December 19, 2023

“In the final central bank decision of the year, Bank of Japan policymakers failed to meet market expectations on signalling a future exit to the negative interest rate policy that has left the yen to slump over 10% this year. UK CPI is the next market event likely to spike volatility.”

Tim Hallinan – Trading Director

Main Headlines

The Bank of France, in its quarterly outlook on Tuesday, forecasted that French economic activity would only see a substantial improvement in 2025, when lower inflation enhances consumers’ purchasing power. This projection falls short of the government’s growth expectations in the interim. According to the central bank, the eurozone’s second-largest economy is expected to expand by 0.8% in 2023, with a downward revision from its previous forecast of 0.9% following weak third-quarter data. In contrast, the government remains more optimistic, incorporating growth projections of 1% for this year and 1.4% for the next in its budget planning.

The UK government plans to boost funding for local government councils by £4 billion, reaching a total of £64 billion, in response to inflation-driven pressures. This move comes after cities Birmingham and Nottingham effectively declared bankruptcy. The settlement for the fiscal year 2024-25 represents a 6.5% increase from the previous year, as announced by the government on Monday. The aim is to alleviate the financial strain on councils responsible for providing local services, especially in the lead-up to the anticipated national election next year.

GBP

Sterling has strengthened this morning ahead of tomorrow’s key CPI release. The Bank of England’s Deputy Governor Broadbent joined a chorus of policymaker pushback to interest rate cut expectations for next year, emphasising the uncertainties surrounding wage growth and asserting that the BoE must wait to be sure that it is truly on its way down. Investors will have only industrial order expectations and a speech from the MPC’s Breeden today as focus shifts to the crucial CPI report tomorrow morning. Market consensus is looking for a 4.3% rate of year-on-year consumer price growth, down from 4.6% in November. The headline figure masks a less encouraging underlying trend, however, and is distorted by declining energy prices and base effects – the more stable core measure is likely to print at 5.6%, supporting the central bank’s higher-for-longer rates stance.

EUR

The euro drifted sideways in the early morning session as it awaits impetus for price action coming in the second half of the week. Germany is yet to see business pessimism peak after the business climate survey deteriorated further in December, despite expectations that it would bottom out. The ECB’s Kazimir reinforced the central bank’s still hawkish stance yesterday, signalling a preference for inadvertently overtightening policy rather than pushing ahead with premature rate cuts that may have to be rolled back. The final revision to the November CPI figure is the main data release today, which fell sharply to 2.4% in the initial estimate.

USD

The dollar steadied on Monday following a hectic week of volatility, with investors looking to Friday’s core PCE release for the next major clues on the path for interest rate cuts next year. A sparse data diary yesterday put the focus on Federal Reserve speakers, who have generally given mixed messages since last week’s dollar slide, following a decisively dovish pivot from Chair Powell. Goolsbee joined the hawkish voices yesterday, claiming that market expectations for swift cuts are at odds with how the Federal Reserve functions and that the Fed would not pre-commit to near-term rate cuts. More speakers come this afternoon with Barkin, Bostic, and Goolsbee again, alongside an insight into the health of the US property sector with building permits and housing starts. In other news, USD/JPY jumped 1% this morning when the Bank of Japan disappointed traders hoping for signalling on a potential exit to negative interest rate policy, leaving policy guidance unchanged since the last decision.

Markets

Stocks and US futures fluctuated as traders evaluated the potential for Federal Reserve easing. The Stoxx Europe 600 index saw a slight increase, while US index futures remained largely unchanged following substantial gains on Wall Street that propelled the Nasdaq 100 to a record high for the second consecutive session.

Main Economic Data/Central Banks/Government (All Times CET)

1:20am.: Reserve Bank of Australia Monetary Policy Meeting Minutes
3:49am.: Bank of Japan Policy Decision
11:00am.: Eurozone Final CPI
12:00pm.: UK CBI Industrial Order Expectations
2:00pm.: UK BoE’s Breeden speaks
2:30pm.: Canadian CPI
2:30pm.: US Building Permits & Housing Starts
3:30pm.: FOMC Member Barkin speaks
6:30pm.: FOMC Member Bostic speaks

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