Markets
When (core) markets barely move the way they do today it’s because there’s little news or important events are looming. It’s both in this case. An empty economic calendar and the Fed policy meeting tonight resulted in technical and directionless trading in FI and FX markets. US yields swapped tiny gains of 1.5 bps for losses of 2 bps the moment first US investors joined the arena. German bunds marginally underperform Treasuries, rising up to 2.8 bps at the very long end of the curve. We did have UK inflation numbers for November featuring the agenda but they came too close to expectations to leave a mark. Headline inflation picked up to 2.6% as anticipated but core (3.5%) and services (5%) price pressures missed the mark by 0.1% ppt. The slight downside miss is not enough to offset sharper-than-expected wage growth in yesterday’s labour market report. If anything, UK money markets price in less rate cuts after this morning’s CPI outcome. Markets barely price in a cumulative 50 bps for 2025 – after tomorrow’s widely anticipated status quo. Gilts underperform peers for a second day. Yields add between 1.4 and 3.4 bps across the curve. Sterling quickly erased negligible kneejerk losses to trade unchanged around EUR/GBP 0.825. EUR/USD isn’t going anywhere either (+/- 1.05). The rest of the G10 FX landscape shows daily changes of less than 0.5%.
Jumping to tonight’s Fed decision now. A rate cut from 4.5-4.75% to 4.25-4.5% is all but certain. Markets have more or less fully discounted such a scenario since the lack of an upward CPI surprise last week. After three consecutive rate cuts (50-25-25) we expect the Fed to steer the market to a pause in January. Chair Powell last month referring the strong economy said there’s no hurry in lowering the policy rates. It also offers the Fed a moment to get a sense of president-elect Trump’s policy goals when entering the office on January 20. The updated dot plot will show fewer rate cuts for 2025 with three reductions instead of the current four the most plausible scenario. We think that the long-term estimate, a proxy for the neutral rate, will have shifted further north from 2.875% to 3%. It was already a close call in September. Since US money markets price in only 50 bps of cuts in 2025, we may see a kneejerk downleg in US (front-end) yields and the dollar after the dot plot release. It won’t stretch very far though if Powell strikes a generally hawkish tone in the presser afterwards by keeping the onus on the solid state of the economy. That should offer solid support to both yields and the dollar, the latter especially against an ongoing ailing euro. First meaningful support in EUR/USD is at 1.0335 (November correction low).
News & Views
The Confederation of British Industry (CBI) reported falling volumes in the final quarter of the year as growth expectations weakened further. The CBI’s quarterly Industrial Trends Survey showed manufacturing output volumes falling at the fastest pace since mid-2020 with manufacturers expecting another steep drop in Q1 2025. Total orders were the weakest since late 2020. Against a backdrop of weak demand, manufacturers’ stocks of finished goods remain relatively high at levels seen during the early stages of the Covid pandemic. CBI’s lead economist warned that “Manufacturers are facing a perfect storm of weakening external demand on the one hand, amid political instability in some key European markets and uncertainty over US trade policy. And on the other hand, domestic business confidence has collapsed in the wake of the Budget, which has increased costs and led to widespread reports of project cancellations and falling orders.” Meanwhile, expectations for selling price inflation picked up noticeably and is forecast to comfortably stick above the long-run average.
Polish consumer confidence improved slightly more than expected in December, from -17.1 to -16.7 (vs 17 consensus). Apart from last month, it’s still the weakest number of this year. Details showed biggest improvements in the current possibility of making important purchases and in the current economic situation of the country. The only decrease came on account of the evaluation of the current financial situation of households. The Polish zloty was unmoved by the numbers, sticking to the YTD highs around EUR/PLN 4.25. Tomorrow’s November wage and employment figures have more market moving potential.
 we expect the Fed to steer the market to a pause in January.){kind=link}