Who Pays The Bill?

Economic

Summary:

The more the Fed’s rate cuts diverge from economic fundamentals, the stronger the hawkish expectations for the future become.

Canada joined the global political gloom. The sudden resignation of the finance minister on Monday started raising questions about Trudeau’s leadership as politicians there try to find ways to deal with economic slowdown topped by Trump’s tariff threats. Happily for the Bank of Canada (BoC), inflation dropped below the 2% target for the second time in three months hinting that the central bank could at least remain supportive when politicians are not. The USDCAD spiked to the highest levels since the pandemic. The Loonie is now oversold versus the US dollar and retreats very rapidly against the euro since the November peak. Oil prices aren’t adding to the selloff these days, but they are not helping either. As such, the political problems pave the way for further Loonie weakness, price pullbacks in the USDCAD and EURCAD could be interesting opportunities to jump on the trend.

A bit lower on the map, Brazil intervened to stop the bleeding of the real after the currency tanked more than 20% against the greenback to an all-time-low this year. Ballooning debt and deficit are taking a toll on the country’s finances as – remember – not everyone can balloon debt infinitely and make the rest of the world pay for it. This is the major differences between what we call developed countries and their emerging market peers.

Because look, the French National Assembly just adopted a stopgap budget bill to avoid a government shutdown from January as the French politicians took down a government that tempted to control, and to narrow the budget deficit. And yet, the French 10-year yield – though higher on the latest shenanigans – is not alarmingly higher. The outlook for France is not brilliant, however.

Investors in the US have a different problem: the retail sales, there, has again been higher than expected by analysts, again pointed at resilient consumer spending and again highlighted the needlessness of another rate cut from the Federal Reserve (Fed) today. But the Fed will announce a 25bp cut no matter what.

The more the Fed’s rate cuts diverge from economic fundamentals, the stronger the hawkish expectations for the future become. Some expect that the Fed could cut only twice next year while others think that the Fed’s premature and rapid cuts will require a rate hike next year. But I would be surprised to see a meaningful reversal in the Fed’s rate cutting plans at today’s announcement. In the worst-case scenario, Fed officials might signal one fewer rate cut on average for next year. I expect them to stick to the familiar ‘inflation is moving toward target’ rhetoric at this pre-Xmas meeting, paving the way for the Santa rally to unfold.

The S&P500 and Nasdaq eased yesterday as the US 2-year yield shortly spiked to 4.30%, Broadcom retreated nearly 4% but after a 38% rally in the previous two sessions, while Nvidia extended gains in the correction territory. If you are asking when is it a good time to buy a dip in Nvidia, I would say near $120 per share, that matches the 23.6% retracement on the AI rally. It’s still a 7.5% away from yesterday’s close near $130 per share.

In Europe, the Stoxx 600 remains downbeat and is about to test the 500 to the downside, as the Xmas magic is really not operating in Europe this year. The EURUSD hovers between gains and losses around 30 pips around the 1.05 psychological mark. The Fed’s decision will probably give a fresh direction to the pair. A sufficiently accommodative Fed statement and dot plot could give support to the EURUSD and help it to recover above the 1.05 mark – that’s my base case scenario. But if the Fed turns realistically less dovish – both of which is not their thing – we could see the US dollar extend gains and pave the way for a further downside correction in the EURUSD. If that’s the case, the parity bets will rapidly come back to the headlines.

Across the Channel, the figures come in but they are not easy to interpret. Yesterday’s jobs data looked strong with strong employment, low claims and nice earnings growth figures. And along with today’s inflation print dashed the likelihood of another rate cut this week from the Bank of England (BoE). But the private sector shed nearly 200’000 jobs this year – perfectly in contrast with the public sector. It’s obviously not good news for the economy and demands some support from the BoE – a support that the BoE won’t provide easily to balance out the government’s spending plans unless the economy weakens due to tax hikes before it improves thanks to spending. Looking at the chart, we are about to see a death cross formation on the daily chart – where the 50-DMA is about to dive below the 200-DMA – hinting that the selloff could accelerate and send Cable toward the 1.25 on worries that the UK economy will weaken before it rebounds.

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

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Warren Takunda

Economic

The Federal Reserve is expected to lower borrowing costs on Wednesday in what some observers are calling a "hawkish cut" set to be delivered alongside policymakers' updated interest rate outlooks and economic forecasts covering the first months of the incoming Trump administration.

The anticipated quarter-percentage-point move would lower the U.S. central bank's benchmark policy rate to the 4.25%-4.50% range, a full percentage point below where it stood in September when it began easing the tight monetary policy used to counter a surge in inflation that began in 2021.

How much further and how fast rates will fall next year remains increasingly uncertain with inflation still lodged above the Fed's 2% target, the economy growing faster than expected, and the prospect that President-elect Donald Trump's tariff, tax and immigration policies could change the economic landscape in unpredictable ways once he takes office in January.

In their most recent set of quarterly projections in September, Fed officials anticipated cutting the benchmark rate by another full percentage point to put it at around 3.4% by the end of 2025.

Between data showing inflation stalled above the 2% target and Trump's victory in the Nov. 5 presidential election, investors now see the Fed perhaps cutting the benchmark rate by only half a percentage point next year - and they will be studying the projections and Fed Chair Jerome Powell's remarks in a post-meeting press conference closely to see if policymakers are also becoming more cautious about further rate reductions.

U.S. stocks ended lower on Tuesday with the Dow dropping for a ninth straight session as investors showed caution ahead of the Federal Reserve's last policy meeting of the year.

"While the Fed will remain keen on projecting additional easing for 2025, guidance regarding the pace of rate cuts will likely be more cautious going forward," economists with TD Securities wrote ahead of this week's two-day meeting.

The Fed will release its policy statement and updated economic projections at 2 p.m. EST (1900 GMT), with Powell scheduled to begin speaking half an hour later.

Data, including the release on Tuesday of a strong retail sales report for November, have done little to alter the Fed's description after its last policy meeting of an economy growing at a "solid pace" with low unemployment and inflation that, while falling, "remains somewhat elevated."

Between a new policy statement, the projections and Powell's press conference, the net result is likely to be "a hawkish cut" with a slower pace of reductions to come, Diane Swonk, chief economist at KPMG, wrote ahead of this week's meeting.

"Debate will be heated," she said. "The economy remains stronger than participants at the meeting thought it would be when they started cutting in September, while improvements in inflation appear to have stalled ... The Fed is going to want time to pause to see where we are and how policy may shift after the president-elect is sworn in."

Trump takes office on Jan. 20, and the Fed meets just over a week later on Jan. 28-29. A total of 58 of 99 economists in a recent Reuters poll said they expected the U.S. central bank to skip cutting rates at that meeting as policymakers take stock of how the economy is evolving.

Source: Reuters

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

Risk Warnings and Disclaimers

Add to Favorites

ING

Economic

UK services inflation is stuck. That’s the main takeaway from the latest UK data, even if it was a tad better than most had expected.

Services CPI stayed at 5.0% for the second consecutive month, though only because of a particularly steep fall in air fares. Once we strip that and other volatile categories out, our measures of so-called “core services” inflation ticked higher.

Indeed our favoured measure, which strips out rents and hotel prices amongst other things, ticked up from 4.5% to 4.7%, having generally been performing better than the headline numbers over recent months.

All of this is really just noise. And in fact, services inflation was still a tad higher than the Bank of England’s most recent forecast, even if it was below everyone else's. Bigger picture, we expect it to bounce around 5% for the next four months or so.

Again though, most of that projected stickiness is likely to be concentrated in categories that the Bank of England has told us it is inclined to pay less attention to. Our core services measure described earlier is likely to get pretty close to 3% next spring.

'Core services' is set to fall close in on 3% in the spring

Source: Macrobond, ING calculations

A lot of the services basket is affected by one-off annual changes in index-linked prices – think of things like phone and internet bills. These are often tied to past rates of headline inflation which, through 2024, has been pretty benign. Those annual price hikes for various services should therefore be less aggressive next April than we saw earlier this year.

If we’re right about that, it should also help overall core inflation to fall materially below 3% in the spring (from 3.5% today). Headline CPI is set to stay a little stickier at 2.6-2.7% in the near-term, thanks to less favourable energy base effects.

If 'core services' inflation does look steadily better, then that would provide some ammunition for the Bank of England to move a little faster on rate cuts than markets are now pricing. Our base case is for back-to-back to rate cuts from February onwards, with Bank Rate falling to 3.25% later in the year.

For the time being though, today’s data means the Bank will stay the course at this week’s meeting. It’ll keep rates on hold and offer no major hints on what’ll come next, beyond re-affirming its commitment to gradual cuts.

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

Risk Warnings and Disclaimers

Add to Favorites

Danske Bank

Central Bank

Economic

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

Risk Warnings and Disclaimers

Add to Favorites

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

Risk Warnings and Disclaimers

Add to Favorites

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

Risk Warnings and Disclaimers

Add to Favorites

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

Risk Warnings and Disclaimers

Add to Favorites