An important week for global markets with the final interest rate decision from three major Central Banks.
So, what do we know?
(A forex, index, and commodity market review)
Global markets continue to believe that the US Federal Reserve, and other central banks, will start reversing rate hikes as early as the start of Q2 next year. This has helped propel the S&P500 within 5% of its all time high as investors remain optimistic about the interest rate outlook, despite central bankers warning that rates could still go up.
Weekly change (amount change and percentage change on the week)
FTSE +38 +0.51%
DAX +359 +2.18%
DOW Unchanged
S&P +7 +0.15%
NASDQ +74 +0.46%
NIKKEI -816 -2.43%
Hang Seng -592 -3.51%
US indices were largely flat last week although holding on to the gains generated throughout November as central bankers continue to push back against market interest rate expectations. Eurozone indices jumped higher with the German Dax extending monthly gains with another 2% advance last week as the prospect for ECB cuts early next year mounts.
Last week we warned that Central Bankers were reluctant to call time on their interest tightening policy because any tacit acceptance that rates were not going higher, would lead to an effective loosening in monetary policy.
The CME Fed Watch Tool implies a 70% probability of a rate cut at the 1st May meeting with an outside chance of a 0.25% cut in the March meeting. This is not the message that the Federal Reserve’s rate setting committee want broadcast because it makes their job more challenging. As a result of the market’s belief, Treasury (US Sovereign debt) bond yields have fallen with the 10-year yield at 4.24% which is 0.43% lower than this time last month. This effective loosening in monetary conditions is a problem for the Fed, and other Central Banks whose job it is to control prices.
Jay Powell, the chair of the Federal Reserve, in answer to a question about Fed thinking said that “it was premature to conclude with any confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”
Not only will Powell want to dampen down expectations of rate cuts but he also knows that it is still possible that the Fed may have to raise rates again if circumstances change. The market does not believe this which is supported by the current data, but central bankers are always wary because
circumstances could indeed change. Jay Powell, to reinforce this belief, stated that he and his FOMC committee members “are prepared to tighten policy further if it becomes appropriate to do so”.
Jay Powell and his committee members, are not alone in this regard, as other central bankers continue to battle market expectation about rate cuts.
The focus this week is again on three key central banks who are expected to keep interest rates on hold again in their final monetary meetings of the year. The announcement about interest rates is only part of the picture, as markets are very keen to understand were these central banks are thinking about possible interest rate cuts, so any press conference following the decisions will be quite lively. The markets remain at odds with these central banks but that often happens and more often than not the markets tend to be right. Forward interest rate contracts imply cuts in rates of 1% by the FED, 1.3% by the ECB and 0.80% by the Bank of England as UK inflation is expected to remain higher than in other countries for much of 2024.
EURUSD -1.20 -1.10%
GBPUSD -1.55 -1.22%
USDJPY -1.78 -1.21%
The US Dollar built on gains last week as traders and investors fret over the likely path in interest rates next year, which has a direct baring on foreign exchange rates, which are largely determined by interest differentials in the medium term. Expectations that the ECB is likely to be the boldest in cutting rates next year as Germany sustains a period of deflation. In the UK, forward rates imply cuts of 80 basis points next year which is less than the Eurozone and the US, which accounts for the strength in sterling over the past 6 weeks, especially against the Euro where sterling hit a 3-month high.
Gold -67 -3.23%
UK OIL -3.03 -3.83%
US OIL -2.92 -3.92%
Gold fell last week as the US Dollar recovered more lots ground. This may just be a lull as a number of central banks continue to build up their Gold reserves.
Oil continues to suffer following the less-than-convincing OPEC+ meeting from the previous week where members were not unanimous in backing the productions cuts into next year. With little sign of an escalation in the Israel / Hamas conflict in Gaza, the oil market awaits further developments from Opec, whose actions have failed to lift oil prices over the past 3 months, whilst losing some market share to non-Opec producers.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
A very important week with four central bank meetings and US inflation data.
Monday
No key data to report
Tuesday
UK Unemployment data. Claimant count expected to rise as the employment picture softens slightly.
US Headline and Core CPI inflation data. Monthly core inflation expected at 0.3%, slightly higher than last months. Headline expected at unchanged month on month, giving us a 3.1% annual reading. A higher figure will raise the blood pressure of the FOMC committee deliberating on Wednesday. USD and US Assets sensitive.
Wednesday
UK Monthly GDP – weakening.
US Core PPI. The costs of good and services that go into production. A pre-cursor to future inflation / deflation.
US FOMC rate decision. Expected to keep rates unchanged. FOMC statement and press conference are key for understanding prospects for rate cuts next year. USD, US and global assets very sensitive to this announcement.
Thursday
Switzerland SNB interest rate announcement. Expected to keep rates unchanged. CHF sensitive.
UK MPC rate setting committee meeting. Interest rates expected to be kept at 5.25%. Guidance in Monetary Policy Statement will be keenly anticipated by the markets.
Eurozone ECB interest rate decision. The governing council is expected to keep rates on hold at 4.5%. Forward rates imply 1.3% worth of cuts next year, starting in Q2. The ECB press conference may shed light on the bank’s thinking regarding possible rate cuts. EURO and Eurozone assets sensitive to this announcement.
Friday
China Industrial Production. Data gradually improving in China. If the number hits consensus then this will be the strongest Industrial Production number this year.
Eurozone, UK & US Flash Manufacturing and Services PMI data. Another modest pickup in both measures. Manufacturing still horribly weak in the Eurozone area, which should pick up if China sustains improving economic activity. Better than expected data may add weight to a re-rating of the scale of rate cuts next year. Central bankers already know the answer to improving data and the effect it will have on inflation and the path of rates next year.
