Financial markets are fairly confident that the US Federal Reserve, Bank of England and European Central Bank are not going to do change interest rates next week but some drama is still expected.
However, economists and traders are increasingly giving up on the ‘higher for longer’ message on interest rates that central banks have been pushing, with forecasts for cuts next year being increased every week.
Each central bank is likely to push back to different degrees at the number of cuts the market is predicting.
While the Fed is the most influential on markets, the ECB may be the one to watch this week, as it is seen as leading the way on cuts next year.
US Fed
First up on Wednesday, the Federal Open Market Committee (FOMC) meeting is expected to deliver the third consecutive no-change decision.
This will pretty much confirm what most market participants already feel – that US interest rates have peaked.
Today, markets are pricing 125 basis points of rate cuts over 2024 to end next year at around 4.0%, though economists are less doveish, according to the last Reuters poll.
December’s FOMC meeting will include an update to the committee's summary of economic projections (SEP), aka ‘dot plot’ chart conveying each member’s outlook on interest rates at the end of each year.
Language used in the post-meeting statement will also be key to the market’s reaction, with Bank of America expecting these two methods giving the Fed the chance to “take the initial steps in changing its communication from hawkish holds to dovish holds”.
In last month’s meeting, most participants viewed incoming macro data as pointing to slower growth and greater evidence of disinflation, which makes maintaining a hawkish view while holding policy now no longer a very credible stance, the BofA economists added.
But they predict that US policymakers are not ready to flip from a rate hiking bias all the way to an outright cutting bias, but “the next three to four months, it is likely the case that many FOMC members would view a potential hike as slightly more likely than a cut”.
And hence they suggest that this coming week’s meeting will see the initial steps of turning the dial on the committee’s policy rate outlook to a more balanced view by changing the language used in its statement.
Similar thoughts were echoed by Well Fargo, which said: “Although the post-meeting statement likely will continue to indicate that additional tightening is possible, we would not be surprised for it to hint that another rate hike is less probable.”
The all-important non-farm payrolls data is due today, but next week the big US macroeconomic events are include CPI inflation on Tuesday, producer prices on Wednesday, retail sales on Thursday and flash PMIs on Friday.
BoE
The BoE at 12pm on Thursday is almost certainly also going to stand pat on rates for the third Monetary Policy Committee (MPC) meeting in a row.
Market repricing for UK rates has been less aggressive than for the Fed and ECB, which has helped lift the pound.
Investors are currently expecting three rate cuts next year, with the first move in June, fewer and later than the ECB.
Despite these more modest expectations, the BoE is not happy, with governor Andrew Bailey pushing back “against assumptions that we're talking about cutting interest rates".
Barclays said: “We expect the rhetoric to remain hawkish as the MPC leans against market pricing of 'premature' cuts."
However, the MPC’s “verbal hawkishness may be going too far”, said economist Martin Beck at the EY Item Club.
Based on the easing in inflation and pay growth, he said “there’s a good case for the MPC to start to pivot away from its previous message of keeping monetary policy restrictive for some time”.
Based on recent comments from MPC members, this almost certainly won’t happen in December’s meeting.
Others agreed, such as ING, which said: “With services inflation coming down and wage growth set to follow suit, we think investors are right to be thinking about a summer rate cut.”
Markets currently expect the base rate to be cut to 4.50% by the end of 2024, from 5.25% now.
Other UK macro data in the week includes unemployment on Tuesday; monthly GDP, trade and industrial production data on Wednesday; RICS house prices on Thursday; and GfK consumer confidence and flash PMIs on Friday.
ECB
The ECB is also not expected to change policy on Thursday, just over an hour after their London counterparts.
But markets have made the biggest swing in recent weeks on what Frankfurt will do next year, with five to six cuts currently priced, the first a soon as March, up from three to four cuts at the end of last month as inflation has eased sharply and economic growth slowed.
Showing the type of thinking behind this, Deutsche Bank said it is “leaning into an increasingly dovish ECB call”, having a month ago brought forward the timing of the first ECB rate cut to next June from September and this week predicted a first cut in April and “significant risk of a cut in March”.
This coming week’s press conference, Deutsche’s chief economist Mark Wall said he expect the ECB “to acknowledge that inflation has declined more rapidly than expected”.
But, he expects, Christine Lagarde et al will be “coy about declaring victory prematurely”.
If the ECB lowers forecasts for inflation and growth it is likely to bolster investors’ belief that rates will soon fall, said economists at Pictet.
“The moment you say you aren’t going to hike again, that means the next move is a cut and opens the door to investors speculating on how soon that will happen.”