Interest rate decisions from central bank, interesting inflation report from China, and debate around an interest rate cut in the UK.
This week is underpinned by the central bank interest rate decisions and subsequent press conferences from the Federal Reserve on Wednesday and the Bank of England and ECB on Thursday, respectively. The market is currently projecting that all three major central banks will keep rates unchanged, the monetary policy committee meetings are being hotly anticipated as investors look to gain further insight into their future paths.
In terms of the Federal Reserve, the FOMC minutes released on 21 November indicated how policy makers saw rates remaining high for some time and that Fed should remain cautious in their strategy, while being data dependent.
Their comments came as the FOMC met market expectations in deciding to hold their benchmark policy target rate of 5.25-5.5% at its highest level in 22 years. Since that meeting, month-on-month CPI has eased to 0% over October, having fallen 40bps from September’s print. Easing inflation was met with cautious optimism from policy makers including Christopher Waller (who is generally considered to be one of the most Hawkish members). For example, at a press conference at the back end of November, he suggested that the Fed is on track to bring inflation back down to their 2% target and that they may not need any further monetary tightening.
This helped give markets greater credence to the idea that the Fed have reached their terminal rate, as attention now turns to how long tightened monetary conditions will plateau ahead of an eventual cut. Last week, the general market consensus was estimating a 60% chance that Fed policy makers would cut rates by March, while fully pricing in a rate cut by May.
It’s worth noting that the latest US CPI figures are released tomorrow at 1330, just the day before FOMC members make their rate decision and provide interest rate projections over the next three years. Here, markets are projecting the headline (annualised) print to come in at 3.1%, with month-on-month inflation expected to come at 0.1% – a marginal rise from last month’s 0% figure.
Moving to the Bank of England, the general market consensus is projecting the central bank’s first rate cut in August ahead of a 25bps subsequent cut at each meeting thereafter until around mid-2025. Elsewhere, it is expected that there is a 50% chance of a cut in March with one being fully priced in by the June meeting.
There was some interesting reading over the weekend from China, in the form of their inflation report. Inflation there fell at the fastest rate in three years last month and prices of goods leaving factories further deflated, leaving the country with an awkward dilemma on how to stimulate domestic growth. Forecasts from the markets and statements from the central bank had investors teed up for a pretty stable inflation print, with the PBoC saying that inflation was expected to be “going upward”, but the print came in much lower than expected and has caught the country out at a time where they’ve got more limited bandwidth to support demand than perhaps at any time in their modern history. Last week Moody’s gave the country a ratings downgrade, warning that the likely state bailouts to property developers would have a dragging effect on the economy and their already weaker than expected annual growth rate of 1.3% means that debt servicing isn’t as straight forward as it once was (though their debt to GDP ratio is ‘only’ 77%, so there is some room there).
Still, what is bad for China might not be terrible for the world: Warmer weather in China has meant food abundance and therefore a likely reduction in demand for imports, which is likely to have an impact on world food prices. A slowdown in demand for oil could lead to commodity price falls too (though we wouldn’t put it past OPEC to just cut production) and falling factory gate prices mean that the finished goods that we all buy from China could also come down in cost too – and shipping costs have fallen sharply in the last week also.
The pace of price declines is causing quite the debate about just when, and how quickly, interest rates will be cut in the UK. The CBI believe base rates have got another couple of years up at their current level of 5.25%, because they don’t see inflation getting to 2% until Q3 2025. On the other side of the coin, Goldman Sachs are now saying an August cut is likely and the bank being consistent in cutting until they reach 3% in mid-2025.
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Thought for Thursday, House of Commons ceasefire vote decision, minutes released from Federal Reserve monetary policy meeting, geo-political update in Russia and Gaza, and looking at today's data.
Word of the week Wednesday, data indicates public sector net borrowing in surplus, this afternoons House of Commons vote for a ceasefire in Gaza, and release of FOMC policy me.eting minutes
Travel Tuesday, changes for China's property market, attacks on Red Sea Vessels cause further shipping disruption, EU defensive naval operation launched, and US propose a UN Security Council Resolution in the Middle East.
Macro Monday, update on Israel-Gaza conflict, town in Ukraine in full control of Russian forces, and pressure for creation of more public-private partnerships in the UK from insurers.
Friday Feeling, Labour take comfort in by-election results, potential for income tax cut plans to be dropped, president of European Commission speaks on European Union defence production.
Thought for Thursday, data released this morning shows UK in technical recession, Sunak's pledge for economic growth takes a blow, increasing number of MPs not looking for re-election for the Conservative party, and Labour party lead drops seven percentage points.
Word of the week Wednesday, hotter than expected US inflation, inflation data in the UK comes in double than BoE's target, US Senate agrees foreign aid package, and today's data.
Travel Tuesday, plight of US commercial real estate owners according to Bloomberg, data shows increase in UK wage growth, easing UK unemployment, and talks to revive negotiations in the Middle East.