Markets continued repricing their expectations for rate cuts by the Fed next year after the FOMC meeting and Chair Powell press conference last week. The dovish pivot by the world’s most important central bank could be instrumental in driving price action over the next few months. US short-term rates are expected to fall below 4% next year from the current 5.25% - 5.50%, and this has given a strong bid into the holiday period to the benchmark S&P 500 index which is now closing in on its all—time highs.
Consensus sees the first Fed rate cut in March, though it’s worth pointing out that the recent easing in financial conditions poses upside risks to inflation in 2024. Recent data also remains relatively solid with the jobs market tight, core inflation still double the Fed’s target at 4% and retail sales surprisingly firm last month. The central bank’s favoured measure of inflation – the core personal consumer expenditure deflator – is released on Friday and is expected to be more benign than the core CPI print. A big miss could encourage more selling in the dollar and buying of stocks as investors gear up for a Santa rally between Christmas and the new year.
The Bank of Japan meets on Tuesday amid much speculation about whether policymakers in Tokyo will tighten policies. Markets have been left disappointed for some time now about the BoJ not moving faster in stopping their current ultra-accommodative stance. The emphasis the bank puts on wage growth will be key with the spring wage negotiations seemingly important in determining any shift in policy. National CPIs have continued to accelerate which could lift the likelihood for businesses and labour unions to agree on another round of pay hikes. Hints around any policy tweak and exit from negative territory this week could be seized upon by traders who are waiting to hit the sell button on USD//JPY again.
UK inflation will be eagerly watched by GBP investors after the Bank of England railed against rate cuts in 2024. But markets looked through this and homed in on the global policy easing theme with four cuts now priced into next year in the UK. The headline CPI rate is forecast to edge lower again, with services inflation the key metric and cited by the BoE last week as an important input into the bank’s decision-making process. Cable closed off its highs from last week and below 1.27 on Friday’s sell-off. The data plus central bank speakers on both sides of the Atlantic will drive price action going forward.
Major data releases of the week
