Macroeconomics: The Day Ahead for 18 December

It’s central bank Thursday, with rate decisions in the UK, Eurozone, Sweden, Norway, Czechia, Taiwan and Mexico ahead of tomorrow’s key BoJ policy meeting, while US CPI tops a relatively modest statistical schedule, with French Business Confidence to digest, and US weekly jobless claims, Philadelphia and KC Fed Manufacturing surveys also on tap. FedEx and Nike provide the day’s corporate earnings highlights. The ongoing negotiations to try and reach some form of peace agreement for the Ukraine will also be a key topic at the two day EU Council of Leaders meeting that starts today, which will also feature discussions on the next multiannual EU budget framework – both topics will likely highlight ongoing divisions within the EU. Sweden’s Riksbank is expected to hold rates at 1.75% and signal that it expects to pause rate moves throughout 2026, as it publishes its latest forecasts update. Norway’s Norges Bank is also seen holding rates at 4.0%, but signals that further cautious gradual rate cuts are likely. This year’s largely unexpected strength (above all given trade tensions with the USA, also see chart) in the Mexican Peso allows Banco de Mexico to continue its easing cycle with a further 25 bps cut to 7.0%.

This week’s run of labour and inflation indicators should be more than sufficient justification of the BoE to cut rates 25 bps to 3.75%, and perhaps persuade one or other of the MPC hawks to join governor Bailey in voting for a cut, even if they may be hesitant given that it might be construed by markets as signalling a more emphatic dovish in policy. While yesterday’s CPI data were well below forecasts, the BoE will have noted that core services CPI remains stubbornly elevated at 4.6% y/y, just 0.1% lower on the month, and that the sharp fall in core Goods prices to 1.1% y/y from 1.5% probably reflected discounting ahead of/for Black Friday, particularly after the poor outturn for October, which may well be unwound in the December data. It will also be important to note any guidance on revisions to its forecasts in the wake of the Budget.

The ECB is expected to hold rates at 2.0%, and continue to signal a steady rate outlook, and at the current juncture may well want to lean against market moves to start discounting the next move in rates as being higher (though only at the end of 2026). The modest downward revision to final headline Eurozone CPI, the downbeat run of surveys above all out of Germany appear likely to prompt the ECB to note downside risks to the growth outlook, even if at the same time pointing to risks on inflation as being somewhat two sided. Its updated quarterly forecasts will see 2025 GDP revised higher, primarily a reaction to the better than expected Q3 data rather than an expression of increasing optimism, while inflation will be tweaked lower.

CPI is expected to have edged up to 3.1% y/y in November from September’s 3.0%, which would be the highest reading since May 2024, while core is seen unchanged at 3.0% y/y, i.e. in the middle of the range 2.8/3.3% range that has been in place over the past year, and clearly not indicative of a disinflationary trend. Both headline and core CPI are seen up 0.3% m/m in November mainly due to tariff related pressures/passthrough, with some data for October also due, though without headline and core readings.

Ahead of the BoJ decision, National CPI is expected to ease 0.1 ppt to 2.9% y/y headline and 3.0% y/y ex-Fresh Food & Energy, marking the 42nd month above target for headline, while core has been above target in 36 of the last 37 months. Transitory is certainly not a moniker that can be applied, even for a central bank that fought deflation for two decades. The expected and recently well flagged BoJ rate hike has been a long time in the making, and with real rates still very negative, there is no doubt that the BoJ will still be well behind the curve. Per se, Ueda & Co are set to leave the door open to at least one further rate hike, though probably making it contingent on next year’s wage round, and rather less explicitly on the performance of the JPY. In addition to the BoJ branch managers’ report earlier in the week on next year’s wage round (suggesting a pace of increase around the level of this year), robust Exports (above all to the US), unexpected jump in Machinery Orders and the Q4 Tankan also made a very strong case for a rate hike, with very solid large company readings and CapEx expectations, and notable improvements for smaller companies.