Weekly Market Forecast (December 16-20)

FUTURE EVENTS:

• Monday: China Retail Sales and Industrial Production, Japan/Eurozone/UK/US Flash PMIs.
• Tuesday: UK employment report, Canadian CPI, US Retail Sales, US Industrial Production and Capacity Utilization, US NAHB Housing Market Index.
• Wednesday: UK CPI, US Housing Starts and Building Permits, FOMC Policy Decision, New Zealand Q3 GDP.
• Thursday: BoJ Policy Decision, BoE Policy Decision, Q3 US Final GDP, US Jobless Claims.
• Friday: Japan CPI, PBoC LPR, UK Retail Sales, Canadian Retail Sales, US Core PCE.

Monday

Monday is Flash PMIs Day with a particular focus on Eurozone, UK and US PMIs as they could impact market expectations regarding interest rates.

• Eurozone Manufacturing PMI: 45.3 expected vs 45.2 previously.
• Eurozone Services PMI: 49.5 expected vs 49.5 previously.
• UK Manufacturing PMI: 48.2 expected vs 48.0 previously.
• UK Services PMI: 51.0 expected vs 50.8 previously.
• US Manufacturing PMI: 49.8 expected vs 49.7 previously.
• US Services PMI: 55.7 expected vs 56.1 previously.

Tuesday

UK Employment in the three months to October is expected to be -12K vs. 219K previously, and the Unemployment Rate is expected to remain unchanged at 4.3%.

The Average Earning Bonus is expected at 5.0% vs. 4.8% previously, while the Average Earning including Bonus is seen at 4.6% vs 4.3% previously.

This report is unlikely to change the market's expectation that the BoE will remain on hold this week unless we see significant deviations from forecasts, particularly in terms of wage growth.

The CPI Y/Y in Canada is expected to be 2.0% vs. 2.0% before, and the M/M figure is seen at 0.1% vs 0.4% before. The CPI Y/Y Trimmed-Mean is expected at 2.6% vs. 2.6% before, and the Average Y/Y CPI is seen at 2.4% vs. 2.5% previously.

The recent BoC drop the line saying “if the economy grows more or less in line with our latest forecast, we expect to reduce the policy rate further”, which indicates that we have reached the peak of divisiveness and that the central bank will now switch to 25 bps cuts and slow the pace of easing. .

M/M US Retail Sales is expected at 0.5% vs. 0.4% previously, while the M/M ex-Autos measure is seen at 0.4% vs. 0.1% previously. The focus will be on the Control Group M/M figure which is expected at 0.4% vs -0.1% previously.

Consumer spending has been steady which is what you would expect given the positive real wage growth and stable labor market. We have also seen a strong increase in consumer sentiment/confidence reports which indicate that the financial situation of consumers is stable/improving.

Wednesday

UK CPI Y/Y is expected at 2.6% vs. 2.3% before, and the M/M figure is seen at 0.1% vs. 0.6% previously. The Core CPI Y/Y is expected to be 3.6% vs. 3.3% previously, and the Services CPI Y/Y is seen at 5.1% vs. 5.0% previously.

As previously mentioned, the data is unlikely to change market expectations that the BoE will remain on hold this week unless we see significant deviations from forecasts. The market sees an 87% probability of no change at this week's BoE decision and around three 25 bps cuts in 2025.

The Fed is expected to cut 25 bps bringing the FFR to 4.25-4.50%. We also get an updated Summary of Economic Projections (SEP) where growth and inflation should be revised upwards, and the Dot Plot is likely to show two rate cuts in 2025. Fed Chairman Powell acknowledged the strength of US data and announced a slowdown in the pace of easing.

This should already be priced in as the market expects just two rate cuts in 2025 with the first coming in March at the earliest. Therefore, market participants will look for deviations from the expectations and the data will have the last word in Q1 2025.

Thursday

The BoJ is expected to keep interest rates unchanged with the market pricing in a similar 77% for such a move. A couple of weeks ago a rate hike was the most likely course of action but the odds have receded as the JPY strengthened.

The data has been for an increase but it is not really screaming for it. The recent “leaks” spoke of the BoJ seeing little cost in waiting, so the market turned its focus to the January meeting, although there are higher chances for walk in March.

The focus will be on the direction of market participants receiving announcements from Governor Ueda's Press Conference.

The BoE is expected to keep the bank rate unchanged at 4.75%. Dhingra is expected to be the only dissenter. Inflation data recently came in on the hotter side and BoE spokespeople seem to be in favor of a “gradual” easing that marks a quarterly rate cut, as already mentioned by Governor Bailey.

US Jobless Claims remains one of the most important releases to follow each week as it is a more timely indicator of the state of the labor market.

Initial Applications remain within the 200K-260K range generated from 2022, while Continuing Applications continue to hover around the cycle levels.

This week initial bids are expected at 229K vs. 240K previously, while there is no consensus for Continuing Claims at the time of writing although it has been increased to 1886K against 1871K previously.

Friday

Japanese Core CPI Y/Y is expected at 2.6% versus 2.3% previously. We've already seen Tokyo Core CPI beat expectations, so it shouldn't affect market expectations too much though a possible upside surprise after the BoJ hold hawkish to boost the JPY.

There is no expectation of the LPR position with the PBoC although the move announced by the Politburo recently, we could see significant cuts which would be the first hard step for a “moderate” monetary policy loose”.

US PCE Y/Y is expected at 2.5% vs. 2.3% before, and the M/M ratio is seen at 0.2% vs 0.2% before. Core PCE Y/Y is expected to be 2.8% vs. 2.8% before, and the M/M figure is seen at 0.1% vs. 0.3% previously.

Forecasters can estimate the PCE once the CPI and PPI are out, so the market already knows what to expect. Therefore, if we do not see a deviation from the expected numbers, it should not affect the current market prices.