USD Advances Toward The Strongest Levels In More Than 2 Years

Economic

Summary:

A week packed with central bank decisions is coming to an end with a sour taste in everybody’s mouth.

The Federal Reserve (Fed)’s decision to cut rates by 25bp was fully meaningless and the incoming data is a proof. The US Q3 growth was revised to 3.1% from 2.8% printed earlier, the sales growth was revised higher from 3 to 3.3% and core PCE priced – though lower than the quarter before – was also revised slightly higher to 2.20%, raising worries that even the two rate cuts from the Fed next year would be too much.

As such, the early gains were given back and the S&P500 and Nasdaq closed in the negative, the Dow Jones was flat while small and mid cap stocks saw no appetite either. Sharing the headlines with Powell, Trump threatens people of his own party to dump a bipartisan deal and risk a government shutdown if they don’t push to raise or suspend the national debt limit under Biden, so he can spend wholeheartedly when he comes to office. The US yield curve is steepening, investors are not willing to buy longer-dated maturities on prospects of higher long-term inflation and ballooning debt. And the US dollar advances toward the strongest levels in more than 2 years leaving other majors under the shadow before Xmas.

The EURUSD failed to stay above the 1.04 mark yesterday and is struggling to hold ground near the 1.0350 level, the Stoxx 600 is racing toward the 500 support, while Cable settles below the 1.25 mark on the back of a dovish no-change that the Bank of England (BoE) delivered at yesterday’s MPC meeting. Three MPC members instead of two (expected by analysts) voted to cut the rates at this week’s meeting. The other six opted for no change – wary of reigniting inflation as the government prepares to increase spending to boost growth, and as Trump threatens the world with eye-watering tariffs. Interestingly, Governor Andrew Bailey – who is clearly not the most popular central banker – had the merit of sounding rational yesterday by saying that the ‘world is too uncertain’ to commit to cut borrowing costs in February. War, Trump, climate change – there’s too much happening for anyone to claim they see the future with clarity. But one good news for the UK is that the United Kingdom is not as concerned as – say the EU, China, Canada and Mexico – by the Trump tariffs and the latter could help the British assets cope with Trump better than their peers. British stocks trade with around 40% valuation discount compared to the MSCI World peers, it has one of the fastest dividend growth among the European and American indices and they returned 10% to their investors these years including reinvested dividends. If inflation U-turns as geopolitical and trade tensions worsen, the FTSE 100 stocks will be in a good position to benefit from these developments.

Elsewhere – and this is amusing – inflation in Japan accelerated in November. The headline figure climbed back to 2.9%, the highest in three months, while core inflation advanced to 2.7%, also a three-month high. Why is this funny? Because just yesterday, the Bank of Japan (BoJ) decided to pass on a rate hike, with officials seemingly too cautious to act amid uncertainties over Trump-era policies and geopolitical tensions. Meanwhile, Japan’s interest rate sits at 0.25%, while inflation is running near 3%. The Japanese have a different relationship with inflation – they don’t despise it as much as we do. After all, decades of deflation, which is far harder to reverse, have shaped their perspective – a lesson the Chinese are now learning the hard way. But the BoJ’s decisions still feel illogical, as they don’t align with a conventional policy framework. Consequently, the USDJPY is giving back some earlier gains on the stronger-than-expected inflation figures and speculation that rising inflation might prompt BoJ action. However, since the BoJ doesn’t really tie interest rates to inflation, the USDJPY has room for further gains, especially as the US dollar continues to strengthen broadly.

In China, the People’s Bank of China (PBoC) kept its policy rates unchanged today – as expected – although the officials are now committed to put in place ‘more proactive fiscal measures’ and ‘moderately loose’ monetary policy. For now, none of these legs have been enough to bring investors back on board. The Chinese CSI 300 is preparing to close the week on a meagre note.

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

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Warren Takunda

Stocks

London stocks looked set for more losses at the open on Friday as investors mulled a smaller-than-expected rise in retail sales but better-than-expected borrowing figures.

The FTSE 100 was called to open down around 10 points.

Figures released earlier by the Office for National Statistics showed that retail sales ticked up 0.2% in November. This was an improvement on the 0.7% decline seen the month before, but was below analysts’ expectations of a 0.5% jump.

The ONS said growth in supermarkets and other non-food stores was partly offset by a fall in clothing retailers.

Alex Kerr, UK economist at Capital Economics, said: "Overall, against a backdrop of recent weak activity data, today’s release could have been worse. However, November’s rise fails to fully reverse October’s fall and sales volumes would need to rise by 1.1% m/m in December to prevent a contraction in Q4 overall.

"The risk of a contraction in overall GDP in Q4 remains (our forecast is 0.0% q/q). That said, as real incomes continue to grow and consumer confidence improves next year, we think the retail sector will contribute to an acceleration in consumer spending growth from around 0.7% in 2024 to 1.6% in 2025."

Separate figures released by the ONS showed that UK borrowing was £11.2bn in November, comfortably below the consensus forecast of £13bn, and £3.4bn lower than in November 2023. It was also the lowest November borrowing figure in three years.

Still to come, investors will eye the release of the US PCE data for November at 1330 GMT.

In corporate news, the UK government has cleared the £3.6bn sale of Royal Mail parent company International Distribution Services to Czech billionaire Daniel Kretinsky's EP Group.

EP Group said in a statement that it had met requirements under Britain’s National Security and Investment Act to “provide services that are in support of UK national security”.

IP Group that two of its life science portfolio companies, Intelligent Ultrasound Group and Abliva, had received cash offers, resulting in anticipated total cash proceeds of £13.8m.

The FTSE 250 company said the transactions represented significant uplifts from their last-reported net asset values, with Intelligent Ultrasound delivering a 100% uplift and Abliva a 284% uplift.

It said it planned to allocate about 20% of the proceeds to expand its share buyback programme, with updates pending completion of the transactions.

GSK announced positive results from a phase III trial of its ovarian cancer treatment, which met its primary endpoint of progression free survival.

Headline results from the FIRST-ENGOT-OV44 phase III trial evaluating a combination of Zejula (niraparib) and Jemperli (dostarlimab) showed statistically significant difference compared with standard chemotherapy. However, the secondary endpoint did not meet statistical significance.

Source: Sharecast

Risk Warnings and Disclaimers

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Danske Bank

Economic

In focus today

In the euro area, we get data on consumer confidence for December. Consumer confidence has been on a rising trend the past two years but in November it unexpectedly declined. It will be very import for the growth outlook to see if the decline was just a blip or it continued in December as we expect private consumption to be the main growth driver in 2025.

From the US, November Private Consumption Expenditures (PCE) are due for release today, including the Fed’s preferred measure of inflation. The CPI measure released earlier pointed towards relatively steady inflation pressure in November.

In the US, we will also keep an eye on Congress, which will have to find a deal to avoid a government shutdown, after the House of Representatives voted down the latest version of a funding bill last night.

In the Nordics, we will look out for consumer and business sentiment in Sweden and Denmark.

We also get retail sales, wage data and PPI inflation in Sweden.

Economic and market news

What happened overnight

Japanese November CPI inflation excl. fresh food increased to 2.7% from 2.3% in October. Core inflation increased to 1.7% from 1.6. The underlying price pressure has been stronger in H2 and largely aims with the 2% inflation target. The unwillingness from the BoJ to raise rates further stems from a worry that wage growth will fade in the spring leaving price pressures back where they have been for decades, close to zero. This has added further to downward pressures on the yen triggering verbal intervention from the Japanese finance minister and top currency diplomat.

What happened yesterday

The Riksbank cut the policy rate by 25bp to 2.5% as widely expected but the signals for the future were more hawkish as the Riksbank expects only one more cut during H1 2025. In the rate path, the implied probability is rather evenly distributed between the January and March meetings, but with the overall communication saying they will have “a more tentative approach” and “carefully evaluate the need for future interest rate adjustments” it seems more likely than not that the Riksbank is ready to pause in January, in our view. We therefore have adjusted our call and now expect 25bp cuts in March and June, resulting in an end point of 2.00% (previously 1.75%). At the press conference, Thedéen commented that current policy is likely somewhat stimulative and that once the policy rate reaches 2.25% by Q1 next year, the risks are actually balanced putting an equal probability between cuts and hikes from there. We firmly believe there are more downside risks to the Riksbank’s main scenario. We now expect two cuts in March and June to 2.0% (previously 1.75%), 19 December.

Also in Sweden, there are plenty of interesting data. We start off with retail sales data for November, and here we will hopefully see more signs of the long-awaited recovery for household consumption. We also get wage data for October and PPI data for November, where the latter will likely see a rise due to higher energy prices (all released at 8.00 CET). At 9.00 CET, we will get a new set of NIER confidence data, and here we also expect to see a continued improvement in sentiment among both households and manufacturing sector. As always, attention will also be on price expectations and hiring plans. NIER will also release new set of economic forecasts at 9.15 CET.

Norges Bank left policy rates unchanged in a decision widely expected by analysts and markets. Importantly the Norwegian central bank firmed its guidance towards a March 2025 rate cut – the first in the cycle – by presenting a rate path suggesting a close to 100% probability of a 25bp rate reduction conditioned on the central bank’s economic projections materialising. Norges Bank notably did not suggest that rates could be cut in January. Further out Norges Bank guided towards three cuts in 2025 although with an elevated risk of a fourth cut. We continue to pencil in the first cut in March alongside three additional rate cuts in 2025 and four cuts in 2026.

The Bank of England also agreed to keep rates unchanged as expected. The decision was taken with three board members voting for a cut, which was a surprise. That said, BoE continues to emphasise a gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February and a quarterly pace after that.

FI: European curves steepened from the long end mirroring the US yields’ reaction to the FOMC meeting on Wednesday night. However, it was a gradual move through the day, thus it was with some delay that we saw the full effect. With the final central bank meetings of the year behind us, and only a few trading sessions left for the year, we expect a relative tight trading range in coming days, with focus on the supply announcements for next year. Yesterday, the French Tresór said that they plan to sell EUR300bn next year, which is unchanged from the October plan. BoE’s dovish tilt (6-3 split vote for unchanged) relative to market expectations sent UK yields somewhat lower on the day, we stay positive GBP.

FX: As expected, the Riksbank lowered the policy rate by 25bp to 2.50% and indicated only one more cut in H1. A hawkish cut which strengthened the SEK and supported our call for tactical downside in EUR/SEK. EUR/SEK dropped some ten figures towards the lower end of 11.40’s before erasing some of the losses in the Asian session. Meanwhile, NOK/SEK was down 1.5 figures to below 0.9650. Norges Bank did not rock the boat, but the NOK traded on the defensive as focus shifts to the looming easing cycle that will probably start in March. The selloff in EUR/USD paused in the European session but as US trading opened the cross dived below 1.04 again and is now back close to 1.0350. The relentless selling of the JPY has continued, and USD/JPY was on the verge to break above 158. This morning Japan FM Kato expressed concerns and talked about appropriate action if there are excessive moves. Sterling was lower after Bank of England’s dovish voting split to keep rates unchanged.

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

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Goldman Sachs

Economic

Stocks

The STOXX 600 index, made up of European and UK companies, is forecast to generate a total return of about 9% next year (as of 19 November 2024) — which is modestly lower than Goldman Sachs Research’s projections for the index's US and Asian counterparts.

We sat down with Goldman Sachs Research senior strategist Sharon Bell to discuss the Europe equity strategy team’s outlook for stocks in 2025. The report, which is titled “2025 Outlook: Peer Pressure,” shows that the team slightly lowered their forecasts for the STOXX 600 for next year. At the same time, Bell points out that European stocks may benefit from cooling inflation, a larger than expected European policy response, or concerns about the prospect for returns from mega-cap US stocks.

Why did the team downgrade its STOXX 600 target prices for the next year?

We’re below consensus on growth: We’ve downgraded our economic figures and our earnings expectations for Europe in the last few months. Given all of that, we’ve also downgraded our price targets very slightly.

Europe has also seen a modest rise in risks. The stability of the fiscal situation in France, Italy, and to some extent the UK, is being questioned, for example. Economic data has been weak, and the manufacturing cycle, which particularly impacts Germany, has been really dire.

The news is not recessionary — it’s nowhere near as bad as what we saw in the financial crisis, the sovereign crisis, or the pandemic — and that’s why it’s a small downgrade. But there is undoubtedly an accumulation of risks along with weaker growth.

What sectors are you optimistic about?

We anticipate that the European Central Bank will bring interest rates down to 1.75% by the middle of next year (from 3.25% in October). Lower interest rates ought to create some opportunities in more indebted sectors like telecoms, and in areas that are sensitive to interest rates, like real estate.

We also expect consumer-facing areas — like retailers and travel companies — to be a bit more robust, because they benefit both from interest rates coming down and also from the fact that they’re not exposed to trade concerns and tariffs, because they’re catering to a more domestic consumer in Europe.

Do lower rates also benefit smaller companies rather than bigger ones?

These companies tend to be more indebted, and to have more floating debt. So interest rates coming down would help them a lot. We also expect M&A activity to pick up — we’re already seeing signs of that coming through. That also tends to help the small- and mid-sized companies, because they’re more likely targets of acquisitions.

Given rates coming down and M&A activity picking up, one would expect small- and mid-caps to do well. The only problem is that they are also cyclical — they’re very sensitive to economic growth, which remains very weak. We haven’t made a strong call for mid-caps, but I can certainly see the positive case for them at the moment.

How might exchange rates impact European stocks?

With all other things equal, lower interest rates will push down European currencies. It’s fair to say that the euro has already come down relative to the dollar, reflecting the weaker economic environment in Europe, and the stronger one that we’ve seen in the US recently.

Normally, a falling domestic currency benefits local companies, who often make some of their money outside of Europe in dollars or other currencies, and end up making more money when they convert that back into euros. This is part of the reason why companies aren’t too worried about the decline in currency — because it makes their business more competitive, for one thing.

If the euro is falling, companies with euro-area costs will also see those expenses coming down relative to companies with dollar costs. So from a competitiveness angle, the currency coming down is a good thing.

However, I don’t think it actually benefits equities overall. If you look at periods when the euro has been weak (or when sterling has been weak, in the case of the UK market), they have been associated with weaker equities. And one of the reasons is that equities are a very risk-sensitive asset. Why are currencies coming down? It’s normally either because of a risk event like a sovereign problem (as in the case of France recently), or because people are very worried about economic growth. Neither of those is likely to benefit equities.

A falling euro also discourages foreign investors from buying European equities. US investors are a large player in European stocks, and if they believe that they are going to lose on the currency fallout, then they will be put off from investing more.

In terms of economic performance, which region is most important for European companies: the US, the EU, or China?

We often ask this exact question: What matters more for Europe? We have a weak view on European growth, but we have an above consensus view on the US, and we think that China will see a stimulus that helps growth next year.

Most of European companies’ sales are to Europe. But that component — sales to Europe — hasn’t been growing at all in the last twenty years. All of European companies’ growth has come from sales to China and the US. So Europe is very reliant for its growth on those regions.

We like companies with US exposure for a couple of reasons: one is that they are exposed to a stronger economy, so over time they should get better sales and earnings; another is that they are dollar earners, by definition, and so they should benefit from a stronger dollar; and finally, in Europe, corporate taxes are generally going up, whereas in the US you may even see some taxation benefit.

The fear for these companies is that they may see higher tariffs if they’re exporters from Europe. But in the vast majority of cases, these companies are not exporters, but they have US businesses — with US assets, employees, and sales.

How do you think lower interest rates and inflation will impact European stocks?

Lower interest rates would be the most positive scenario for European companies. They stimulate better economic growth, which feeds through to better earnings. I am skeptical that that will be the case, though. I think the European Central Bank is in a cutting cycle, but a relatively cautious one — reflecting the fact that there are pockets of inflation that still look quite sticky in Europe.

That being said, because we’re below consensus on growth, we think that both growth and inflation will be a bit weaker next year. And lower inflation has historically been associated with higher valuations for the market. This is an upside we’re not totally taking into account in our target prices. We’re saying valuations will remain roughly the same over the next year, but we expect a rise in earnings. But what if we have much lower inflation, and that drives higher valuations?

Valuations can reach as much as 15- or 16-times price divided by earnings, and at the moment we’re only on 13 or 14 for Europe. So we could see a higher valuation for the European equity market, reflective of lower rates and a lower inflation environment. That’s not our core view, but it is an upside risk.

How has the strong performance of US equities impacted European stocks?

The US market has done extremely well over the last year. In fact, it has outperformed relative to Europe over any time period you choose to take, really — the last month, the last three months, the last six months, the last year, and even the last few years. And there have been a lot of fund flows into the US recently, whereas there’s not been very much allocation into Europe.

The question is: Could that reverse? We’ve had an absolutely stellar rally in the US, particularly since the election. And I think the concern is that the US looks vulnerable, given its high valuation. Could that make Europe more interesting? I’m getting a lot more questions about that.

I think Europe is an interesting market, and there are many things that could help it reverse its underperformance versus the US, but none of them are our core view: more significant policy easing, a peace deal in Ukraine, or an improvement in manufacturing in Germany, for example.

The other thing that would help Europe outperform would be something going wrong in the US in some way — either economically or with some of the largest companies. The biggest American technology companies used to be capital-light businesses, but now they’re spending a lot of money on capital investment. If people start questioning the returns on that investment, then the valuations could come down, which could benefit European stocks on a relative basis.

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

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Cohen

Korea's financial authorities said on Friday they would loosen foreign exchange regulations and allow more corporate borrowings abroad, in a bid to defend the won that is trading at a 15-year low with improved liquidity.

"Strict regulations restrain the efficiency of foreign exchange management, and there is a need to take into account worsened foreign exchange liquidity conditions after recent events," the finance ministry said in a joint statement with the central bank and regulatory agencies.

The Korean won dropped on Thursday to its weakest level in 15 years, weighed down by risk-averse sentiment after the U.S. Federal Reserve's cautious stance on more interest rate cuts, as well as domestic political uncertainty stoked by President Yoon Suk Yeol's short-lived martial law order on Dec. 3 and his subsequent impeachment.

According to the statement, measures include allowing companies to take out loans in foreign currencies and exchange the funds for the won, if they are used for investing in facilities such as equipment, property and land purchases.

"It is a paradigm shift in foreign exchange policy, from regulating external debt, to inducing more foreign inflows," a finance ministry official told Reuters by phone.

Traumatized by capital flight during the 1997-1998 Asian financial crisis and the 2007-2008 global financial crisis, Korea has had a tight grip on foreign exchange borrowings even as it has encouraged overseas investments.

At the end of September, the country held a record high of a net $977.8 billion in financial assets abroad, after turning a net creditor in 2014.

"We will continue to loosen regulations on capital inflows from the private sector unless it affects external debt or credit ratings in a negative way," the official, who did not wish to be identified because the person was not authorised to speak to media, said.

The ministry also said the ceiling of foreign exchange futures contracts would be raised to 75 percent of capital holdings for local banks and 375 percent for Seoul branches of foreign banks, from the current 50 percent and 250 percent, respectively.

"They are clearly tools for controlling the weakening pace of the local currency by easing the strain in foreign exchange liquidity," said Park Sang-hyun, an economist at iM Securities.

"But, there will be limitations, as unfavourable external conditions, from U.S. policy to China risks, are putting pressure on all emerging currencies, not just the won," Park said.

The ministry said it would implement the measures in a swift manner and consider expanding them after reviewing the effects. (Reuters)

Source: Koreatimes

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ACY

Economic

Central Bank

The Bank of England (BoE) decided to keep its interest rate at 4.75% during its most recent meeting, a move widely anticipated by markets. However, the real story lies in the voting dynamics of the Monetary Policy Committee (MPC), where a closer-than-expected 6-3 split has revealed an emerging dovish tone within the central bank. This subtle shift could pave the way for a significant policy change in 2025.

The Decision and Its Implications

The BoE’s decision to hold rates reflects a continued commitment to its data-driven approach. Policymakers remain cautious in their forward guidance, emphasizing flexibility and refraining from committing to any specific timeline for future rate cuts. This stance aligns with ongoing inflationary challenges, particularly sticky wage growth and elevated services inflation.

Yet, the three dissenting votes—favouring a 25-basis point cut—signal an internal debate about the appropriateness of the current monetary policy stance. These dissenters, including the recently appointed Alan Taylor, argue that the existing policy risks deviating too far from the BoE’s 2% inflation target and could unnecessarily widen the output gap, potentially stifling economic growth.

A Market Responds

The market reaction was swift. The dovish undertones of the MPC vote prompted a modest repricing of interest rate expectations. The two-year GBP swap curve shifted downward, reflecting increased probabilities of rate cuts as early as February 2025. Currency markets also felt the impact, with the pound losing ground against the dollar, while EUR/GBP showed less pronounced movement due to euro-specific bearish factors.

Bank of England Holds Rates Steady Amid Growing Dovish Momentum_1

This reaction underscores growing market anticipation that the BoE may adopt a more accommodative stance in the coming year, especially as economic data points to slowing activity.

Inflation vs. Growth: A Delicate Balancing Act

The BoE faces a challenging environment where inflation remains stubborn in certain sectors, even as broader economic indicators show signs of softening. Wage growth continues to outpace expectations, adding to inflationary pressures. However, the dissent within the MPC suggests that some members believe the focus should now shift toward preventing economic stagnation and supporting growth.

Bank of England Holds Rates Steady Amid Growing Dovish Momentum_2

This debate reflects a broader dilemma faced by central banks globally: how to strike the right balance between containing inflation and fostering sustainable economic momentum. For the BoE, the growing dovish sentiment may indicate that the pendulum is beginning to swing toward the latter.

What to Expect in 2025

Looking ahead, the BoE’s policy trajectory will remain heavily influenced by incoming data. The MPC’s emerging dovish tone suggests a greater willingness to consider rate cuts next year, particularly if economic activity continues to decelerate. While markets currently expect modest easing of around 55 basis points, some analysts, including ING, predict more substantial cuts totalling 150 basis points in 2025.

This potential policy shift highlights the importance of adaptability in a rapidly changing economic landscape. As the BoE navigates these complexities, its decisions will not only shape the UK’s economic outlook but also influence global financial markets.

The Bank of England’s latest decision may appear unremarkable at first glance, but the close vote and underlying sentiment reveal a central bank at a crossroads. As inflationary pressures persist and economic growth slows, the BoE’s evolving approach will be critical in steering the UK economy through a period of heightened uncertainty. For now, all eyes remain on February’s meeting, where the dovish momentum within the MPC may gain further traction.

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

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Owen Li

Economic

Commodity

SINGAPORE (Dec 20): Oil prices fell on Friday on worries about demand growth in 2025, especially in top crude importer China, putting global oil benchmarks on track to end the week down nearly 3%.

Brent crude futures fell by 41 cents, or 0.56%, to US$72.47 a barrel by 0420 GMT. US West Texas Intermediate crude futures fell 39 cents, or 0.56%, to US$68.99 per barrel.

Chinese state-owned refiner Sinopec said in its annual energy outlook, released on Thursday, that China's crude imports could peak as soon as 2025 and the country's oil consumption would peak by 2027 as diesel and gasoline demand weaken.

"Benchmark crude prices are in a prolonged consolidation phase as the market head towards the year end weighed by uncertainty in oil demand growth," said Emril Jamil, senior research specialist at LSEG.

He added that Opec+ would require supply discipline to perk up prices and soothe jittery market nerves over continuous revisions of its demand growth outlook. The Organization of the Petroleum Exporting Countries and allies, together called Opec+, recently cut its growth forecast for 2024 global oil demand for a fifth straight month.

Meanwhile, the dollar's climb to a two-year high also weighed on oil prices, after the Federal Reserve flagged it would be cautious about cutting interest rates in 2025.

A stronger dollar makes oil more expensive for holders of other currencies, while a slower pace of rate cuts could dampen economic growth and trim oil demand.

JPMorgan sees the oil market moving from balance in 2024 to a surplus of 1.2 million barrels per day (bpd) in 2025, as the bank forecasts non-Opec+ growth increasing by 1.8 million bpd in 2025 and Opec output remaining at current levels.

In a move that could pare supply, G7 countries are considering ways to tighten the price cap on Russian oil, such as with an outright ban or by lowering the price threshold, Bloomberg reported on Thursday.

Russia has evaded the US$60 per barrel cap imposed in 2022 using its "shadow fleet" of ships, which the EU and Britain have targeted with further sanctions in recent days.