Archive for: Echo_20

• US Jobs report all but confirms a December rate cut, with markets pricing in an 80% probability.
• Nasdaq nears 22,000 as US equities continue their strong performance, with the S&P 500 also hitting record highs.
• Global markets await US CPI and ECB decisions, with expectations of a 25 bps rate cut from the ECB.
• Focus for the week ahead includes US CPI, ECB decision, and Chinese inflation data.

Week in Review: Jobs Data All but Confirms a December Rate Cut

A week that saw a lot of choppy price action as markets awaited the US jobs report on Friday. A stellar jobs print of 227k and a slight uptick in the unemployment rate to 4.2% appear to have sealed a December rate cut.

Source: LSEG 

Barring any crazy inflation surprise in the week ahead, markets appear fairly certain that the Fed will deliver a 25 bps cut in December. Federal Reserve policymakers will enter a media blackout that kicks in on Saturday, in the run-up to the central bank’s Dec. 17-18 policy meeting.

US Equities have been the talk of the town once more, as Wall Street Indexes continued their impressive YTD performance. The S&P 500 and the Nasdaq hit intraday record highs on Friday while the Dow struggled following a drop in UnitedHealth shares.

The ‘Santa rally’ appears to be here with the S&P making its way above the 6100 handle and the Nasdaq eyeing consolidation above the 21500 handle. Following the day’s move the S&P and Nasdaq are on course for a third consecutive week of gains with the Dow on course for a minor setback.

Oil prices struggled this week despite OPEC + continuing their current production cut schedule into 2025. The Organization of the Petroleum Exporting Countries (OPEC)+, pushed back the start of oil output rises by three months until April and extended the full unwinding of cuts by a year until the end of 2026

Following a choppy week, Oil was trading down around 1% on Friday and on course to finish the week down around the same. Bank of America forecasts that increasing oil surpluses will drive the price of Brent to average $65 a barrel in 2025, while expecting oil demand growth to rebound to 1 million barrels per day (bpd) next year, the bank said in a note on Friday.

Gold remained rangebound for the majority of the week, as the precious metal coiled in a $40 range between 2612-2660. Not even Friday’s jobs data was enough to shake the precious metal into a breakout.

The DXY had a mixed week with a strong start and end to the week followed by a soft middle leaving the DXY on course for marginal gains of about 0.35%. This was reflected in the choppy price action by major pairs this week with the Euro and the GBP unable to hold onto gains against the Greenback.

The DXY will be worth monitoring given the US Dollar has a track record of poor performance in the Month of December. An uptick in US inflation however could aid the Dollar in its bid to reclaim the 107.00 handle next week.

The Week Ahead: US Jobs Data to Dominate

Asia Pacific Markets

The week ahead in the Asia Pacific region sees some key economic data releases and events.

In China, the big event next week is the annual Central Economic Work Conference. While it won’t focus on exact numerical targets (those are usually set during the Two Sessions), it will give clues about how policymakers are planning for next year. This could have an impact on emerging market currencies and currencies like the Australian Dollar as well.

The better question would be whether there’s any change in their approach to fiscal policy or monetary policy.

China will release its November inflation data on Tuesday and trade numbers on Wednesday. Inflation could very well rise to 0.6%, from the previous 0.3%. Imports are likely to stay weak due to low domestic demand, growing only around 1.2%.

In Australia, the RBA is expected to keep rates on hold this week at 4.35%. The uptick in October core inflation coupled with stronger economic growth in the third quarter suggest the RBA isn’t in a hurry to lower rates.

In Japan, the Tankan Business Survey will be out this week. This comes as speculation continues to grow that the BoJ will deliver a rate hike of 25bps at its upcoming meeting. Something else to pay attention to may be the manufacturing sector, which may face challenges due to growing uncertainty around global trade policies, especially in the auto industry.

Europe + UK + US

In developed markets, the focus moves back to the US and CPI inflation data as speculation grows around a December rate cut.

Core CPI is expected to rise by 0.3% month-on-month again, which could complicate the December decision for the Federal Reserve despite the probability of a rate cut lingering around the 80% mark.

Policymakers agree that policy remains restrictive and the sticking point seems to be over the pace of cuts. I do still think the idea of Trump assuming office will play in the minds of policymakers who will likely cut in December and take a pause in January.

In Europe the ECB decision is due this week with any doubt around the size of a cut seemingly evaporated. A recent bout of data and comments from policymakers have seemingly ruled out the possibility of a 50 bps cut with 25 bps the most likely outcome.

To show they remain committed to managing rates effectively, the ECB is likely to signal that it plans to keep moving rates towards neutral levels and is open to lowering them further into easing territory if needed.

The Bank of Canada has lowered its policy rate by 125 basis points since June, and there’s a strong chance it will cut another 50 bps next week. This would bring the rate down to 3.25%, as the central bank tries to reach a neutral level quickly.

The cuts are needed as Canada struggles with slow economic growth and low inflation. There are other challenges as well while the looming threat of a Trump Presidency and tariffs when he takes office also weighs on the minds of BoC officials.

Chart of the Week

This week’s focus is now on the Nasdaq 100, following another stellar showing by US equities. The ‘santa rally they say’, looking good so far.

The Nasdaq 100 is now within 400 points of the 22000 handle following a strong end to the week as US jobs data seemed to confirm a December rate cut.

The Nasdaq is currently in a channel and the top of the channel is around the 22000 handle which would make that a key area of resistance. Before that level however the 21750 handle may also present challenge. The Nasdaq monthly open was around 20930 with the index already rising around 700 points this month.

Any pullback may be viewed as a potential opportunity for buyers to get involved. The historical performance of the index in December coupled with the current fundamentals suggest we may see more upside before the month comes to a close.

My bias remains bullish for the Nasdaq but getting involved now would pose the risk of a correction before the next leg to the upside.

Nasdaq 100 Daily Chart – December 6, 2024

Source: TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

Resistance

• Next week, the ECB is set to cut rates for the fourth time this year. Unlike the previous three cuts, the outcome of next week’s rate decision is not given as 1) the restrictive policy stance, 2) the deteriorating growth outlook, and 3) inflation at target has opened discussions of a 50bp cut. While a 50bp cut will certainly be discussed, we judge that the ECB will ultimately deliver a 25bp rate cut, and guide that they are open to any size of rate cuts at future meetings, subject to the incoming data. A 25bp cut next week will bring the ECB’s deposit rate to 3.0%. In the coming year, we expect a string of rate cuts, leading to a terminal rate of 1.5% being reached in September 2025.
• We expect a benign market reaction, even if Lagarde decides to twist guidance towards an increasing likelihood of a faster rate of normalisation.

Change guidance of policy restrictiveness

Since last year, the ECB has included a reference that it aims to keep monetary policy ‘sufficiently restrictive’ for as long as necessary. Following the disinflationary process that has gained traction through 2024, the updated staff projections next week are likely to forecast inflation on target from 2025 and onwards. Thus, whether monetary policy should stay restrictive is likely going to be debated. We believe that the slightly hawkish bias in the ECB’s communication is set to change as the need for a restrictive monetary policy stance in the Eurozone is no longer obvious. But the camps inside the GC are obviously divided. In a recent interview the ECB’s Schnabel said that in her view the restrictive part of the monetary policy stance is already fading. At the same time, we see the dovish camp, for example Villeroy, saying that there ‘won’t be any reasons’ for policy to remain restrictive.

A 25 or a 50bp rate cut? It is not the most important question

With activity indicators looking bleak heading into 2025, the case for a 50bp rate cut has strengthened, as the starting-point for financial conditions is restrictive based on most measures. However, given the ECB’s sole inflation mandate, and the ‘political’ aspect of having a gradual rate cutting cycle, we believe it will favour a 25bp rate cut.

However, whether the ECB will deliver a 25bp rate cut or 50bp rate cut in December is not that important in isolation, as the communication around it will be key as well. There seem to be diverging views on how to cut the cake. Most recently, Schnabel’s interview clearly suggested that she would opt for a 25bp rate cut, as would Vujcic, while others such as Lane, Villeroy and Centeno are more open to discussing a 50bp rate cut.

That said, rather than focusing on the rate cut next week, we should focus on where the policy rate will end in this cutting cycle, albeit we do not expect any verbal guidance on this. Markets may though interpret a 50bp cut as a signal of a lower terminal rate – and that may even be a signal that the ECB wants to send.

But as we do assume the ECB does not want a hawkish reaction from markets, leading to tighter financial conditions, we expect it to opt for a dovish 25bp cut, focusing on the communication on a potential jumbo cut.

Macro data since the October meeting has mainly given ammunition to the doves

Since the October meeting, the momentum in underlying inflation has fallen further and growth indicators have weakened. The composite PMI indicator declined sharply to 48.3 in November mainly driven by the service sector, which is now also in contractionary territory. Data indicates that the eurozone’s two largest economies, Germany and France, are likely to contract in Q4 while Spain should drive aggregate euro area growth together with Portugal and Greece. The deteriorating growth indicators combined with rising political uncertainty since the October meeting have mainly given ammunition to the dovish members of the ECB. However, the hawks’ last battalion, namely the labour market, continues to show resistance with the unemployment rate remaining at a record low of 6.3% in October and the national account data showing increased employment in Q3.

Underlying inflation has eased further

While headline inflation has increased from the three-year low in September, mainly reflecting base effects, the underlying momentum has continued to ease. The average month-on-month increase in seasonally adjusted core inflation has been 0.14% in the past three months, which is well in line with 2% annualised inflation. Importantly, the lower momentum in underlying inflation has been driven by service inflation where momentum is also quickly approaching the 2% target, according to the ECB’s own seasonally adjusted data. Hence, inflation developments have clearly also supported the doves in the ECB. For the hawks, an argument for a cautious cutting approach is wage growth that remains elevated given the tight labour market. Negotiated wage growth increased to 5.4% y/y in Q3, albeit largely driven by one-off payments, and has averaged 4.6% so far this year, compared to 4.4% in 2023.

Staff projections to show lower growth and inflation

We expect the ECB staff to take note of the recent easing in the momentum of underlying inflation and incorporate this into a lower forecast for core inflation next year relative to the forecast in September. We expect core inflation to be revised down to 2.2% y/y in 2025 (from 2.1%) and headline inflation to 2.1% y/y (from 2.2%). Oil futures were 6% lower at the cut-off date for the staff projections compared to December, but gas and electricity futures were higher, so we expect only a marginal reduction in the headline forecast. We expect the growth forecast to be revised down in 2025 to 1.1% y/y from 1.3% y/y due to the continued struggles in the manufacturing sector combined with cautious consumers and a weak German economy. In contrast to the ECB’s previous projections, consumers continue to have an elevated savings rate, which prevents consumption from picking up in the near term. The new staff projections will also include an additional year, albeit we do not attach significant weight to those projections given their embedded uncertainties.

Limited FX market reaction on 25bp rate cut

Speculation around a 50bp cut has diminished, with markets now largely positioned for a 25bp move, with only 27bp priced in. However, the post-decision communication will be crucial, given divisions within the Governing Council that could drive a range of market responses.

We view a dovish 25bp cut, where the ECB signals flexibility to adjust the size of future cuts, as the most likely scenario. Such an outcome would likely have a limited impact on EUR/USD, and with the probability of a jumbo cut still being priced in markets. However, should the ECB indicate a preference for continuing the easing cycle in 25bp increments, market pricing could shift, potentially triggering a hawkish response and a moderate EUR/USD rally, albeit given the meeting-by-meeting approach and thereby keeping full flexibility about future monetary policy decisions, we see that as a low probability outcome. By contrast, a 50bp cut – an outcome we believe is underappreciated despite weak euro area growth and inflation – would likely prompt significant EUR depreciation, with EUR/USD potentially dropping sharply.

Looking ahead, the Fed’s December meeting is likely to have a more decisive impact on EUR/USD’s near-term trajectory, with Friday’s US jobs report a critical input. While markets currently assign a decent probability to a Fed pause, we expect a 25bp cut. If this materialises, it should help contain further EUR/USD downside into year-end. Seasonal trends and our short-term valuation models support this view, as EUR/USD appears oversold after its sharp decline since October. We expect the pair to close the year at around 1.06.

From a strategic perspective, we maintain our bearish EUR/USD outlook, driven by the relatively stronger US growth narrative. Our 12M target remains 1.01, making parity a plausible level over the coming year. On the rates side, we note that the significant decline in rates over the past month has brought the spot level for long swap rates close to our 12- month forecast, thus offering a very limited declining profile from here, see more in Yield Outlook – Transatlantic decoupling but not for much longer, 28 November 2024. We do not expect a signal from the ECB to address the French spread widening to peers.

• Last policy decisions of 2024 to shape market mood
• RBA, BoC, SNB and ECB are on the agenda
• US CPI report to be crucial too as Fed undecided

RBA to hold rates, but will it turn less hawkish?

The Reserve Bank of Australia will kick off the central bank bonanza next week, announcing its decision on Tuesday. Unlike its major peers, the RBA has not yet embarked on a rate-cutting cycle as policymakers remain wary about inflation despite the recent decline.

Governor Michelle Bullock said underlying inflation is still “too high” in recent remarks and doesn’t expect for it to return to target sustainably until 2026. Unless that outlook changes, the RBA isn’t about to ditch its ‘higher for longer’ stance anytime soon, and investors don’t see a rate cut before April 2025.

Even April was considered a bit optimistic prior to the GDP data that showed Australia’s economy grew by slightly less than forecast in the third quarter. The soft reading undermines Bullock’s claim about the level of excess demand in the economy. Monthly CPI was also weaker than expected in October, and further downside surprises could see the timing of the first rate reduction being brought forward again.

This may prompt Bullock and other board members to sound a little more upbeat about inflation as they keep rates at 4.35%. A dovish lean could push the Australian dollar below the four-month lows brushed on the back of the GDP print.

Aussie traders will also be keeping an eye on the November employment report due on Thursday, as well as CPI and PPI figures out of China on Monday, and November trade figures on Tuesday.

Whilst the Chinese data will be important in gauging the health of the world’s second largest economy, a bigger market mover might be any new announcement on stimulus, as political leaders meet next week to set out Beijing’s economic plan for 2025.

Will the BoC cut by 50 bps again?

In sharp contrast to the RBA, the Bank of Canada has been taking the lead in the global race to cut rates. The BoC has slashed rates four times this year, the last being a hefty 50 basis points. But investors are split if another double cut is likely in December.

Both headline and underlying measures of inflation ticked up in October, and the jobs market is rebounding after a soft patch. On the other hand, growth remains subdued and businesses are downbeat about the outlook, especially now that US president-elect Donald Trump is threatening tariffs of 25% on all Canadian imports.

Another consideration for the BoC is the widening yield spread with the US, as the Fed has not been as aggressive and may even go on pause soon. With the Canadian dollar already down more than 6% this year, policymakers may not want to risk lowering rates significantly below US ones.

Hence, Wednesday’s decision of whether to cut by 25 bps or 50 bps will likely be a very close call, and the risks to the loonie are symmetrical.

Dollar awaits CPI data as Fed meeting looms   

The December policy decision is also proving to be a bit of a dilemma for the Federal Reserve. Judging by the latest rhetoric, most Fed officials appear to be in favour of a 25-bps reduction at the December 17-18 meeting but are not ready to commit just yet.

The CPI report for November out on Wednesday will be the last major piece of the jigsaw for policymakers ahead of the meeting, so a strong market reaction is almost guaranteed.

The headline rate of CPI is expected to edge up from 2.6% to 2.7% y/y, while core CPI is projected to stay unchanged at 3.3% y/y. Barring any upside surprises, the Fed will probably be inclined to lower rates and keep the January meeting as an option for pausing.

The producer price index will follow on Thursday.

The US dollar is consolidating after hitting two-year highs in November. Any unwelcome acceleration in the month-on-month rates could recharge the bulls to drive the dollar index to fresh highs.

SNB set for first cut under dovish new Chairman

The Swiss National Bank has trimmed rates three times since March when it became the first of the major central banks to ease policy. It’s widely expected to cut again in December, which will be new Chairman Martin Schlegel’s first decision since taking over from Thomas Jordan in October.

However, the size of the cut is less certain, and the choice between 25 bps or 50 bps was looking like a coin toss until the October CPI data came along. Switzerland’s annual CPI rate increased by 0.7%, falling short of the 0.8% expected. The odds for a 50-bps cut subsequently rose to more than 60%.

Dovish remarks by Schlegel have further boosted the chances for a larger reduction, after he repeatedly floated the idea of reintroducing negative interest rates if necessary.

Should the SNB opt for a 50-bps cut on Thursday, the Swiss franc could resume its downfall against the US dollar. However, if policymakers stick with a 25-bps increment, the franc could extend its latest recovery.

ECB unlikely to go big in December

Soon after the SNB announces its policy settings, the European Central Bank is expected to hit the headlines with its rate decision. A rate cut is almost certain, with economists predicting a 25-bps reduction. However, some investors think that a 50-bps cut is on the cards, although the odds have fallen in recent days to about 15%.

This has helped the euro to stabilize a little against the US dollar as ECB policymakers, including President Lagarde, have been careful not to pre-commit to a particular rate path amid a pickup in inflation in the euro area.

Nevertheless, a weak economy and renewed political uncertainty in both France and Germany have some traders betting that the ECB will have to be a lot more aggressive with its policy easing in the coming months.

However, it’s unlikely that the ECB will change its stance just yet and if it cuts rates by 25 bps as forecast on Thursday, the euro may not move much unless there is some unexpectedly dovish language by Lagarde in her post-meeting press briefing on Thursday that spurs a fresh selloff.

Pound rebounds ahead of UK data

Across the channel, the uncertainty over the UK economic outlook has also risen, mainly on the back of the Labour government’s budget. The tax and spend budget has been widely perceived as boosting inflation, limiting the scope for the Bank of England to cut interest rates. And whilst it does include measures that could lift growth, in the immediate term, the British economy appears to have stagnated.

GDP numbers for October will therefore be closely watched on Friday for signs that growth is coming out of the doldrums.

Although sterling has recouped a decent portion of its recent losses against the greenback, stronger-than-expected growth data could help it extend the gains.

Elsewhere, the yen might be sensitive to any revisions to Japan’s Q3 GDP print on Monday and any surprises in Friday’s quarterly Tankan business survey amid ongoing speculation about whether or not the Bank of Japan will hike rates at its December meeting.