9 min readWeekly recap
Last week was another strong week for riskier assets, with equity indices rising further to record highs. The German DAX was a standout performer in Europe, and in the US, the S&P 500, NASDAQ and Wall Street rose to new record levels.
U.S. stocks are boosted by expectations that the Federal Reserve will continue to move ahead with a rate cut in December after a speech by Federal Reserve chair Jerome Powell, who highlighted strength in the US economy but didn’t deter from rate cut expectations this month.
On the data front, US nonfarm payroll was modestly higher than expected at 227K, up from 36K in October. Unemployment rose to 4.2%, up from 4.1%. The Goldilocks data supports the view that the US jobs market is holding up sufficiently to ward off any worries over the health of the economy, but it will still allow the Fed to cut rates again.
In the FX market, the US dollar rose 0.4% across the week. The USD/JPY, GBP/USD, and euro USD were largely unchanged. The euro managed to brush off concerns over the political situation in France where PM Michel Barnier lost a vote of no confidence.
AUD/USD fell to a 4-month low and was among the weakest-performing FX majors. Meanwhile, Gold remained broadly unchanged even as digital gold—Bitcoin—hit the key 100K milestone.
RBA rate decision (Tuesday)
The RBA is expected to hold interest rates steady at 4.35% in December amid a resilient labor market keeping inflation elevated. Meanwhile, the first rate cut is not expected until the second quarter of next year.
The RBA is the only major central bank that has not begun lowering the cost of borrowing, in part because it raised interest rates by a comparatively modest 425 basis points between May 2022 and November 2023. Inflation was 2.8% in the previous quarter, between the RBA’s target of 2% and 3%. However, core inflation remains stubbornly high at 3.5%, and unemployment is near a record low, meaning that the RBA will likely keep interest rates higher for longer.
The first of a rate cut of 25% is expected well into 2025. Markets are pricing in a 70% chance of a cut in April.
Despite the RBA’s more hawkish stance compared to other central banks, the AUD has struggled amid a weak outlook from China. Chinese inflation data cooled by more than forecast at the start of this week. However, the PBoC eased monetary policy is a surprise move.
China’s Central Economic Work Conference
There are no major numerical targets expected at this conference, and the market will be watching closely for any shifts in tone on fiscal and monetary policy as we head into the new year. Currently Beijing is proactive on fiscal policy and more prudent on monetary policy. Attention will be on whether there is more emphasis on boosting domestic demand or supporting the property market. Investors will be attentive to changes in stance that could signal a shift towards more aggressive policy support.
Signs of more support could help boost Chinese equity markets, including the Hang Seng. Meanwhile, industrial metals and natural resources such as oil could also move higher. China is the largest oil importer, so an improving economic outlook there could lift the oil demand outlook.
US CPI (Wednesday)
US inflation, as measured by CPI, is expected to tick higher to 2.7% year on year in November, up from 2.6% in October. On a monthly basis, inflation is expected to have risen 0.2% in November, in line with the previous four months. Meanwhile, core inflation, which excludes more volatile items such as food and fuel, is expected to have risen 3.3% year on year and 0.3% month on month, unchanged from October.
The inflation swap market is pricing in a slightly hotter CPI print at 0.27% MoM. If this proves correct, inflation will be hotter than expected. This could see the market lower the possibility of a Fed rate cut in December from its current 85% level and also rein in rate cut expectations for 2025.
This could boost the USD and pull Gold prices lower. Gold is non-yielding, so it often struggles in a higher interest-rate environment.
BoC rate decision (Wednesday)
After four straight rate cuts over the last few months, another rate cut is expected on December 11th. However, the market is undecided over whether the central bank will opt for a jumbo-sized rate cut again. After several 50-basis-point rate cuts, there is a chance that the central bank will lean towards a 25-basis-point reduction, taking the rate to 3.5%.
The meeting comes after GDP data helped reinforce that interest rates are higher than they need to be to maintain inflation at 2%. Meanwhile, Canada’s unemployment rate hit an 8-year high of 6.8% in November, supporting the view that the BoC needs to cut rates further.
Given the uncertainty surrounding the size of the BoC rate cut, USD/CAD could see heightened volatility.
ECB rate decision (Thursday)
The ECB is expected to cut interest rates by 25 basis points on Thursday. The market is pricing in a 93% probability of such a scenario, with the ECB also expected to sound more dovish, which could further fuel expectations of rate cuts in the following meetings.
The data comes as inflation has ticked up slightly, but the PMI figures for the region showed that business activity fell to a 10-month low, back in contraction, and retail sales were weaker than expected.
The outlook in Germany, the eurozone’s largest economy, is particularly depressed. The manufacturing PMI implies a widening contraction of Germany’s manufacturing sector.
The meeting is coming as the political situation in France doesn’t help investor confidence. France’s government collapsed last week after a vote of no confidence. Meanwhile, there are also rumblings of economic uncertainty in Germany ahead of the elections next February. See the EUR/USD chart below:
SNB rate decision (Thursday)
The SNB Is expected to cut rates by 25 basis points to 0.75%. However, the market is keeping the door open to the possibility of a larger 50 basis point cut. The decision is likely to be a close call, although a 25 basis point cut could be more likely allowing the SNB to adopt a gradual approach to loosening policy. In the previous meeting, the SNB cut rates by 25 basis points and signaled that further cuts were likely, and also stated that it was prepared to intervene in the FX market if necessary. The meeting comes as inflation remained lackluster at 0.7% over the previous quarter, below the SNB’s forecast of 1%. Meanwhile, growth has slowed, with GDP in Q3 at 0.4% QoQ down from 0.6% in Q2. Given that there is some uncertainty surrounding the size of the cut, USD/CHF could see heightened volatility around the decision, with a smaller cut boosting CHF.
Japanese Q3 GDP & Tankan data (Friday)
This week, Q3 GDP and Q4 Tankan data will be in focus and will need to be significantly strong to firmly bring expectations of rate hikes back onto the table. The data comes after the market pared back hawkish BoJ expectations for a 25 basis point rate hike for next week’s meeting. The BoJ will likely look more closely at the Taken report on the outlooks offered by large and small manufacturers and services firms. The last BoJ meeting for the year is on December 20th, with the next inflation print not due until after that meeting. See the USD/JPY chart below:
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