Macroeconomics: The Day Ahead for 19 December

  • Digesting Fed, BoJ, Riksbank and Norges bank rate decisions, awaiting  BoE, CNB and Banxico; modest run of data unlikely to have much impact; EU leaders meeting, smattering of US corporate earnings

  • UK: BoE set to hold after uptick in inflation, jump in wages, and likely to  retain cautious tone on rate outlook, but markets under clubbing scope for 2025 rate cuts

  • Fed: sharper upward revisions to rate trajectory, economic projections  imply rates would not have been cut if markets had not discounted a  cut; balance of risks maintained, but has been a clear shift back to  prioritizing inflation risks over labour markets

  • Japan: BoJ a good deal more dovish than anticipated; JPY centrality to  policy outlook downgraded; political pressure very evident

EVENTS PREVIEW

** U.K. – BoE rate decision **

– The wages and price data leading up to today’s MPC meeting made a solid case for the BoE holding rates this week, as is universally expected. An 8-1 MPC vote with Dhingra voting again for a 25 bps cut is expected. The statement will likely stick to the November Q4 Monetary Policy Report messaging in terms of the rate outlook, which stated that “a gradual approach to removing policy restraint remains appropriate.” The MPC will doubtless reprise its emphasis on waiting to see the impact on Services CPI of the aforementioned hike in NI employer contributions; though there may also be some referencing of the weak Q3 GDP, and the likelihood that Q4 will undershoot the 0.3% q/q the BoE had anticipated. But it is now very difficult to square market expectations on UK rates in 2025 (at most 2 cuts) with what is happening in the UK economy, unless one attributes this almost wholly due to a very bleak view on UK politics, rather than inflation, growth and the labour market. Tuesday’s wages surge was above all paced by Finance, Construction and Manufacturing, the latter two clearly owing much to skills shortages, rather than actual sectoral demand (cf. the weak Manufacturing PMI and the slide in the Orders component of yesterday’s CBI Industrial Trends survey). Clearly the rise in the Minimum Wage and Employer NI contributions does pose a threat on wage growth (and employment) in H1, above all in thinly operating margined Services sectors, but if the weak GDP trend continues, the threat to economic growth may be larger.

** Central Bank rate decisions

– In Scandinavia, Sweden’s Riksbank cut rates by 25 bps to 2.50%, and continued to signal just one more rate cut in 2025, in Q1, stressing a large array of uncertainties for 2025, above all the threat from tariffs and Eurozone govt crises, but still sounding an optimistic note on growth, while seeing CPI around target. In all likelihood it may be confronted by weaker growth, and inflation (above all core) below target, and end up cutting rates more than once. Norway’s Norges Bank held rates at 4.50% as expected, and while it acknowledged that last week’s improved Regional survey suggests growth will be stronger than it had anticipated, it underlined that inflation was now on course to get back to back to target, and opened the door to a March rate cut. Czechia’s CNB is seen holding rates at 4.0%, as it frets that the downtrend in inflation has lost momentum and may settle above target, per se warranting a more cautious approach to further rate cuts. In contrast to the sharp tightening in policy rates in Brazil, Mexico’s Banxico is expected to ease rates by a further 25 bps to 10.0%, with inflation still well contained, and economic growth sluggish, and threatened by Trump 2.0 tariffs. The latter continues to pressure the MXN, and this may well be touted as grounds for caution on further rate cuts.

** Japan – BoJ rate decision **

– While there were no surprises in the BoJ’s decision to hold rates at 0.25%, the tone from Ueda was a good deal more dovish, with an overall impression that his political masters are leaning on the BoJ to be very cautious on further rate hikes. He emphasized that wage settlements would again be a key factor in deciding the trajectory for rates, while highlighting downside risks to the growth outlook, and appeared to play down the JPY as a policy factor, noting that import price growth has been broadly steady. Nevertheless, he did acknowledge that there remained a risk that the BoJ was behind the curve, while at the same time hinting that 0.50% may be close to being the ‘neutral rate’, highlighting the need to be even more cautious in policy terms as rates get close to neutral. Interestingly, above all given comments from a good many other major central banks, the BoJ noted that unconventional policy (QE) had not been very effective in ‘anchoring’ inflation around the target rate, only adding to the general impression that central banks are tacitly admitting that QE has not been an effective policy tool. But they all remain guilty of not acknowledging that QE has caused asset price hyperinflation, which has been divisive, increased inequality, and ultimately hobbled the efficacy of ‘traditional’ monetary policy.

** U.S.A. – FOMC rate decision **

– It would appear that the only reason that the Fed cut rates was because markets had fully discounted a rate hike, given that its updated Summary of Economic Projections offered no justification for a cut, and indeed suggested even more limited scope for further rate cuts than had already been assumed. While the statement stuck with the wording that ‘the risks to achieving its employment and inflation goals are roughly in balance’, it is all too obvious that its shift in recent weeks acknowledges that it misread the labour market in the summer (perceiving more risks than there actually were), and is now a lot less sanguine about inflation getting back to target on a sustained basis than it was in Q3. Hammack’s dissent also hints growing divisions on the policy outlook, and the balance of risks, and there appeared to be an element of rebuke from Powell when he said: “some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecasts at this meeting” and adding later “It’s very premature to try to make any kind of conclusion. We don’t know what will be tariffed, from what countries, for how long and what size. We don’t know whether there will be retaliatory tariffs. What the Committee is doing now is discussing pathways and understanding the ways in which tariffs can affect inflation.” Market rate expectations have been volatile all year, that is likely to persist into 2025.

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