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Central Bank Blockbuster

 

Here are the week’s key events: 

It’s a blockbuster week for central bank action with the Federal Reserve, European Central Bank, Swiss National Bank, and Bank of England all in action with policy meetings. All four seem likely to keep interest rates on hold. The key for market watchers is the extent to which there is any change to the higher-for-longer messaging or whether they seek to push back against the market pricing in aggressive rate cuts in 2024. 

 

Monday  

Markets will digest the Chinese inflation reports from over the weekend, looking to see if outright deflation is the order of the day and something that we can expect to be exported westwards. We get an early taste of the central bank mood with a speech from RBA governor Bullock. A 10yr Treasury auction will be watched ahead of the FOMC meeting and markets will be still playing out the results of Friday’s nonfarm payrolls report.  

 

Tuesday  

The last big piece of economic data for the Fed is the monthly US CPI report for November. Inflation declined to 3.2% in October, the first drop in four months, sparking a decline in Treasury yields and boosting stocks. Core inflation rose 4.0%, the slowest pace of growth since September 2021. The data added to the growing sense in the market that the Fed is done with hiking and looking closely at when to begin cutting rates.  

 

Wednesday  

Fed Day! The FOMC is almost certain to hold the target range for the fed funds rate between 5.25% - 5.50%. This would be a third straight pause and all but nail on that the terminal rate has been reached. More important for the market will the new economic projections and so-called dot plot to gauge where policymakers think rates will in 2024. The market is currently pricing in aggressive cuts next year but so far Fed speakers have not gone along with this narrative – the December meeting provides the moment to shift the tone to lean into what the market is forecasting. 

 

Thursday  

The Bank of England is probably also done with policy tightening and will leave its Bank Rate at 5.25%, having paused already in November. UK interest rate swaps indicate the BoE will be cutting rates next year, though governor Andrew Bailey has been cautious about endorsing this view, pointing out that inflations remain too high and dismissing rate cut chatter. The ECB is will also pause with inflation down to 2.4% and markets now expecting 150bps of cuts in 2024 it will be a hard line for Lagarde to trade. Meanwhile the Swiss National Bank may also choose to maintain its policy rate at 1.75% after a decline in inflation. Swiss CPI declined to 1.4% year-on-year, from 1.7% in October, the sixth month in succession that the reading has remained within the SNB's price stability target range. 

 

Friday  

Central bank action out of the way the focus returns to the economic data with the flash manufacturing and services PMIs for the Eurozone, UK and US. China’s latest industrial production and retail sales figures will be parsed for the state of the nation’s output and domestic demand. Later in the day is the Empire State manufacturing index. 

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