Fed Cut Coming Up

Danske Bank

Central Bank

Economic

Summary:

Focus today will be on tonight’s FOMC meeting.

In focus today

Focus today will be on tonight’s FOMC meeting. We expect a 25bp cut, which is also fully discounted by markets. Apart from the rate decision, market attention will be on the updated rate projections, and especially on the FOMC’s latest view on the terminal rate level. We think Chair Powell will aim for a neutral tone in his remarks, but he is still likely to verbally open the door for slowing the pace of cuts.

The UK November inflation out at 8:00 CET will be the data release to watch. Focus is on service inflation, which is expected to continue to show signs of stickiness around the 5% mark. Combined with the hawkish data surprises this week, this will support our call for a BoE pause tomorrow.

Today’s calendar also features the final euro area inflation figures for November, which will provide details on the drivers behind the drop in the services component. Additionally, ECB’s Lane and Muller are on the wire before noon.

Economic and market news

In the US, retail sales figures landed close to expectations at 0.4% y/y in November when measured by the control group (which strips out the most volatile components). Car sales and online sales contributed positively, while other more discretionary categories (furniture, electronics, restaurants) saw weaker or negative sales growth. This could be a signal of a tad more cautious consumer, but of course the monthly data is volatile as always.

In Germany, the IFO indicator for December declined more than expected from 85.7 to 84.7, which can mainly be attributed to lower expectations for the economy. The assessment of the current situation picked up slightly, which was in line with what the comparable PMI survey signalled earlier this week. Overall, soft indicators for the German economy continue to indicate that activity contracted in Q4.

In France, several major banks were downgraded by Moody’s yesterday, following last week’s sovereign rating cut due to the government collapse and the rejection of the 2025 budget. The 10-year French-German government yield spread is currently trading at 80bp, but we see a high likelihood that the spread will go to 100bp early next year.

In the UK, wage growth (excluding bonuses) picked up more than expected from 5.0% to 5.2% y/y in the three months to October. Moreover, payrolls decreased by 35,000 in November, vacancies declined, and the unemployment rate held steady at 4.3% in October. Combined with the stronger than expected PMIs, this week’s UK data releases have so far highlighted why the BoE is set to continue lagging European peers in the easing cycle.

Equities: Global equities were lower yesterday, with a somewhat unusual sector rotation in which consumer discretionary outperformed alongside healthcare. However, the more interesting aspect is the very narrow leadership we have observed recently. To provide a few more examples: the Dow is now down for nine consecutive days, which has not happened in 45 years. At the same time the Nasdaq achieved a record high closing yesterday. Additionally, Tesla has risen in nine of the last ten sessions, significantly contributing to the superior performance of the consumer discretionary sector. The point here is that we have not had any macroeconomic, microeconomic, or monetary policy news that can explain or justify this rotation. However, there is a unique political and CEO situation in the US, coupled with an exuberant market where investors are hunting for winners. In the US yesterday, the Dow declined by 0.6%, the S&P 500 by 0.4%, the Nasdaq by 0.3%, and the Russell 2000 by 1.2%. Asian markets are mixed this morning. European futures are marginally lower, while US futures, including the Dow, are marginally higher.

FI: It was a quiet Tuesday in European rates markets with most of the action in the UK market. The higher-than-expected UK wage figures pushed 10Y GILT yields up by 8bp, while the implied change in the BoE bank rate until end-2025 moved up from -70bp to -55bp. Our forecast is -150bp, leaving substantial downside risk to UK rates for the coming 12 months. EGB yields were close to unchanged across tenors yesterday in line with the UST curve. The 5y5y EUR inflation swap rate moved back to 2%, dropping 3bp throughout the session.

FX: EUR/USD continues to trade close to 1.05 and USD/JPY within 153-154 ahead of tonight’s Fed. Sterling has firmed and cable is back at 1.27, while the antipodeans continue to slide vs the USD. Cable is back at 1.27. USD/CAD has breached 1.43 and takes out new multi-year highs. EUR/SEK has erased some of yesterday’s losses amid poor risk appetite and trades at 11.50, while EUR/NOK has sidelined around 11.75.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Stocks

London stocks were set to nudge higher at the open on Wednesday as investors mulled the latest UK inflation figures and looked ahead to a policy announcement from the Federal Reserve.

The FTSE 100 was called to open around five points higher.

Data released earlier by the Office for National Statistics showed that consumer price inflation reached 2.6% in November, the second consecutive rise.

CPI rose in the 12 months to November, from 2.3% in October, the highest since March. It was, however, largely in line with expectations.

The ONS said the prices of motor fuel and clothing had driven the increase, although that had been partially offset by a bigger-than-normal fall in air fares.

Core CPI, which strips out the more volatile elements of energy, food alcohol and tobacco, rose by 3.5% in the 12 months to November, a jump from 3.3% in October.

Paul Dales, chief UK economist at Capital Economics, said the further rebound in CPI inflation could have been worse.

"But coming on the back of the stronger-than-expected rebound in wage growth in yesterday’s release, there is almost no chance of the Bank of England delivering an early Christmas present with another interest rate cut tomorrow."

Looking ahead to the rest of the day, eyes will be on the Fed interest rate decision at 1900 GMT.

Danske Bank said: "We expect a 25bp cut, which is also fully discounted by markets. Apart from the rate decision, market attention will be on the updated rate projections, and especially on the FOMC's latest view on the terminal rate level.

"We think Chair Powell will aim for a neutral tone in his remarks, but he is still likely to verbally open the door for slowing the pace of cuts."

In corporate news, DIY group Kingfisher announced the sale of its Brico Dépôt business in Romania to retailer Altex Romania for €70m.

The Bucharest-headquartered subsidiary comprises 31 stores across 24 cities, along with distribution operations.

Kingfisher said the divestment will give it “greater strategic focus on markets and growth initiatives where we are most strongly positioned to deliver attractive returns and create shareholder value”.

National Grid said it planned to invest up to £35bn in Britain’s electricity network over a five-year period from April 2026.

The plan includes £11bn to maintain and upgrade existing networks, alongside construction works for the first three of its accelerated strategic transmission investment projects.

A further £24bn has been allocated to future projects, including around £15bn to increase network capacity.

Source: Sharecast

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Warren Takunda

Stocks

Asian stocks were mostly higher on Wednesday ahead of the Federal Reserve’s final rate decision of this year.

U.S. futures rose while oil prices were mixed.

Japan’s benchmark Nikkei 225 slipped 0.2% in morning trading to 39,281.06 after the nation’s exports grew 3.8% in November year-on-year. Meanwhile, imports fell by 3.8%, according to data from the Ministry of Finance.

Trading in Nissan Motor Corp.’s shares temporarily was suspended after they surged 22% as reports said the automaker was considering a possible merger with Honda Motor Co. The latter’s shares lost as much as 3%.

The companies issued a statement saying they were discussing closer collaboration but had not decided anything yet. Nissan, Honda and Nissan alliance member Mitsubishi Motors Corp. agreed in August to share components for electric vehicles like batteries and to jointly research software for autonomous driving to adapt better to dramatic changes in the auto industry.

The yen traded lower ahead of a meeting by the Bank of Japan, where the central bank is expected to keep its benchmark rate unchanged when it provides a policy update on Friday.

The Hang Seng in Hong Kong added 0.6% to 19,815.30 and the Shanghai Composite index gained 0.7% to 3,385.64.

In South Korea, the Kospi jumped 1% to 2,481.87. Australia’s S&P/ASX 200 edged 0.1% lower to 8,304.00.

On Tuesday, the S&P 500 slipped 0.4% to 6,050.61, though it’s still near its all-time high set earlier this month. The Dow Jones Industrial Average dropped 0.6% to 43,449.90, and the Nasdaq composite gave back 0.3% from its record set the day before to 20,109.06.

Across a survey of global fund managers, strategists at Bank of America found many plowing into U.S. stocks and pulling out cash reserves to do so. The survey found fund managers are holding a notably small percentage of their overall portfolios in cash, similar to 2002 and 2011, which preceded tougher times for riskier investments.

The S&P 500 is on track for one of its best years since the millennium, up nearly 27%, because the U.S. economy has remained remarkably resilient, hopes are high that President-elect Donald Trump’s policies will boost growth but not inflation too badly and the Federal Reserve has begun to make things easier by cutting interest rates from a two-decade high.

The Fed is widely expected to announce the third cut of the year to its main interest rate on Wednesday, and officials are also scheduled to unveil projections about where they see rates heading in upcoming years.

Expectations for coming cuts have been on the downswing, though, as inflation looks like it could stubbornly stick above the Fed’s 2% target after slowing sharply from its peak above 9%.

A report on Tuesday showed sales at U.S. retailers strengthened by more last month than economists expected. That could be an indication of an economy that doesn’t need much more help from easier interest rates. While lower rates can goose the economy, they can also give inflation more fuel.

“The Fed is still on track to cut rates (Wednesday), but more strong economic data could make it more likely they’ll pause in January,” according to Chris Larkin, managing director, trading and investing, at E-Trade from Morgan Stanley.

Treasury yields held relatively steady following the report. The 10-year Treasury yield held at 4.40%, where it was late Monday. The two-year yield, which more closely tracks expectations for the Fed, edged down to 4.24% from 4.25%.

Bitcoin set a record above $108,000 on Tuesday before pulling back toward $106,500, according to CoinDesk.com. It’s catapulted from roughly $44,000 at the start of the year, riding a recent wave of enthusiasm that Trump will create a system that’s more favorable to digital currencies.

In other dealings Wednesday, U.S. benchmark crude oil rose 7 cents to $69.72 per barrel. Brent crude, the international standard, added 6 cents to $73.25 per barrel.

The U.S. dollar fell to 153.47 Japanese yen from 153.50 yen. The euro traded at $1.0505, up from $1.0491.

Source: AP

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ING

Forex

Economic

USD: Trump policy pledges to be felt at the FOMC

Our view for today’s Fed rate announcement is that the risks are broadly balanced for the dollar, and we see limited scope for a surprise driving major FX moves. The prospect of fiscal stimulus among other promised policies by US President-elect Donald Trump will, in our view, force some scaling back in expected rate cuts included in dot plot projections as rates are cut by 25bp, matching pricing and consensus.

Even if the communication nuances end up delivering some sort of dovish surprise, we doubt the Fed will derail from a generally cautious stance on guidance, which inevitably leads the markets’ own (hawkish-implying) expectations for Trump’s policy mix as the main driver for rate expectations. This means that any potential USD correction should not have long legs. Also remember that January is a seasonally strong month for the greenback, and markets may be lured into building strategic bullish USD positions as Trump’s mandate kicks off.

Our baseline view for today is that the modest hawkish readjustment in Fed communication will leave markets content with current pricing for further Fed meetings: a hold in January and around 50% implied probability of a March move. Ultimately, that can leave the 2-year USD OIS at the 4.0% mark and DXY close to 107.0 into Christmas.

EUR: German story to stay soft before turning any better

The latest input to the eurozone’s growth story – another decline in the German Ifo index – should keep market’s dovish tendency in European Central Bank pricing well intact, even if consensus is building that the upcoming German election will generate some degree of fiscal support. Ultimately, a retightening in the very wide Atlantic spread seems unlikely in the near term.

EUR/USD has continued to hover around the 1.050 gravity line, and we see a good chance this will remain the case into the end of the month. Still, we are comfortable with retaining a negative bias on the pair into the new year, where the start of Trump’s second term in office should offer multiple reasons to stay bearish.

In the UK, CPI data released this morning showed increase from 2.3% to 2.6% year-on-year, with the month-on-month slowdown moving from 0.6% to 0.1%, in line with market consensus. Our core services metric, which strips out all the volatile stuff and also rents/hotels (i.e., elements that the Bank of England is less bothered about) did tick higher from 4.5 to 4.7%. Our view on EUR/GBP remains generally flat for the near term, even if an eventual acceleration in BoE easing next year can offer some pockets of support.

BRL: Failing to tackle the problem at source

Despite attempts by the local central bank to get ‘ahead of the curve’ last week with an outsized rate hike, the Brazilian real has remained under heavy pressure. Here, the central bank has been involved in several rounds of dollar selling intervention, including two rounds totalling over $3bn yesterday. Money markets now price BACEN hiking the 12.25% policy rate above 16% over the next 6-12 months, with the central bank having to do the heavy lifting when it comes to defending the real. Fortunately the central bank has a large stock ($330bn) of FX reserves, and at this stage there are no concerns of lack of available resources to defend the BRL.

However, the source reason for the ongoing BRL sell-off is the fiscal side. Here the suspicion is that the Lula administration will want to keep fiscal policy loose into 2026 elections and will not be swayed by pressure on Brazilian asset markets. Until the government is prepared to come back with some genuine fiscal consolidation it is hard to see the BRL enjoying much of a rebound.

How far could BRL fall? In our last edition of FX Talking we had felt there was outside risk to the 6.50 area. These are difficult times for those with Brazilian assets. However, commodity producers with a cost base in the country now see attractive levels in the one-year outright forward above 6.60.

CEE: Market switched to Christmas mood

As expected, the National Bank of Hungary left rates unchanged yesterday and forward guidance did not see much change either. As in November, one member voted for a rate cut. But at the same time, the press conference tried to introduce a long pause in the cutting cycle. The new forecast showed a slightly higher inflation profile for next year, while the economy will be weaker this year compared to the September forecast.

The NBH found a rather muted market reaction to today's meeting. In line with CEE peers, the EUR/HUF moved up very little after the press conference. The HUF market, like its CEE peers, seems to have already switched into Christmas mode, and with little news coming out of today's NBH meeting, it is hard to expect a big market view. EUR/HUF seems to have stabilised around 408-410 for now.

Today's calendar in the region is empty with several bond auctions on the calendar only, the last of the year. The rates market seems to be dominated by low liquidity and CTA flow, which is driving rates up, especially in the PLN market, which could again deliver some boost to FX. On the other hand, CZK rates seem too aggressively hawkish after a few days of upward movement and closed lower yesterday despite the spike in rates, indicating in turn a weaker CZK into the Czech National Bank's meeting tomorrow.

To stay updated on all economic events of today, please check out our Economic calendar

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Titan FX

Economic

Commodity

Key Highlights

Gold failed to clear the $2,725 resistance and corrected gains.

A connecting bullish trend line is forming with support at $2,630 on the 4-hour chart.

Oil prices are struggling to clear the $71.50 resistance.

EUR/USD could decline if it breaks the 1.0450 support level.

Gold Price Technical Analysis

Gold prices remained well-bid near the $2,615 zone against the US Dollar. The price formed a base and started a fresh increase above $2,640 and $2,680.

The 4-hour chart of XAU/USD indicates that the price even climbed above $2,700 but struggled to clear the $2,725 level. As a result, there was a bearish reaction below the $2,700 and $2,680 levels. The price dipped below the 50% Fib retracement level of the upward move from the $2,613 swing low to the $2,726 high.

It even settled below the 100 Simple Moving Average (red, 4 hours) and the 200 Simple Moving Average (green, 4 hours). On the downside, initial support is near the $2,630.

There is also a connecting bullish trend line forming with support at $2,630 on the same chart. The first major support is near the $2,610 level. The main support is now $2,600. A downside break below the $2,600 support might call for more downsides.

The next major support is near the $2,575 level. On the upside, immediate resistance is near the $2,665 level. The first major resistance sits near the $2,670 level.

A clear move above the $2,670 resistance could open the doors for more upsides. The next major resistance could be $2,700, above which the price could rally toward the $2,720 level.

Looking at Oil, there was a decent increase, but the bulls seem to be facing hurdles near the $71.50 level.

Economic Releases to Watch Today

Euro Zone CPI for Nov 2024 (YoY) – Forecast +2.3%, versus +2.3% previous.

Euro Zone CPI for Nov 2024 (MoM) – Forecast -0.3%, versus -0.3% previous.

US Housing Starts for Nov 2024 (MoM) – Forecast 1.340M, versus 1.311M previous.

US Building Permits for Nov 2024 (MoM) – Forecast 1.430M, versus 1.419M previous.

To stay updated on all economic events of today, please check out our Economic calendar

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Justin

Commodity

SINGAPORE (Dec 18): Oil prices traded in a narrow range early on Wednesday as investors remained cautious ahead of an expected interest rate cut by the US Federal Reserve, while weighing up the potential supply impact of tighter sanctions on Russia.

Brent futures inched up one cent at US$73.20 a barrel at 0420 GMT, while US West Texas Intermediate crude rose one cent to US$70.08 a barrel.

The market is watching out for clues on interest rate moves for 2025 following the Federal Open Market Committee's (FOMC) meeting, which ends later on Wednesday, analysts said.

"Additional sanctions from the West may limit some losses in today's session, but a cautious tone persists in the lead-up to the FOMC meeting," said Yeap Jun Rong, market strategist at IG.

"Looking ahead, oil prices are likely to remain constrained within their current range, with subdued price action expected to persist through the end of the year," Yeap added.

The Fed on Wednesday is widely expected to cut interest rates for the third time since its policy easing cycle began.

"Projections for rate cuts in 2025 are being second-guessed, especially with Trump planning a comeback on January 20," said Priyanka Sachdeva, senior market analyst with Phillip Nova.

"There is a prevailing narrative that Trump's policies may lead to inflation, which, coupled with concerns about potential interference with the Federal Reserve's autonomy, is causing oil investors to remain cautious," she added.

Lower rates decrease borrowing costs, which can boost economic growth and demand for oil.

Meanwhile, the European Union on Tuesday adopted a 15th package of sanctions against Russia over its invasion of Ukraine, adding an additional 33 vessels from Russia's shadow fleet used for transporting crude or petroleum products. Britain also sanctioned 20 ships for carrying illicit Russian oil.

The fresh sanctions could stoke further oil price volatility though so far they have not succeeded in shutting Russia out of the global oil trade.

In the US, American Petroleum Institute data on Tuesday showed that crude stocks fell by 4.69 million barrels in the week ended Dec 13, a source said. Gasoline inventories rose by 2.45 million barrels, and distillate stocks rose by 744,000 barrels, according to the source.

Analysts projected US energy firms pulled about 1.6 million barrels of crude from storage during the week ended Dec 13, according to a Reuters poll on Tuesday.

The US Energy Information Administration will release its oil storage data on Wednesday.

Source: Theedgemarkets

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Pepperstone

Economic

Central Bank

WHERE WE STAND

Anyone else getting the vibe that folk have already put their feet up for Christmas, and are done with 2024?

That’s certainly the feeling I got while commuting on comparatively empty trains yesterday, and also the feeling that financial markets appear to have, with price action subdued for a second straight day yesterday.

Of course, we can’t be ‘officially’ done and dusted just yet, and there’s the small matter of an FOMC decision to navigate later today, but it’s clear that participants lack conviction to do anything much at all as the final ‘proper’ trading week of 2024 progresses.

That isn’t to say there’s a shortage of catalysts, with Tuesday actually presenting a fair few things of note for participants to digest.

Let’s start here in the UK, where the latest employment data – which remains rather unreliable – showed joblessness holding steady at 4.3% in the three months to October, while both regular and overall earnings grew by 5.2% YoY over the same period, these latter prints being considerably above consensus expectations. Not only that, such a pace of earnings growth is clearly incompatible with a sustainable medium-term return to the BoE’s 2% inflation aim, even if earnings growth was boosted by an unfavourable base effect from last year, and the start of summer’s above-inflation public sector pay rises feeding into the data.

In any case, the figures killed stone dead the already-slim chances of any BoE action tomorrow, with the GBP OIS curve also trimming the chances of a 25bp cut in February to around a 60% chance, from over 80% at the start of the week. The pound also strengthened, with cable reclaiming the 1.27 handle intraday, while gilts sold off across the curve, as 10-year yields rose north of 4.50%, and 30-year yields climbed above 5% to the highest level since 2023. Fading GBP strength would also be my preferred play.

I do think, on the whole, that the market might be getting overly hawkish here, and would be inclined to fade any further selling if, say, 10-year yields rise another 10bp. My base case remains that the MPC will probably cut 25bp once per quarter next year, with the next such cut coming at the February meeting. Risks to that view are tilted to the dovish side, given the potential for increased labour market softness to crush demand, thus quickening the pace of services disinflation, and unlocking a potential faster pace of policy normalisation from the second quarter onwards.

Across the pond, participants deftly dealt with the November US retail sales report, which showed headline sales having risen by 0.7% MoM last month, marginally above expectations. Meanwhile, the key ‘Control Group’ metric, broadly representative of the basket used in the GDP report, rose 0.4% MoM, bang in line with consensus. The old adage of ‘never betting against the US consumer’ continues to ring true, while sales are likely to be further boosted in December, given the late occurrence of Thanksgiving this year, which will push a significant degree of holiday spending into the final month of the year.

Stocks, though, did trade marginally softer on the day, with both the S&P 500 and Nasdaq 100 losing ground, as conviction remains somewhat lacking, both ahead of the FOMC, and as year-end approaches and participants seek not to chase further returns with the index already >25% higher YTD.

Back in Europe, pigs might well be flying soon, with that rarest of occurrences taking place yesterday – German economic data surprising to the upside!

The data in question was the monthly ZEW sentiment survey, where the ‘expectations’ index rose to 15.7, its highest level since August. Still, before those pigs do take off, it’s worth bearing in mind that the IFO sentiment survey, also out yesterday, pointed to the lowest ‘business climate’ figure since May 2020. Clearly, the German economy is far from being out of the woods, particularly as elections loom in mid-February.

The EUR, though, remains relatively impervious to negative catalysts for now, having yesterday spent a 4th straight day treading water around the $1.05 handle. It feels too early to call ‘peak pessimism’ just yet, though as we conveniently sit right in the middle of this range, I stand by my call that spot trades to $1.10 before printing parity.

LOOK AHEAD

Here we go then, the final ‘Fed Day’ of 2024 is upon us and, dare I say it, probably the final ‘proper’ trading day of the year for most as well.

What to expect from Powell & Co., then? A 25bp cut is nailed on, after unemployment unexpectedly rose to 4.2% in November, and after both headline and core CPI rose in line with expectations, at 2.7% and 3.3% respectively, last month. Furthermore, given the FOMC’s longstanding desire not to ‘rock the boat’, the USD OIS curve discounting a 95% chance of a 25bp cut is probably enough on its own to see one delivered, no matter what the data may be saying.

Such a cut, though, is likely to be a ‘hawkish’ one, as Powell attempts to build greater optionality into the FOMC’s policymaking in 2025, amid increasing upside inflation risks, with the labour market still tight, and with potential trade tariffs set to be imposed once President-elect Trump takes office. Hence, we are again unlikely to see any firm pre-commitments as to the future path that the fed funds rate will take, with Powell instead likely to repeat that data will guide the FOMC in terms of the speed at which rates return to neutral, and that the FOMC can be “cautious” in finding said neutral rate, while also being able to slow the pace of easing were data to permit them.

The updated ‘dot plot’, meanwhile, will likely show a more hawkish path than that issued in September. Then, the median expectation saw the fed funds rate falling to 3.375% by the end of next year, while the December plot will likely see that median revised 25bp higher, with the longer-run rate estimate likely also nudged higher by the same magnitude. The dispersion of 2025 dots, meanwhile, is set to be considerably tighter, as downside risks to the dual mandate recede.

Besides the FOMC, today presents another couple of interesting events. This morning’s UK CPI figures should show inflation having risen once more last month, to 2.6% YoY on a headline basis, and to 3.6% on the core print, both +0.3pp compared to October. Elsewhere, the Bank of Japan should hold rates steady in the early hours of Thursday morning, as has already been indicated by an inordinate number of pre-meeting ‘sources’ reports.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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