The Last ‘Proper’ Trading Day Of The Year

N.B. – Publication of this daily note will resume on Monday 6^th January 2025. I’d like to wish all readers a very merry Christmas, and a Happy New Year!

WHERE WE STAND – The post-FOMC yo-yo price action persisted yesterday, as participants continued to digest Powell & Co’s hawkish 25bp cut on Wednesday, though a decent chunk of the market moves seen during the decision itself pared as yesterday progressed.

As so often tends to be the case, markets had shifted to a hawkish extreme amid Powell’s remarks, before then gradually edging back from said extreme as the dust settled, and calmer heads prevailed, yesterday.  

This was perhaps most evident in the FX space, where the greenback finding sellers against most G10 peers, seeing the DXY slide back under the 108 handle intraday, while the EUR managed to reclaim $1.04 intraday. Some profit taking in long USD positions isn’t especially surprising here, given the rapid nature of yesterday’s rally, though I, personally, remain a dollar bull, and a firm believer in the case for ‘US exceptionalism’.

Actually, that brings me neatly on to my one-word macro outlooks for 2025:

• US: Exceptionalism
• UK: Stagflation
• Eurozone: Stagnation
• China: Disappointment
• Japan: Normalisation

We can revisit those in 12 months’ time and see how accurate they prove to be, or whether a ‘black swan’ event throws a spanner in the works.

Back to yesterday, and there were plenty of catalysts for participants to digest.

A dovish hold from the BoJ, with Governor Ueda seemingly in no hurry to deliver another 25bp hike, sparked a sizeable sell-off in the JPY, as USD/JPY climbed north of the 157 handle, with spot briefly trading to its highest since mid-July. The window for the BoJ to hike further is shutting rather rapidly, as policy normalisation progresses elsewhere in G10. Nevertheless, Governor Ueda will be speaking again on Christmas Day (I wish I was joking!), which may perhaps offer greater clarity on the conditions required to unlock another rate hike. Still, as the BoJ turn more dovish, just as Fed Chair Powell releases his inner hawk, further upside in USD/JPY seems plausible.

Thursday also brought the final policy decision of the year from the ‘Old Lady’, with the BoE standing pat, as expected, maintaining Bank Rate at 4.75%. The vote split, though, was considerably tighter than expected, with three of the 9-member MPC (Dhingra, Taylor, and Ramsden) dissenting in favour of a 25bp cut. The quid was, predictably, sold on the back of the dovish vote split, though cable did just about manage to cling onto the $1.26 handle.

My BoE base case remains that 25bp cuts are delivered once per quarter next year, with the next such cut coming in February. Risks to this view, though, are tilted to a more dovish outcome, amid increasing signs of overall economic momentum stalling, and with risks to the labour market tilted to the downside, amid the upcoming changes to National Insurance. Were a greater degree of labour market slack to dramatically reduce overall demand, thus leading to an easing in stubborn services inflation, this could lead to a faster pace of normalisation from the BoE, though firm hints in this direction are unlikely until the second quarter, at the earliest.

We also heard from the Riksbank and the Norges Bank, yesterday, neither of whom delivered any surprises. The Riksbank duly delivered a 25bp cut, as well as gain flagging the likelihood that another such cut will be delivered in the first half of next year. Meanwhile, the Norges Bank held rates steady at 4.50%, while repeating that this cycle’s first cut will most likely come in Q1 25.

LOOK AHEAD – We’ve made it! The final day of the final full working week of 2024 is finally upon us!

A busy-ish economic calendar awaits. Here in the UK, this morning brings the latest retail sales report, with sales set to have risen by 0.5% MoM in November. However, the ONS’ reference period for the figure likely fell before the majority of ‘Black Friday’ discounting begun, which may pose some downside risk to consensus expectations. The latest public sector borrowing figures are also due, and will be of particular interest given the perilous fiscal backdrop, especially after the 10-year Gilt yield rose to a fresh post-Budget high north of 4.60% yesterday.

Elsewhere, the stateside calendar sees the latest PCE inflation figures scheduled. Chair Powell, helpfully, informed us at Wednesday’s press conference that headline PCE is set to have risen by 2.5% YoY in November, with the core print having risen 2.8% YoY. Hence, the figures are unlikely to spring much by way of a surprise. The same can be said of the final UMich consumer sentiment print, which is seen unrevised at 74.0.

Once that’s out of the way, we can all go to the pub. A merry Christmas to all!