CPI Cements December Fed Cut, ECB Eyed Today

WHERE WE STAND – The November CPI figures, released yesterday, cemented the case for a 25bp cut from the FOMC next week, igniting a sharp rally in risk assets as a result.

Headline prices rose 2.7% YoY last month, the fastest pace since July, albeit a rate in line with consensus expectations, while core inflation rose by 3.3% YoY for the third month running. While these metrics remain somewhat on the tepid side, and the disinflationary path back to the 2% price target remains a bumpy one, the figures are highly unlikely to deter the FOMC from further normalising policy next week.

As discussed previously, the FOMC’s focus has - for now at least - shifted from inflation, to developments in the labour market. With unemployment having unexpectedly risen to 4.2% in November, and with evolving broadly in line with expectations, there is little to deter policymakers from another 25bp cut, particularly when risks to either side of the dual mandate are seen as being roughly in balance.

That said, risks are likely to become considerably more two-sided as we head into 2025, with policymakers likely concerned about the inflationary impact of incoming President Trump’s tariff plans, and broader reflationary fiscal stance, which should underpin demand, and may further risk embedding persistent price pressures. Combined with the continued bumpy disinflationary progress, and likelihood that policymakers seek to slow the pace of easing as rates approach neutral, a ‘slip’ at either the January or March meeting is a relatively high likelihood, with the pace of policy normalisation next year likely to be considerably slower than that seen in 2024.

I wonder, though, whether the Bank of Canada have provided something of a blueprint for the FOMC to follow. The BoC delivered a second straight 50bp cut yesterday, taking benchmark rates to 3.25%, though simultaneously removed a pledge to ease further were the Bank’s economic forecasts to materialise. A similar statement from Powell & Co. seems likely some time in the first quarter, thought next week is too early to anticipate such a pivot.

In any case, the loonie firmed after the BoC announcement, as USD/CAD backed away further from the near 4-year highs seen earlier in the day.

Overall, yesterday was a day of modest USD demand, with the buck navigating the dovish implications of the CPI report with relative ease, as the DXY continued to hover around the 106.50 mark.

That USD demand emanated principally from reports, via Reuters that Chinese policymakers may be content to allow the CNY to weaken next year, as the threat of Trump trade tariffs looms. This speaks further to my long-running idea that authorities there are likely seeking to keep their powder dry for now, waiting to see the specifics of any policies that the incoming US administration may unveil before pulling the trigger on any further fiscal stimulus. Still, I wouldn’t be touching the China market with a barge pole, stimulus or not.

Sticking with Asia, Bloomberg sources reported yesterday that the BoJ are said to see ‘little cost’ in waiting to deliver another 25bp rate hike. One would’ve expected these reports to have strengthened the JPY, though they actually had the opposite effect, with USD/JPY rallying close to the 153 mark, before paring gains.

This seemed to be a result of further reports that policymakers see there being “less risk” of a weak yen resulting in upward inflationary pressures. Frankly, though, it’s been a long year, and second-guessing the BoJ is a fool’s errand at the best of times, let alone when everyone is winding down into Christmas!

Elsewhere, yesterday, gold built upon Tuesday’s close above the 50-day moving average, benefitting from the in-line CPI report to trade back above $2,700/oz once more. The yellow metal has been something of a momentum juggernaut this year, and it would appear that said momentum is back with the bulls once again. I’d not be keen to fade the rally at this juncture.

Meanwhile, crude traded firmer on the day, with WTI rallying around 2% to test $70bbl to the upside, despite OPEC+ trimming their demand projections for the fifth time this year. In fact, global demand is now seen at just 1.6mln bpd, a whopping 27% fall from the July forecast. Against this backdrop, it should be little surprise that planned production hikes were pushed back by three months last week, with further such delays impossible to rule out.

Finally, equities on Wall Street enjoyed a positive day, with the tech-heavy Nasdaq 100 leading the way higher, as stocks found form amid the dovish repricing of Fed expectations. I remain a bull, here, and continue to envisage a solid rally into year-end, particularly with the majority of this year’s scheduled event risk - barring next week’s FOMC decision - now out of the way, clearing the path to further upside.

LOOK AHEAD – ‘ECB Day’ is upon us, with Lagarde & Co. set to deliver another 25bp deposit rate cut this lunchtime, while reiterating the longstanding data-dependent, meeting-by-meeting guidance, refusing to pre-commit to a particular future policy path. Key for the direction of the EUR will be comments from Lagarde, or post-meeting sources reports, as to whether a larger 50bp cut was discussed, and the likelihood of such a move at coming meetings.

Elsewhere, the SNB are also set to announce policy, with a 25bp cut to 0.75% foreseen, albeit with a negligible chance of a larger 50bp move. As is usually the case with the SNB, focus will likely fall more on commentary on the valuation of the CHF, than the rate move itself.

Stateside, a busy-ish data docket awaits. The weekly jobless claims figures will be of some interest, though neither the initial nor the continuing claims print pertains to the December nonfarm payrolls survey week. November’s PPI figures are also due, with factory gate prices set to have risen 2.6% YoY last month, a touch above the pace seen in October. 30-year supply is also due late in the day.