no verified reports or video footage of actual DPRK troops in combat against Ukraine.  Rumors abound, like the “Ghost of Kyiv”)

What we do know is that Ukraine is desperate for new soldiers to refresh their defensive lines.  NATO leaders and the Biden White House have been putting pressure on Vladimir Zelensky to draft men from the 18-25 age bracket; a move Zelensky has avoided to prevent the complete loss of a generation.  The average age of conscripts is now well over 40 years old.  

This may be why Joe Biden recently gave the green light for Ukraine to use long range missiles (ATACMs and Storm Shadows) within Russian territory.  Every time Ukraine faces a strategic failure, NATO offers up new weaponry as a public distraction.  They said Abrams tanks would be a game changer for Ukraine, then they said the F-16s would be a game changer.  Now they claim the long range strikes using smart weapons will be a game changer.

Most military analysts agree that these weapons have had little effect on the course of the war.   

Russia’s typical methodology for dealing with urban centers has been to surround and then bombard with artillery and FABs until the majority of buildings and defenses are rubble.  A renowned Ukrainian military officer, Serhii Filimonov, commander of the Da Vinci Wolves battalion of the 59th Motorised Brigade, described Pokrovsk’s defense as a “disaster”.  Senior officers are placing “unrealistic” demands on units and are unfamiliar with circumstances on the front line, Filimonov wrote on his Telegram channel this week.   

Just days after the rapid collapse of the Syrian government of Bashar al-Assad, and now with Israeli warplanes having complete domination over Syria’s skies for the first time in modern history, the priorities of US and Israeli officials in the region have drastically changed.

Both US and Israeli leaders are now mulling the possibility of striking Iran’s nuclear program, amid several reports in recent weeks saying the Islamic Republic is expanding its program and enriching more nuclear-grade material. Tehran is now much more on the defensive, and could be more desperate to achieve nuclear weapons.

A significant Friday report in The Wall Street Journal says that “President-elect Donald Trump is weighing options for stopping Iran from being able to build a nuclear weapon, including the possibility of preventive airstrikes, a move that would break with the longstanding policy of containing Tehran with diplomacy and sanctions.”

“Trump has told Israeli Prime Minister Benjamin Netanyahu in recent calls that he is concerned about an Iranian nuclear breakout on his watch, two people familiar with their conversations said, signaling he is looking for proposals to prevent that outcome,” the report continues.

“The president-elect wants plans that stop short of igniting a new war, particularly one that could pull in the U.S. military, as strikes on Tehran’s nuclear facilities have the potential put the U.S. and Iran on a collision course.”

Currently the United States still has some 1,000 troops occupying northeast Syria, and they have come under internecine attacks by Iran-backed militias over the recent years. In any broader US-Iran war, these troops would be sitting ducks for attack via Tehran’s proxies in the region.

Trump in his first administration tried but failed to bring the troops home, but deeper entanglement in striking Iran could surely draw these troops into a broader conflict. The Pentagon would in that case likely expand its deployed forces in the region as well.

“Iran has enough highly enriched uranium alone to build four nuclear bombs, making it the only nonnuclear-weapon country to be producing 60% near-weapons-grade fissile material,” WSJ has noted further. “It would take just a few days to convert that stockpile into weapons-grade nuclear fuel.”

Iran has long maintained it develops only peaceful nuclear energy, and there’s little doubt that after the dramatic events unfolding in Syria, and with Hezbollah top leadership largely decimated, Tehran finds itself on a back foot. 

Some Israeli and Western officials believe that all of this will make Iranian leaders more desperate to ensure they have a final and ultimate defense against any threats (as in rapidly developing a nuke).

But if Trump were to authorize strikes on Iranian facilities, this would also obviously violate his frequent vows to his voters to not start new wars in the Middle East. The reality is that even ‘limited’ strikes still constitute an act of war. The potential for runaway escalation involving the US, Iran, and Israel would be a much bigger likelihood. 

Russia launched a massive drone and missile strike against Ukraine on Friday in retaliation for Kyiv’s recent use of the US-supplied Army Tactical Missile System (ATACMS) against a Russian military base.

ABC News quoted Ukrainian President Volodymyr Zelenskyy, who said Russia launched 93 missiles and nearly 200 drones targeting the country’s energy infrastructure. This was one of the largest bombardments against Ukraine’s energy sector since the invasion began almost three years ago.

Zelenskyy said Ukrainian defense forces intercepted 81 missiles, including 11 cruise missiles shot down by Western-supplied General Dynamics F-16 Fighting Falcon fighter jets.

He accused Russia of continuing to “terrorize millions of people” with these reckless assaults, renewing his request to the international community for intervention and more support for Ukraine.

“A strong reaction from the world is needed: a massive strike – a massive reaction. This is the only way to stop terror,” Zelenskyy said.

Meanwhile, the Russian Defense Ministry published a statement on its official Telegram channel, claiming that the retaliatory strike hit all intended targets:

“In response to the use of American long-range weapons, Russia’s Armed Forces launched a massive strike with high-precision long-range air- and sea-based weapons and UAVs on critical fuel and energy infrastructure facilities in Ukraine that support the operation of the military-industrial complex.”

On Wednesday, Ukraine fired six ATACMS at a Russian airfield inside the country’s sovereign territory. Russia claimed after the attack that all missiles were intercepted.

Reports on X indicate that Ukraine’s state-run energy company, Ukrenergo, warned that up to 50% of residential customers could be without power after today’s attack.

The world’s largest asset manager, BlackRock, said a portfolio allocation of up to 2% is “reasonable” for investors who wish to hold Bitcoin, in their latest Investment Perspectives report.

They begin the report by noting that “bitcoin cannot be compared to traditional assets,” but from a portfolio construction perspective, Samara Cohen (CIO of ETFs) and her team suggest that the so-called “Magnificent 7” group of mega-cap tech stocks is a useful starting point.

“Those stocks represent single portfolio holdings that account for a comparatively large share of portfolio risk as with bitcoin.

In a traditional portfolio with a mix of 60% stocks and 40% bonds, those seven stocks each account for, on average, about the same share of overall portfolio risk as a 1-2% allocation to bitcoin.

We think that’s a reasonable range for a bitcoin exposure.”

As with gold, bitcoin can be driven by sentiment, narratives and momentum – both up and down.

Why not more, they ask (and answer):

“Going beyond that would sharply increase bitcoin’s share of the overall portfolio risk.”

With approximately $11.5 trillion in assets under management (and manager of the largest spot BTC ETF, iShares Bitcoin Trust (IBIT), which holds net assets of nearly $54 billion), they are worth listening to.

According to BlackRock, investors “need to think about Bitcoin’s expected returns in a different way: it has no underlying cash flows for estimating future returns. What matters: the extent of adoption.”

“Bitcoin may also provide a more diversified source of return,” BlackRock said, adding:

“We see no intrinsic reason why Bitcoin should be correlated with major risk assets over the long term given its value is driven by such distinct drivers.”

Longer term, BTC “could potentially also become less risky – but at that point it might no longer have a structural catalyst for further sizable price increases,” the report said.

Instead, “investors may prefer to use it tactically to hedge against specific risks, similar to gold.”

Launched in January, spot BTC ETFs emerged as 2024’s most popular investment vehicles, breaking $100 billion in net assets in November. 

As CoinTelegraph reports, these surging inflows from institutional investors could cause “demand shocks” in 2025, driving up BTC’s spot price, according to a Dec. 12 report by Sygnum Bank.

“Our analysis shows how even relatively modest allocations from this segment can fundamentally alter the crypto asset ecosystem,” Sygnum said.

The report, dubbed ‘Sizing Bitcoin in portfolios’, was released by BlackRock Investment Institute on Dec. 12.

Submitted by Newsquawk

• ECB policy announcement due Thursday December 12th; rate decision at 13:15GMT/08:15EST, press conference from 13:45GMT/08:45EST
• Expectations are for the ECB to cut the Deposit Rate by 25bps to 3.00%
• The backdrop of the meeting comes amid a highly uncertain growth outlook for the Eurozone

OVERVIEW: The ECB is expected to follow up the October rate cut with another 25bps reduction, its 4th rate cut in a row, disappointing some of those looking for a deeper cut of 50bps on account of ongoing growth concerns. The ECB will most likely maintain a gradual approach to rate cuts with accompanying macro projections potentially set to not fully reflect recent negative events in the Eurozone. If the GC surprises markets by going for 50bps it will be a highly pre-emptive move and a step away from data-dependency. In order to get a consensus for such a move, the doves will need to convince the hawks that this is not a precursor for a move into sub-neutral territory.

PRIOR MEETING: As expected, the ECB opted to cut the Deposit Rate by 25bps. Despite the bank seemingly positioning itself for an unchanged rate in the wake of the September meeting, soft outturns for inflation and survey data forced the hand of the Bank into easing policy. Accordingly, the ECB reaffirmed its data-dependent credentials and reiterated that it will keep policy rates sufficiently restrictive for as long as necessary. The only minor tweak in the policy statement was that the Bank now sees inflation at 2% in the course of 2025 vs. previous guidance of H2 2025. At the follow-up press conference, Lagarde noted that there will be a lot more data available before the December 12th meeting, which suggests that there is not a preset expectation on the GC over what happens at the final meeting of the year. Furthermore, Lagarde stated that she has not opened the door to another rate reduction in December. That being said, she noted that there is no question that policy is currently restrictive. With regards to the decision, the President noted that it was a unanimous one on the GC.

RECENT ECONOMIC DEVELOPMENTS: On the inflation front, headline Y/Y CPI rose in November to 2.3% from 2.0%, which was largely expected on account of base effects. Core inflation remained at a stubborn level of 2.7% whilst services inflation ticked marginally lower to 3.9% from 4.0%. The ECB’s Consumer Expectations Survey saw the 12-month inflation forecast rise to 2.5% from 2.4% with the 3yr forecast holding steady at 2.1%. The 5y5y inflation forward has pulled back to 2.00% from the 2.14% seen at the time of the last meeting. On the growth front, Q3 GDP came in at 0.4% Q/Q, whilst the November Eurozone Composite PMI slipped to 48.1 from 50.0 amid heavy pessimism surrounding the French economy. The accompanying release noted “the eurozone’s manufacturing sector is sinking deeper into recession, and now the services sector is starting to struggle after two months of marginal growth.” In the labor market, the unemployment rate remains at a historic low of 6.3%.

RECENT COMMUNICATIONS: Since the prior meeting, President Lagarde has noted that the medium-term economic outlook is uncertain and therefore the Bank is not pre-committing to a particular rate path. Chief Economist Lane said while inflation had fallen close to the ECB’s target of 2%, there is a little bit of distance to go. He added that while data dependence falls down in priority, the new challenge would be assessing the incoming risks on a meeting-by-meeting basis, via FT. The influential Schnabel of Germany has stated that she sees only limited room for additional cuts, adding that the ECB should take a gradual approach and not go to an accommodative stance. In the hawkish camp, Austria’s Holzmann has said that a 25bps rate cut is conceivable in December but not more. Interestingly, the typically centrist Villeroy of France said interest rates should clearly go to the neutral rate and would not exclude going below the neutral rate in the future. He added that negative rates should remain in the ECB’s toolkit. Elsewhere, Italy’s Panetta has said that the ECB should move to a neutral monetary stance, or expansionary if necessary, adding that the ECB is still a long way away from neutral.

RATES/ECONOMIC PROJECTIONS: Expectations are for the ECB to cut the deposit rate by 25bps to 3.0% with markets assigning a circa 82% chance of such an outcome (with an 18% probability for a 50bps rate cut). Despite the weak growth outlook for the Eurozone, which is also complicated by Trump’s return to the White House, developments on the inflation front suggest there is still more work done to return inflation to target. In recent weeks, policymakers have also stressed the need for the Bank to step away from recent data dependency and focus on forward-looking expectations. On which, the accompanying macro projections are likely to be viewed as stale given that the cut-off date did not encapsulate the latest French political woes, whilst as highlighted by ING, “the ECB normally also applies a ‘no policy change’ assumption to its forecasting”. ING expects projections to be little changed vs. September (other than a slight downward revision for growth and inflation in 2025). As such, those on the GC looking for a 50bps cut are unlikely to be supported by the latest forecasts. If the GC surprises markets by going for 50bps it will be a highly pre-emptive move and a step away from data- dependency. In order to get a consensus for such a move, the doves will need to convince the hawks that this is not a precursor for a move into sub-neutral territory. Looking beyond the upcoming meeting, assuming the ECB cuts by 25bps, an additional 125bps of loosening is seen by the end of 2025.

Current forecasts:

• HICP INFLATION: 2024: 2.5%, 2025: 2.2%. 2026: 1.9%
• HICP CORE INFLATION (EX-ENERGY & FOOD): 2024: 2 9%, 2025: 2.3%, 2026: 2.0%
• GDP: 2024: 0.8%, 2025: 1.3%, 2026: 1.5%

* * *

How to trade today’s ECB rate cut?

Here is Bloomberg’s Vassilis Karamanis explaining why “Euro Traders Brace For Risk In Lagarde Guidance”

Options traders see the euro moving by the most since May 2023 on the day of a European Central Bank meeting, even amid market consensus on the policy decision. It’s mostly about forward-guidance expectations and a new FX volatility environment that’s been shaping up since the US elections.

Euro-dollar overnight volatility rises to 16.56%, the fifth highest reading in the past 19 months, pointing to a potentially game-changing moment for investors. Money markets fully price a quarter-point interest rate cut by the ECB later Thursday, assigning next to zero chances of a larger cut.

The updated inflation and growth projections are one part of the uncertainty surrounding the decision. The biggest surprise would of course come from a jumbo rate cut, but it’s mostly down to what President Christine Lagarde will offer to the market in terms of verbal projections.

Questions include whether the central bank sticks to restrictive-rates language and delivers a modest hawkish surprise, or if officials are comfortable in communicating that a move below neutral levels is on the cards by the summer of 2025. Traders may be also looking for clear guidance on what the ECB has in store in case of a global trade war or should political risks in the euro area’s largest economies spill over to spreads.

Lagarde has been careful in maintaining full flexibility during the press conferences that follow a policy decision, sporadically offering only subtle messaging on the Governing Council’s thinking for the next move. While options pricing points to chances that today’s messaging could be more revealing, high euro hedging costs also reflect the shaping up of expectations for higher volatility next year.

Chances of a global trade war, lingering geopolitical risks and diverging inflation paths for the world’s largest economies — and in turn monetary policy, make the case for long-volatility exposure in the currency space which is seen once again as a strong alpha-generating asset class. Interbank traders say that positioning is now much lighter in the euro, as many desks have trimmed exposure ahead of year-end, and that leaves room for a wide move, even if it all goes according to consensus.