Week ahead: Fed expected to cut, while BoE set to remain on hold, as UK economy contracts again

Fed rate decision – 18/12 – This week it’s widely anticipated that the Federal Reserve will cut its main benchmark rate again for the 3rd time this year, following on from the 50bps cut in September and the 25-point reduction in November, cutting the main rate to 4.5% and hopefully bringing further relief to the US economy in the form of lower long-term rates. That will be their hope at any rate, however sometimes it isn’t that straightforward, given the market reaction in the wake of the November reduction which saw long term rates initially move higher. We’ve seen them come back down since then with the 5-year and 10-year yields back where they were just before the Fed cut rates. One reason for the stickiness in US rates can probably be put down to the strength of the US economy, which continues to hold up reasonably well, with the jobs market remaining reasonably resilient. There is a concern about the stickiness of headline inflation which appears to be ticking higher again, and this may make the FOMC more cautious about guiding too aggressively when it comes to further rate cuts in 2025 which means this latest meeting could deliver when it comes to this rate cut, however if the FOMC then signal a period for reflection when it comes to further reductions then long term rates could edge higher as markets price out cuts in 2025. This is the balancing act the Fed must walk when it comes to its forward guidance. It also helps to explain some of the more cautious commentary about pre-committing to further cuts especially since there is likely to be some uncertainty about the effects that soon to be President again Trump’s new administration might have when it comes to future inflation expectations. Fed chair Jay Powell certainly isn’t buying into a narrative of signalling certainty about further easing, warning recently that the upcoming December meeting isn’t the lock many think it is for a rate cut. That said there are a number on the FOMC who are comfortable with the idea of another cut. It’s what comes after that markets will be looking for clues on. The reality is they may not get any.    

Bank of England rate decision – 19/12 – Earlier this month we heard from external MPC member Swathi Dhingra urging for further rate cuts from the Bank of England, saying that current policy is too restrictive, and that they were weighing on the UK economy. She cited weak consumer confidence and a reduction in business investment as evidence that rates needed to come down. This shouldn’t be a surprise to many people who have been observing recent Bank of England rate meeting voting patterns. Dhingra was a lone voice voting against rate hikes once the base rate went above 3% and has been voting for cuts since February this year. The problem with this diagnosis is that the current collapse in consumer and business confidence has little to do with Bank of England rate policy and more to do with the economic illiteracy of the current government, which has resulted in the UK economy contracting in both September, and now October.  It is therefore surprising that there hasn't been more talk of Labour crashing the economy with their negative briefings and then the budget, now that we've seen 2 successive months of economic contraction. There is also the small matter that core and services inflation are still well above the Bank of England’s inflation target and while a lot lower than it was at the start of the year, still has a 3 handle. Wages growth is also much higher than the central bank would like, with the recent announcements by the government of inflation busting pay awards to public sector workers hardly likely to help bring it down quicker. This means that while we can expect further rate cuts it doesn’t seem likely that the Bank of England will want to vote for a 3rd cut quite yet, given that in the wake of the November cut, gilt yields rose to their highest levels since October 2022, while several banks also raised mortgage rates. Fortunately, these long-term rates have since come back from those peaks, however the fact that rates jerked higher suggests that markets are concerned about the inflation outlook, even more so since the UK’s economic growth prospects don’t exactly look rosy. Consequently, while we can expect a split decision the majority vote looks set to be a hold on this occasion, given that other policymakers like Catherine Mann appear to be of the view that upside risks to inflation remain a possibility in the short term.     

UK CPI (Nov) M/M – 18/12 – With the Bank of England meeting later this week, and the MPC marginally split when it comes to cutting rates further the recent rebound in headline CPI from 1.7% will be an uncomfortable reminder that UK inflation always tends to be stickier than many would like. Historically inflation in the UK tends to be higher than elsewhere given a lot of it comes through the input channel by way of imported goods, as well as high energy prices. In October headline inflation rebounded from 1.7% in September to 2.3% which was slightly more than expected, while core prices unexpectedly ticked up from 3.2% to 3.3%. Services inflation also remained sticky, edging up to 5%, having slipped to 4.9% in September and its lowest level since May 2022, having been as high as 6.4% at the start of 2024.                       

European flash PMIs (Dec) – 16/12 – Having just seen the ECB cut rates by 25bps for the 4th time this year the European economy isn’t in a good place. That much has been apparent in the manufacturing numbers, however the malaise is now spreading into the services sector which up until recently had been holding up well. In the recent November numbers, this area of the economy is now starting to suffer as well and with both France and Germany undergoing significant political instability it seems unlikely that the respective governments will be able to offer much help in the short term. One bright spot is the Spanish economy, however the other big 3 of Germany, France and Italy are sinking into contraction on the services side, following in the footsteps of their manufacturing sector which all returned readings in the low 40’s in November. This week’s flash December numbers for Germany and France are unlikely to offer any comfort, and the recent ECB rate cut is unlikely to help things much as much as they would like it to.    

UK unemployment/wages (Oct) – 17/12 – While UK unemployment remains low, there is evidence that it could start to rise significantly over the next 12 months if recent reports from small and medium sized businesses are any guide to the government’s recent budget. 2025 could be a worrying time for some UK workers as business adapts to the new challenges it is likely to face in the weeks and months ahead. In the 3-months to September the unemployment rate rose from 4% to 4.3% and the highest level since the middle of the summer when it was at 4.4%. With wages growth likely to be sticky over the next few months as the recent pay settlements in the public sector trickle into the numbers we could be faced with a situation where wage growth remains sticky and the jobless rate starts to rise back to levels we saw back in 2021, when we closer to 5% than 4%.

FedEx Q2 25 – 19/12 – A key bellwether as to the overall health of any economy is how well delivery companies are doing. If the consumer is confident and buying goods and services then companies like FedEx should also be doing well, delivering these same parcels. FedEx has certainly had its ups and downs, spiking higher in June when it reported its Q4 numbers and dropping sharply after reporting its Q1 numbers. Its share price performance has been unremarkable in 2024 since touching its highest level in 3-years back in July, since when it has struggled to get much above $300 a share. Its Q1 numbers were disappointing, revenues slightly lower from the same period the year before at $21.6bn while earnings per share saw a sharp drop, as net income fell from $1.08bn to $790m, largely due to higher costs, as well as less demand for higher priced services. The company also lowered its outlook for the current year, from $18.25 to $20.25 a share, to $17.90 to $18.90 a share, which prompted the share price fall. Q2 profits are forecast to come in at $3.98 a share. 

Nike Q2 25 – 19/12 – Nike shares haven’t had a great 2024, the shares falling sharply in June after warning that quarterly sales would fall 10% in Q1 and cutting their full year guidance for the new fiscal year. The slowdown in revenue the company warned about was expected to be due to a slowdown of sales in China which is one of its biggest markets. Investors had been expecting some sort of slowdown; however, the extent of the pessimism caught them off guard sending the shares to their lowest levels since the covid lows of 2020. We've seen a modest recovery since then, but we’ve not got anywhere close to the level we saw in the summer. When Nike reported again in October the news wasn’t much better for Q1 as the sportswear brand pulled its guidance for the year, falling short on revenue with $11.59bn, while postponing its investor day, although profits were better, coming in at 70c a share. For Q2 Nike said it didn’t expect an improvement on Q1 warnings of a further slowdown in sales of another 10%, as well as warning of a 1.5% decline in gross margins. Nike said it expects online digital sales, or direct sales to be down double digits in 2025 at a time when the company has been focussing on digital sales and taken its eye off the ball when it comes to sales to wholesalers. Incoming CEO Elliot Hill certainly has his work cut out in reinvigorating the brand at a time when global sales growth in footwear is slowing. Investors have accused the company of sitting on its laurels and not innovating, focussing more on direct sales than to wholesalers. This week’s numbers ought to give the market a taste of what if any new approach Hill has in mind in the hope, he can give the share price the boost it needs.