As the world’s major central banks convene for policy meetings this week, all eyes are on the U.S. Federal Reserve. However, it’s the Bank of Japan (BOJ) that might deliver an unexpected twist. The Bank of England (BoE), BOJ, Norges Bank, and Sweden’s Riksbank will announce their rate decisions on Thursday, following the Fed’s announcement on Wednesday. Current market pricing suggests a 20% probability of a BOJ rate hike, yet the anticipation of higher rates in Japan is palpable, with over 40 basis points of hikes priced in by the end of 2025.
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UK Inflation Data and BOE Expectations
Preceding the Fed’s announcement, UK inflation data will be released, potentially solidifying expectations for the BoE to maintain its Bank Rate at 4.75%. Recent data revealed stronger-than-anticipated wage growth in the UK, leading investors to curtail bets on BoE rate cuts in the coming year, despite emerging signs of economic deceleration. This surge in wages triggered a sell-off in gilts, diminished rate cut expectations, and bolstered sterling. Currently trading around $1.2710, sterling is flat for the year and stands as the top-performing G10 currency against the dollar.
Money markets indicate traders anticipate approximately 70 basis points in rate cuts from the BoE next year. This contrasts with expectations of similar cuts from the Fed and around 120 basis points from the European Central Bank (ECB). Europe will also release its November inflation data on Wednesday. A Reuters poll forecasts harmonized consumer prices (HICP) in the eurozone to remain unchanged from October at 2.3%. The ECB has signaled its intention to further reduce interest rates if inflation stabilizes at its 2% target, a stance reiterated this week by ECB President Christine Lagarde and influential policy hawk Isabel Schnabel.
Fed Decision Looms Large Over Global Markets
The Fed’s impending decision holds significant sway over global markets. Asian shares declined on Wednesday, continuing the risk-off sentiment observed in global stocks on Tuesday. Wall Street experienced substantial losses, the dollar held steady, and the 10-year U.S. Treasury yield briefly touched a one-month high of 4.44% before retreating. The Dow Jones index recorded its ninth consecutive daily loss, marking its longest losing streak since 1978.
The Fed is widely expected to lower the Fed funds rate window by 25 basis points from its current 4.5-4.75% range later today. However, the central bank is also anticipated to offer a cautious outlook and potentially raise its long-run interest rate projections. Surprisingly robust U.S. retail sales figures did not alter the near-certainty of a quarter-point rate cut on Wednesday. However, this positive economic indicator reinforces the narrative of “U.S. exceptionalism” and a relatively hawkish Fed heading into next year.
Assuming a 25 basis point rate cut by the Fed on Wednesday, rates futures markets have not fully priced in another quarter-point reduction until June. The 2025 curve implies only about 50 basis points of easing throughout the entire year.
Corporate News: Japanese Automakers Explore Collaboration
In corporate news, shares of Japanese automakers surged following reports that Honda and Nissan, Japan’s second and third-largest auto manufacturers, are engaged in discussions to establish a holding company. This potential move, according to a source familiar with the matter, would enable the companies to share resources more effectively. This development could significantly reshape the landscape of the Japanese automotive industry.
Conclusion: A Pivotal Week for Global Monetary Policy
This week marks a critical juncture for global monetary policy. The decisions of the Fed, BOJ, and other central banks will have far-reaching implications for financial markets and the global economy. While the Fed remains in the spotlight, the potential for a surprise move by the BOJ adds another layer of intrigue to this pivotal week. Market participants will closely scrutinize the statements and projections from these institutions for insights into the future trajectory of interest rates and economic growth.
