07/12/2024 Market Analysis

Week Ahead: U.S. Inflation Data, ECB Rate Decision

The upcoming week focuses on key inflation data in the U.S., which remains pivotal as uncertainty around interest rate decisions persists. The European Central Bank (ECB) and Swiss National Bank (SNB) are expected to lower interest rates in Europe. Meanwhile, attention in Asia shifts to Australia’s central bank decision and important economic data releases from Japan and China.

Last week, the U.S. dollar strengthened against all G10 currencies except the Swiss franc, while its performance against emerging market currencies was mixed. The U.S. 10-year Treasury yield fell for the third consecutive week, settling near 4.16%, and the two-year yield dropped to 4.10%. Both yields are now lower than pre-election levels. The Dollar Index has climbed 2% since the election, but the Japanese yen is the only G10 currency to appreciate against the dollar. In contrast, the Chinese yuan has weakened, losing around 2.35% over the same period, diverging from its earlier alignment with the yen. Bitcoin has also garnered attention, soaring above $100k, sparking debate about its role as a store of value, with Fed Chair Powell suggesting it may rival gold rather than the dollar.

This week will see four major G10 central bank meetings. The Reserve Bank of Australia is expected to hold rates steady with no surprises anticipated. The Bank of Canada faces pressure to cut rates following a rise in unemployment to 6.8%, potentially overlooking recent inflation data. The ECB and SNB meet on Thursday, with the ECB likely to deliver a 25-basis-point cut, scaling back earlier speculation of a larger move. For the SNB, markets are now nearly split on whether a 25 or 50-basis-point cut is more likely.

The spotlight remains on the U.S. November Consumer Price Index (CPI) data set for release on Wednesday, where a second consecutive increase in headline inflation is expected. Market sentiment suggests an 85% chance of a rate cut by the Federal Reserve, though Fed officials have entered a quiet period ahead of their mid-December meeting. Historically, the Fed has used quiet periods to guide markets through media channels, leaving room for strategic surprises.

Overall, inflation trends, central bank decisions, and the evolving outlook for interest rates will shape global markets in the days ahead.

United States of America

U.S. Inflation Data Could Shape Fed’s Next Move

The U.S. Consumer Price Index (CPI) report, due Wednesday, is a crucial indicator for the Federal Reserve’s interest rate decision on December 18. While markets broadly expect a rate cut, it is far from certain. A strong inflation reading could prompt the Fed to leave rates unchanged, increasing volatility in the dollar and U.S. Treasury. Analysts suggest that the Fed may proceed with a December cut even if inflation comes in slightly higher than anticipated, given their prior communications pointing to a pause in 2024.

Pipeline Inflation Signals and Labor Market Data

On Thursday, the Producer Price Index (PPI) will offer insights into underlying inflationary pressures, while weekly jobless claims will provide a snapshot of labour market conditions. These data points are critical for assessing whether inflation remains sticky or shows signs of easing.

Treasury Auctions to Test Market Demand

The U.S. Treasury will auction $58 billion in three-year notes on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday. The outcome will reflect investor sentiment amid ongoing policy uncertainty and inflation concerns.

Inflation Trends Reflect a Bumpy Path to 2%

November’s CPI is expected to rise by 0.3% month-over-month after four consecutive increases of 0.2%. This would lift the year-over-year headline rate to 2.7% from 2.6%. Core inflation, which excludes food and energy, is also anticipated to increase by 0.3%, holding the annual rate steady at 3.3%. The lack of improvement underscores the Fed’s cautious approach. Rising producer prices reinforce that inflation’s path toward the 2% target remains uneven.

Market Sentiment Clashes with Fed Patience

Despite rising unemployment and mounting market expectations for a rate cut, the Fed may opt to hold rates steady in December. The central bank can afford to be patient, particularly with fiscal policy uncertainty following the election. However, markets have priced in an 88% chance of a cut, up from 70%, leaving little room for surprises. Historically, the Fed has been reluctant to go against such strong market consensus.

Dollar Index Faces Key Technical Levels

The Dollar Index (DXY) initially weakened after the latest jobs report, reaching its lowest level since November 11 at 105.40. While it recovered to 105.85, resistance remains in the 106.20–40 zone. A break below 105.40 could trigger a move toward stronger support around 105.00–15. The dollar’s recent performance has been mixed after rallying throughout October and most of November, followed by a 1.7% decline in late November.

Key Points:

• CPI Report (Wednesday): Critical for gauging Fed policy direction.
• PPI and Jobless Claims (Thursday): Indicators of inflation momentum and labour market health.
• Treasury Auctions: Investor demand amid economic uncertainty.
• Dollar Index Movement: Support at 105.40 and resistance near 106.40.

Australia

RBA Meeting: Policy on Hold but February Cut in Focus

The Reserve Bank of Australia (RBA) will hold its final meeting of the year on Tuesday, with markets widely expecting rates to remain unchanged. However, weak third-quarter GDP data, which was propped up by strong government spending, has fueled speculation of a potential rate cut as early as February. Treasurer Jim Chalmers highlighted that without government support, Australia’s economy would likely be in recession, as other economic drivers remain weak.

RBA Governor Bullock’s Stance Under Scrutiny

RBA Governor Michele Bullock has consistently ruled out near-term rate cuts, but any shift in tone during her post-meeting press conference would be significant. Markets currently price in the first cut around May, but further weakness in economic data could accelerate that timeline. A speech by Deputy Governor Andrew Hauser on Wednesday will be closely watched for any signs of a change in the central bank’s stance on inflation, which the RBA still views as “troubling.”

Key Employment Data to Influence Rate Expectations

Australia’s November employment data, due Thursday, will be pivotal in shaping rate expectations. Despite a slight rise in unemployment to 4.1% from 3.9% earlier this year, the labour market has remained resilient, with nearly 390,000 jobs created in 2024, the bulk of which are full-time positions. However, the rising participation rate, now at 67.1%, suggests the economy is gradually absorbing a growing workforce. Evidence of a cooling labour market could add weight to arguments for an earlier rate cut.

Australian Dollar Under Pressure Despite RBA Hold

The Australian dollar struggled last week, falling nearly 2% and breaking below $0.6400. It posted its lowest settlement of the year, even as the RBA remains on hold while other G10 central banks prepare for cuts. Despite its resilience in earlier months, the Aussie’s performance now lags behind peers like the Canadian and New Zealand dollars, with the latter already navigating an easing cycle.

Key Points:

• RBA Decision (Tuesday): Focus on any dovish shift in tone from Governor Bullock.
• Deputy Governor Speech (Wednesday): Possible signals of a February rate cut.
• November Employment Data (Thursday): Cooling job growth could accelerate calls for policy easing.
• AUD Movement: Pressure remains below $0.6400, with further downside possible on weak data.

Canada

Bank of Canada Decision: 25 or 50 Basis Points?

The Bank of Canada (BoC) announces its latest interest rate decision on Wednesday, with markets and analysts split on whether the central bank will opt for a 25 or 50 basis-point cut. Money markets reflect roughly equal odds for both outcomes. While the Canadian economy has shown underlying resilience, recent signs of weakness, such as a rise in unemployment and slowing wage growth, have increased the likelihood of a larger rate reduction.

Labour Market Weakness Driving Expectations

Canada’s labour market delivered strong full-time job gains of 54k recently—proportionally equivalent to 550k jobs in the U.S. However, the jump in unemployment to 6.8% from 6.5%, coupled with wage growth slowing to 3.9% from 4.9%, could push the BoC toward a 50 basis-point move. The central bank has already cut rates aggressively this year, including a half-point reduction in October, with markets now pricing the overnight target rate to hit 3.25% after this meeting.

U.S. Tariff Threat Adds Pressure

The risk of tariffs under President-elect Trump is another factor weighing on policymakers. Increased trade uncertainty could prompt the BoC to take out “insurance” against further economic weakness, as suggested by analysts at Corpay. The possibility of rising trade barriers may push the central bank to act more decisively to support the economy ahead of potential headwinds.

Canadian Dollar Under Pressure

The U.S. dollar surged to CAD1.4155 last week, approaching a four-year high near CAD1.4180, which remains a key resistance level. Beyond that, the charts point to highs from 2016 and 2020 in the CAD1.4670-90 range. Despite brief pauses, momentum indicators are turning higher again, suggesting further strength for the U.S. dollar. The 20-day moving average held firm three times last week, and the U.S. dollar hasn’t closed below it since the U.S. election.

Key Points:

• Rate Decision (Wednesday): A 50 bp cut remains a strong possibility amid rising unemployment and slowing wages.
• Trade Risks: U.S. tariff uncertainty could sway policymakers toward a larger rate cut.
• USD/CAD Levels: Watch for resistance near CAD1.4180, with potential upside to 2016/2020 highs if the BoC delivers a dovish surprise.

China

Chinese Inflation Data: Demand in Focus

China will release its inflation figures on Monday, providing insights into domestic demand trends. Economists predict consumer prices (CPI) rose 0.5% year-on-year in November, up from 0.3% in October. Meanwhile, factory-gate prices (PPI) likely fell 2.8%, slightly improving from October’s 2.9% decline. Persistent deflationary pressures, driven by the ongoing property downturn, remain a significant challenge for Beijing’s economic revival efforts.

Trade Data: Exports Under the Microscope

Tuesday’s trade data will highlight whether exports, a critical growth engine, continued their resilience. Analysts at Nomura expect export growth to remain solid in November, though it may moderate to 8.4% from October’s 12.7% due to a high base. Import growth, seen rising 0.8% (versus October’s 2.3% drop), could signal a modest improvement in domestic demand. The trade surplus is forecasted to narrow slightly to $92.8 billion from October’s $95.7 billion.

Policy Signals from Key Economic Conference

China’s top leadership will meet this week for the Central Economic Work Conference, setting the economic agenda for next year. Markets will watch for signs of additional stimulus measures aimed at stabilizing growth and addressing deflation. Recent lending data will also be scrutinized to gauge the effectiveness of current support measures.

Yuan and Bond Market Dynamics

China’s 30-year bond yield recently fell below Japan’s, reflecting significant shifts in investor sentiment. Despite capital controls, China’s lower inflation keeps real interest rates relatively attractive compared to U.S. markets. For instance:

• China’s 10-year yield: ~2.0% nominal, with 1.7% real yield.
• U.S. 10-year yield: ~4.2% nominal, with 1.6% real yield.

Meanwhile, the yuan continues to face pressure. The offshore yuan (CNH) fell nearly 0.5% last week, marking its eighth weekly decline in the past ten weeks. While some argue the yuan’s weakness offsets trade tariffs, the PBOC’s intervention—setting the dollar reference rate below market levels—has helped moderate the decline.

Key Technical Levels for the Yuan

U.S. dollar reached a high of CNH7.3150 last week before retreating. The next resistance lies near CNH7.3700, last year’s peak.

Key Points:

• Inflation Data (Monday): CPI expected at 0.5%; PPI to remain negative.
• Trade Data (Tuesday): Export growth forecasted at 8.4%; imports improving modestly.
• Central Economic Work Conference: Focus on additional stimulus signals.
• Yuan Movements: Watch CNH7.3150 and CNH7.3700 for technical resistance.

Europe

ECB’s Final Meeting of the Year: Rate Cut Expectations

The European Central Bank (ECB) will hold its final meeting of the year on December 12, with market expectations leaning towards a rate cut. While a 25 basis-point (bp) cut is seen as the most likely scenario, there is still a possibility for a more aggressive 50 bp reduction. The focus will be on the ECB’s quarterly staff forecasts and any guidance on future policy, although analysts don’t anticipate significant downward revisions to the economic outlook.

Economic Data to Watch

• German CPI (Tuesday): Final inflation figures for November are due, offering insights into price pressures in Europe’s largest economy.
• German Foreign Trade (Friday): Data on exports and imports for October will be released.
• Eurozone Industrial Output (Friday): October figures will provide a snapshot of industrial activity across the region.
• French & Spanish CPI (Friday): Final inflation data for November will also be available.

Focus on 2025 Funding Plans

The last bond auctions of the year will take place, with Austria set to auction 2034- and 2053-dated bonds on Tuesday and Italy planning its auction on Thursday. These auctions will shift focus to the sovereigns’ 2025 funding plans, providing a glimpse into fiscal strategies for the coming years.

Economic Challenges Amid Uncertainty

The Eurozone continues to struggle with economic imbalances and external challenges. With the impact of the pandemic still lingering and trade ties shifting—especially with the U.S. re-election of Donald Trump and new tariff threats—there is a growing case for continued monetary easing. Inflation in the Eurozone showed a slight increase to 2.3% in November, largely due to base effects from fuel prices. The slowing service price inflation (falling to 3.9%) may boost policymakers’ confidence in easing policy further. Market expectations currently price in a total of 100 bp of rate cuts in H1 2025.

Euro and Dollar Movements

The euro surged to $1.0630 after the US jobs report but reversed lower, testing support around $1.0480-$1.0500. Initial support is seen at $1.0480-$1.0500, with a potential break below $1.0450 bringing the currency pair back to November’s low. $1.0630 marked the high after the US jobs report, but the euro reversed lower. Support is seen around $1.0480-$1.0500, with the potential for a move back toward the November low if the $1.0450 level is breached.

Key Points:

• ECB Rate Decision (Dec 12): Expect a 25 bp cut, with the potential for a 50 bp reduction.
• Economic Data: German CPI, foreign trade figures, and Eurozone industrial output will be crucial.
• Bond Auctions: Austria and Italy’s auctions will shift focus to 2025 funding plans.

Japan

Japan’s Economic Data and Bank of Japan’s Policy Outlook

The Bank of Japan (BoJ) is under scrutiny ahead of its December 18-19 policy meeting. The key focus will be whether the central bank will opt for a rate hike later this month, with several economic data points influencing the decision.

Data Releases:

1. Tankan Survey (Dec 13): The Tankan survey, a quarterly corporate sentiment report, will be released on Friday and is highly anticipated. Business confidence is expected to remain stable, with market participants particularly looking for any signs of how uncertain U.S. trade policies might impact corporate outlook and capital expenditure plans.
2. Third-Quarter GDP (Dec 11): The revised GDP data for Q3 will be released Monday, confirming the 0.2% growth from Q2, or 0.9% annualized. No major revisions are expected, but an upward revision to capital expenditures could provide positive signals for economic activity.
3. PPI Report (Dec 11): Japan’s Producer Price Index (PPI) for November will also be closely watched. The PPI has risen from 0.3% YoY at the end of 2023 to 3.4% in October, signalling increasing inflationary pressures.
4. Current Account and Bank Lending Data (Dec 11): The current account balance for October and bank lending for November are due Monday. These data points will give additional insights into the health of Japan’s economy.
5. Government Bond Auction (Dec 12): On Tuesday, the Ministry of Finance will auction 2.3 trillion yen of five-year Japanese government bonds. This could attract attention as markets prepare for the BoJ meeting later in the month.

Potential Policy Implications

A firmer Tokyo CPI and signs of stronger Q4 economic activity, including stronger exports, would make a rate hike more likely.

The BoJ Governor Ueda has signalled that the meeting is live without making specific commitments. Firmer inflation data and strong export performance would favour a tightening stance.

Key Points:

• Tankan Survey (Dec 13): Corporate outlook and capex plans amid trade policy uncertainty.
• Third-Quarter GDP Revision (Dec 11): Confirmation of economic growth.
• PPI Data (Dec 11): Monitoring inflation pressures.
• Current Account & Bank Lending (Dec 11): Insights into economic health.
• BoJ Policy Meeting (Dec 18-19): Rate hike decision influenced by inflation and economic data.

Switzerland

Swiss National Bank (SNB) Rate Decision Overview

The Swiss National Bank (SNB) will announce its rate decision this Thursday, with expectations pointing toward a rate cut from its current 1.0% policy rate. However, there is uncertainty regarding whether the SNB will opt for a 25 basis-point (bp) cut or a 50 bp reduction.

Money Markets: Data from LSEG show a 55% probability of a 50 bp cut, reflecting market uncertainty over the size of the rate adjustment.

Potential SNB Actions

• Rate Cut Likely: The market is leaning towards a 50 bp cut despite the already low deposit rate of 1.0%, which makes a substantial cut somewhat aggressive.
• Policy Caution: While the SNB has suggested it may return to negative rates if necessary, it is expected to take a cautious approach.
• The strength of the Swiss franc has become a key consideration for the SNB, as it approaches its highest level of the year.

Auction on Wednesday

On Wednesday, Switzerland will conduct an auction. The outcome of this auction may influence market expectations for the SNB’s decision on Thursday.

Key Points:

• Rate Cut: Markets anticipate a rate cut, with a 50 bp cut seeming slightly more likely.
• Weak Inflation: Recent inflation data suggests that the SNB may reduce its inflation forecasts, adding to the case for a rate cut.
• Swiss Franc Strength: The franc’s strength against the euro continues to be a significant factor, with the SNB likely to be cautious in its approach.
• Auction and SNB Caution: The bond auction on Wednesday could add further insights, but the SNB is likely to maintain caution in any rate decisions.

United Kingdom

October GDP Expectations

The U.K. GDP data for October will be released on Friday, with expectations for a rebound following a slight contraction in September. Economists forecast a +0.4% growth for the fourth quarter, with a steady economic pace projected for 2025.

Additional Data Releases

In addition to GDP, October’s industrial production and trade data will be announced. These releases will provide a clearer picture of the U.K.’s economic performance and help assess whether the rebound in October will continue.

Housing and Consumer Sentiment

On Thursday, the RICS Housing Survey will be released, followed by the GfK Consumer Confidence data on Friday. These indicators will offer insights into the state of the housing market and consumer sentiment, both of which are crucial for understanding the broader economy.

Bond Auctions

This week, U.K. bond auctions will be held, with the November 2033 gilt scheduled for Tuesday and the July 2034 gilt on Wednesday. These auctions will provide key information about the government’s funding and market conditions.

Economic Data and Policy Stance

Despite the anticipated recovery in October’s GDP, the Bank of England (BOE) is unlikely to make any significant policy changes during its December 19 meeting. Data from September showed a 0.1% contraction, and October retail sales were weaker than expected. Additionally, the PMI dropped to its lowest level of the year in October, signalling a potential economic slowdown.

Market Expectations for Interest Rate Cuts

The swaps market currently indicates a 13% chance of a rate cut at the December 19 meeting, with a higher probability of a cut (85%) at the February 6 meeting.

Pound’s Fluctuation

The British pound briefly rose above $1.28 after releasing the U.S. jobs data, but failed to break the 200-day moving average and quickly reversed lower to $1.2720. The rebound from the November 22 low may have run its course, with a potential further downside if it breaks key support levels.

Key Points:

• October GDP is expected to show a rebound after September’s contraction.
• Industrial production and trade data will provide further insights into the U.K. economy.
• Bank of England is likely to hold rates steady at its December 19 meeting, with a higher chance of a cut in February 2024.
• Sterling faces downside risks if it falls below the $1.2675-$1.2685 support zone.