In this episode:
- Asia: Diverging Central Bank Policies and Key Economic Indicators
- Europe: Rate Cuts and Neutral Policy Shifts
- The Americas: Rate Cuts and Data-Driven Decisions
Asia: Diverging Central Bank Policies and Key Economic Indicators
- Japan's Bank of Japan (BoJ): Markets are closely watching the December 19 meeting, with the Tankan survey and wage data being pivotal for gauging corporate and economic health.
- China's Economic Stimulus: CPI, PPI, and aggregate financing data will assess the sufficiency of measures to bolster domestic demand and inflation.
- Australia's RBA: Despite expectations of unchanged rates, weak Q3 GDP and mounting expectations for rate cuts in 2025 dominate discussions.
Europe: Rate Cuts and Neutral Policy Shifts
- Switzerland's SNB: Markets are split between a 25 and 50 basis point rate cut, with inflation having already fallen to 0.7% year-on-year.
- ECB's Policy Increment: Focus shifts back to 25 basis point cuts, with the governing council emphasizing proximity to neutral rates amid expected downward growth and inflation revisions.
- UK's Domestic Demand Concerns: Limited data but growing anticipation of more substantial rate cuts in 2025 to address economic weaknesses.
The Americas: Rate Cuts and Data-Driven Decisions
- Canada's Divergence: A potential 50 basis point rate cut reflects disappointing growth and inflation already meeting targets.
- US Fed Reaction Function: Key CPI data will shape expectations for a December 18 rate cut, as markets anticipate a 25 basis point reduction amidst weaker economic data.
- South America's Dynamics: Developments in Brazil, Mexico, and Argentina play a backdrop to North American policy focus.
Transcript
Matt Jones
Welcome to "The Long & Short of the Week Ahead", a production of Eurizon SLJ Capital that takes a look at the macro-economic themes of the week ahead and has been recorded for professional investors.
My name is Matt, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.
Welcome back, Neil. It's great to have you here with us again.
Neil Staines
Thank you very much Matt. It's great to be here.
Matt Jones
So despite the fast approaching holiday season, markets are maintaining an elevated pace at the moment with some very important data, central bank action, global geopolitical events. But perhaps we can take a slightly different approach this week and look at things geographically. So first of all, what are we looking out for in Asia?
Neil Staines
Yeah, thanks very much, Matt. In Japan next week markets will be very much focused in honing expectations towards the Bank of Japan's 19th of December meeting.
Currently we're pricing around 16 basis points of a rate hike or 63%, notably, the Bank of Japan moving in the opposite direction to all other major central banks at the moment.
The data will be key with trade data and Q3 GDP, Although that's the final reading there. The big focus next week will be on the quarterly TANKAN survey the short term economic survey of corporates split between small and large corporates and manufacturers and non manufacturers.
And that should give us a better picture about the corporate trajectory. Bank of Japan Nakamura said this week that they are closely watching the tank can and wage data before the meeting. Household spending this week has disappointed. But wage data has remained strong pushing its biggest annual gain since 1994 at plus 2.8 percent year on year and keeping the Bank of Japan clearly on track. The progress of the Bank of Japan hiking cycle and at least versus or relative to the rest of the world's cutting cycles will be a very big focus going into 2025. But the TANKAN data will be a big focus for markets this week.
In China, the ongoing debate around the sufficiency of the economic stimulus, or the boost to both domestic demand and inflation, remains key for financial markets. Next week, we get the CPI and PPI print on Monday, and the aggregate financing data on Monday. At some point from Tuesday onwards, both will give a gauge to the current state of disinflation and the domestic demand.
And we get the Central Economic Work Conference next week. And that'll be very important to align the prospects for, economic stimulus going forward and in particular, how that sets up the domestic economy against the potential threat of tariff imposition from the Trump administration. We also get the RBA. As we discussed last week, there was plenty of upcoming data. Q3 GDP data in particular came in very weak. Although retail sales and household spending held up a little better inflation, disappointing to the downside it's still a complicated backdrop for the RBA. And while the expectations are that they remain unchanged next week, there are growing anticipation and expectations for rate cuts next year, with three currently priced for 2025.
Matt Jones
Now, politics have been a dominant theme of late in Europe, notably Germany, France and the UK, the implications of which is likely more significant for 2025 so what are the more immediate considerations and focal points for markets in Europe next week?
Neil Staines
Yeah, good question, Matt. That's it's very interesting.
We get little from the UK next week, some house price data from Rightmove and from Ricks. Very low implied probability of a rate cut in the UK this December. But we certainly think that there's a potential for greater rate cuts next year than the market is currently pricing on the back of domestic demand weakness.
Switzerland, not a country we talk about particularly often , but it's very interesting next week. The market is almost 50 50 between a 25 and 50 basis point cut in December, and that's after three 25 basis point rate cuts in December. Since March of 2024, will the SMB increase the increment now as we approach that zero bound rates currently standing at 1 percent it would be bold, but the expectation of the market is still there.
Swiss trades at its strongest level versus the euro. In history, apart from the spike that we had in the gap after the SNB removed the floor in the Euro Swiss in 2015. Downside inflation risk remains a function of that, and that inflation already stands at just 0. 7 percent year on year after the November print.
So a very interesting focus in Switzerland. Will they go 50 or stick to just 25 basis point increments? In the, in Europe. And the ECB, the the focus is let's start that again. But really the big focus is on the ECB. Over recent weeks, the market expectations for the ECB have converged back towards 25 basis points as the active ECB policy increment again, markets had expected at some point that the ECB would shift up the pace of rate cuts or the size of rate cuts to 50 basis point increments. Although that risk premium has been priced out of markets of late. The interjection of governing council member Isabel Schnabel was instrumental in that the ECB may not be so far away from neutral rates was the emphasis from Schnabel And thus that monetary caution should accompany such proximity to that neutral level. Now we expect the ECB to cut 25 basis points and for it to drop its restrictive bias. We also expect downward revisions to growth and inflation and that will bring them back into closer balance with market expectations. It's likely that they maintain the optionality around the prospect of a 50 basis point cut going forward. So we may expect some language around of the that further disappointments could open the door to faster rate cuts in 2025.
But as we see it, it's more likely. That the ECB move away from data dependence and more towards the debate over getting rates to or now even below that neutral level. So a big focus on the neutral level for the ECB, but the emphasis likely to swing back towards 25 basis points as the active policy increment.
But it will be a big focus nonetheless across Europe and European markets.
Matt Jones
And finally, the Americas. Obviously there's plenty of interesting developments across South America, notably Brazil, Mexico, and even Argentina. But let's stick to North America. So what are you looking out for in the US and Canada next week?
Neil Staines
Yeah, absolutely. Canada next week is going to be an interesting event, not just in relation to the divergence that we've seen between Bank of Canada and the Fed, but on Wednesday, the markets, the analysts that is, are expecting a 50 basis point rate cut.
The pricing in the market itself is somewhere closer to 40 basis points, but still well in excess of that. Of that 25 basis point increment expected growth has been disappointing in Canada and inflation is already at target. However, the real focus of next week will likely still be in the U. S. And as we discuss in slightly further in this week's blog all about the data implications for the Fed reaction function in December and the implied reaction functions from the Fed going into 2025. The CPI next week is the last top tier print before the December the 18th FOMC and would therefore be very closely watched. We see the default position as things stand bearing in mind, we are recording this pre the November payroll print as a 25 basis point cut in December with data broadly in line with or weaker than expected in the period between now and that FOMC.
Overall, we may be approaching the holiday season but there's no time for the mince pies just yet and no rest for financial markets at the moment.
Matt Jones
Fantastic. Thank you for joining us once again and outlining your thoughts on the week ahead. I look forward to catching up with you again next week.
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