7 min readWeekly recap
Last week, the main focus was on US inflation data, which came in no worse than expected. November’s US CPI was the last key data point before the Fed’s meeting, and it showed that inflation rose by 2.7% year on year, up from 2.6%. This was in line with economists expectations. Core inflation remained unchanged at 3.3% for the third straight month.
The data boosted the market’s expectations of a December Fed rate cut, helping the Nasdaq 100 reach a record high.
Meanwhile, Gold prices also gained throughout the week on the prospect of lower rates in the near term. The price briefly rose back above 2700, although it finished the week below this level.
Week Ahead
Chinese data (over the weekend)
Economic data released over the weekend showed an uneven recovery in China’s economy, pointing to the likelihood of further stimulus measures from Beijing. Chinese industrial production rose as expected in November thanks to recent stimulus measures supporting business activity. However, retail sales data fell short of forecasts, highlighting the ongoing weakness in consumer spending while house prices continue to fall.
The mixed data underlines the challenges Chinese leaders face with the economy as it heads into 2025 as domestic consumption remains weak and ahead of the possibilities of U.S. trade tariffs under a trump administration.
The Hang Seng trades under pressure, see chart below.
German IFO business climate & Eurozone ZEW economic sentiment (Tuesday)
In addition to PMI data on Monday, I have faux business climate and the eurozone’s ZEW economic sentiment figures, which will provide further insight into the outlook for the German and broader eurozone economies. The data could show signs of weakness amid concerns over the political uncertainty in both France and Germany after the French government collapsed and as Germany is heading towards an election in the new year.
The data comes as PMI data at the start of the week showed that business activity remains in contraction. Weak data could pull EUR/USD lower.
Fed rate decision (Wednesday)
The Fed is widely expected to cut rates on Wednesday in its final FOMC rate decision of the year. The markets are pricing in a 97% probability that the Fed will cut rates by 25 basis points, bringing the rate to 4.25%—4.5%.
December’s rate cut comes after the Fed started its rate-cutting cycle in September with a jumbo 50-basis-point cut, followed by a 25-basis-point reduction in November.
The Fed’s rationale for reducing rates has diminished recently following a solid November non-farm payroll report, which saw 227k jobs added, and as inflation ticked higher to 2.7%—still above the Fed’s 2% target level.
With the Fed rate cut priced in, the focus will be on communication from the central bank. Federal Reserve Chair Powell comments on the outlook for rates in the post-meeting conference and the latest round of projections, including the dot plot, which will influence the market. Should this point to the Fed slowing the pace of rate cuts, it could boost the USD and pull stocks away from record highs as well as weigh on Gold prices. See XAU/USD chart below.
Furthermore, Trump remains a wild card for the Fed. The Fed is in a lull period before Trump assumes power on January 20th. He is expected to implement inflationary policies. However, the Fed will only react once measures are implemented and the impacts are shown in the data.
BoE rate decision (Thursday)
The BoE will announce its rate decision on Thursday and is widely expected to leave rates unchanged at 4.75% after cutting rates in the November meeting. To recap, the BoE reduced rates by 25 basis points in November, the second rate cut after kicking off the monetary loosening cycle in August with a 25-basis-point cut.
The meeting comes ahead of Tuesday and Wednesday’s labor market and inflation data. Inflation ticked higher to 2.3% in October, up from 1.7%, and the jobs market has been showing resilience. However, recent industry data following the Labour government’s budget suggests that the jobs market could be heading for a sharp slowdown after employer National insurance contributions and the minimum wage increased in the Autumn Budget.
With no cut expected, the focus will be on the central bank’s outlook for rates across the coming year. In a recent speech, Governor Andrew Baily suggested that the central bank could cut rates four times next year, which would take the level to 3.75%. The market sees three rare cuts next year.
A dovish-sounding BoE could see GBP/USD fall lower. The pair fell 1% last week, raising concerns over the growth outlook.
BoJ rate decision (Thursday)
The BoJ holds its final policy meeting of the year this week, and its decision will be announced just hours after the Fed. The BoJ ended negative interest rates in March, lifting its rate to 0.25% in July, and has signaled it is prepared to hike rates again, although the timing remains unclear. Bank of Japan officials see limited urgency in acting as there is little cost to waiting before raising interest rates.
As a result of expectations that the BOJ may leave rates on hold, the yen has weakened to its lowest level since November. The market is pricing in just a 20% likelihood of a Bank of Japan interest rate hike this week. However, it’s also worth noting that the Bank of Japan has a history of surprises. Officials are open to a December hike depending on data and market developments. While we consider the Bank of Japan is coming closer to a hike, they could hold off until January. After the Bank of Japan raised rates in the summer, turmoil followed in the global markets owing to a lack of clear communication.
Should the Bank of Japan adopt a more dovish stance and the Fed adopt a hawkish stance in its meeting hours before, this could weigh heavily on USD/JPY.
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