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BOJ to spring a Christmas


Here are the week’s key events: 

After a deluge of central bank activity last week, the Bank of Japan assumes the mantle this week as it lays the ground for normalising policy next year. US core PCE inflation – the Fed’s preferred price metric – is the major data release ahead of the Christmas holidays. UK inflation will likely set the tone for Bank of England rate cut expectations. 



Germany’s economy has stuttered and spluttered its way towards 2024. The latest German ifo business climate survey will provide the final snapshot of sentiment among firms in 2023. Germany’s manufacturing downturn appeared to ease in November and the last survey was a slight improvement – will expectations for rate cuts by the European Central Bank next year help to further boost sentiment? 



Bank of Japan meeting – could we be in for a Christmas surprise again this year as we had in 2022? Perhaps not. Sources have indicated the BoJ sees little need to end negative rates in December, lacks proof of sustainable inflation and will reach a decision on when to pull the trigger on ending negative rates based on data up to the last minute. The inclination is to assume that the BoJ is prepared to wait a little longer before normalising policy – but it has form in surprising markets with unexpected moves. At the moment, markets are fully pricing in a rate hike by the end of April. 



Sterling traders will be watching the latest UK CPI inflation report for clues about how the Bank of England will pursue monetary policy next year, with cuts currently priced for June.  Wage growth last week cooled – markets brought forward rate cut expectations afterwards, but inflation remains stubbornly higher than peers.  UK core inflation at 5.7% is notably above average and indicates the BoE has a problem if it wants to lower rates. Last month’s headline rate of 4.6% was better than expected. Also check US existing home sales and the latest Conference Board consumer confidence survey. 



The final read on US third-quarter GDP is delivered alongside the weekly unemployment claims figures, with the latter shining a more forward-looking light on the health of the US economy.  The Philly Fed manufacturing index will also be parsed after another decline in November pointed to ongoing softness. Canadian retail sales figures will be one to watch for CAD crosses, whilst Japan’s national core CPI inflation data is one for JPY in the wake of the BoJ decision earlier in the week. 



The last day of trading before the Christmas break could be a quiet one with desks thinning out. But the data keeps on coming: German import prices, UK retail sales and Canadian GDP figures are among the many releases, but it’s the core PCE inflation index from the US that is the main event. A month ago this declined to 3.5% from 3.7% before, or +0.2% month-on-month, pointing to cooling price pressures but still indicating the absolute level of inflation remains too high for the Fed.  

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