Four key events to follow next week

This week, central banks around the globe made significant monetary policy decisions. While the Reserve Bank of Australia maintained its interest rate, the Bank of Canada, the Swiss National Bank, and the European Central Bank all implemented rate cuts. Let's take a closer look at what to expect next week.

PMI figures - Monday, 16th of December

In November 2024, PMI figures across the Eurozone, UK, and US globally revealed notable contractions in manufacturing and slowing growth in services. Here's a summary of the key trends and expectations for December:

Eurozone

• Manufacturing PMI: Declined to 45.2, signaling a deeper contraction in the sector.

• Services PMI: Revised slightly upward to 49.5 but remained in contraction territory, marking the first decline in service output since January 2024.

• December Forecast: Modest improvement expected, with manufacturing PMI at 45.4 and services PMI crossing into expansion at 50.7.

United Kingdom

• Manufacturing PMI: Revised downward to 48, reflecting the sharpest contraction since February.

• Services PMI: Revised upward to 50.8, but at a rate being the slowest since the expansionary phase started in November 2023.

• December Forecast: Market participants expect manufacturing PMI figures to remain unchanged at 48 and services to slightly weaken at 49.5.

United States

• Manufacturing PMI: Revised upward to 49.7.

• Services PMI: Revised downward to 56.1, maintaining strong growth and marking the fastest expansion since March 2022.

• December Forecast: Stability anticipated, with manufacturing at 50 (neutral) and services steady at 56.

Fed monetary decision - Wednesday, 18th of December

The Federal Reserve (Fed) appears on track to lower interest rates by 25 basis points at its upcoming meeting, bringing the benchmark rate to 4.50%. Markets now place a 96.4% probability on the cut, compared to 71% a week ago, reflecting growing confidence in the Fed's near-term easing path despite mixed signals from inflation data.

Source: FedWatch Tool from the CME

The latest Consumer Price Index (CPI) report showed prices rose 2.7% annually in November, slightly up from October’s 2.6% but aligned with economists’ expectations. On a monthly basis, CPI increased by 0.3%, the largest gain since April, after four months of 0.2% increases. While inflation has cooled from its peaks, it remains above the Federal Reserve's 2% target, suggesting that price pressures persist.

The election of Donald Trump as the next U.S. president complicates the inflation outlook. His proposed policies—such as tariffs on imported goods, corporate tax cuts, and immigration curbs—are considered potentially inflationary. If implemented, these measures could increase costs across the economy, challenging the Federal Reserve’s strategy of gradual rate cuts.

Adding to inflation concerns, the Producer Price Index (PPI)—a measure of wholesale inflation—rose 0.4% monthly and 3% annually in November, marking the highest yearly increase since February 2023. While core PPI (excluding food and energy) rose a more modest 0.2% for the month, its annual rate remained elevated at 3.4%.

Despite these developments, most economists and market participants expect the Fed to proceed with the December rate cut, citing slowing inflation trends overall and the need to support economic growth. However, uncertainties surrounding inflation and Trump’s policy agenda could complicate the Fed's path in 2025, potentially altering the pace or direction of its monetary easing strategy.

Bank of Japan monetary decision - Thursday, 19th of December

While recent data might have been boosting rate hike odds from the Bank of Japan (BoJ) for some analysts, others believe that the BoJ will keep its key interest rate unchanged at 0.25% during its monetary policy meeting on December 18–19, 2024, marking the fourth consecutive meeting without a rate hike. This stance comes as policymakers seem to seek more clarity on overseas risks and next year’s wage growth before deciding on further tightening.

Market speculation has intensified regarding when the BoJ might raise rates, with December and January seen as potential options. Recent data showing accelerating wholesale inflation—up 3.7% year-on-year in November compared to forecasts of 3.4%—has kept the central bank under pressure to act. Rising raw material and labor costs have pushed businesses to pass on higher prices, underscoring persistent inflationary pressures.

However, some factors may allow the BoJ to delay action. The Japanese yen has strengthened in recent weeks, easing the risk of imported inflation from a weaker currency. This development reduces the urgency for immediate rate hikes, giving the central bank more time to assess global economic uncertainties and the broadening impact of wage increases expected in 2025.

Weekly USD/JPY Chart - Source: ActivTrader

While a decision to hold rates in December appears likely, a surprise rate cut could occur. Analysts also anticipate that the BoJ could raise rates at its January or March meeting. By then, policymakers will have more comprehensive data on wage trends and inflation dynamics, allowing for a more informed judgement on the timing and scale of monetary tightening.

Bank of England monetary decision - Thursday, 19th of December

The Bank of England (BoE) reduced its key interest rate to 4.75% in November, marking the second cut this year following a reduction from 5.25% to 5% in August. The decision, widely anticipated by economists, reflects efforts to balance slowing inflation with persistent concerns over economic stability.

Inflation in the UK had fallen significantly from its peak of over 11% in 2022, reaching the BoE’s 2% target in May 2024. However, since then, inflationary pressures have resurfaced. The Consumer Price Index (CPI) rose by 2.3% in the year to October, up from 1.7% in September, marking its highest level in six months. Core CPI, which excludes volatile items like energy and food, also climbed to 3.3% in October, up from 3.2% the previous month.

Despite these increases, BoE Governor Andrew Bailey suggested that rates are likely to "fall gradually" over time, contingent on inflation staying near the target. However, inflationary risks persist, fueled by Britain’s tight labor market and the government’s recent tax and spending plans, which have added uncertainty to the inflation outlook.

Looking ahead to December, the BoE is expected to keep interest rates on hold as it adopts a cautious approach to further easing to make sure that inflation stays close to its 2% target, potentially lagging behind central banks in Europe and on the other side of the Atlantic.

Source: Bank of England’s Monetary Policy Report - November 2024

The central bank now projects inflation to rise to 2.75% next year—higher than earlier forecasts—before gradually returning to its 2% target. Meanwhile, forecasts indicate a modest improvement in economic growth, with a projected GDP increase of 0.75% over the next year.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.