Ahead of the game: 18 December 2023

US equity markets hit the turbochargers, locking in a seventh straight week of gains as the Fed delivered an early Christmas present by keeping rates on hold; and completing its pivot towards rate cuts in 2024.

In Australia, the ASX 200 ripped higher, taking its lead from Wall Street and expectations that the RBA will follow the Fed's lead and cut interest rates in 2024.

• In the US, headline inflation rose by 0.1% MoM in November (slightly higher than the 0% expected), as the annual rate eased to 3.1% from 3.2%
• Core inflation in the US rose by 0.3% MoM, which saw the annual rate remain unchanged at 4%
• Retail sales in November rose by 0.3% vs -0.1% expected
• The Fed kept its Federal Funds target rate unchanged at 5.25%-5.50%
• The Fed's all-important median "dot" showed no more rate hikes projected for the first time since March 2021, and three rate cuts are expected in 2024
• In Europe, the ECB kept its deposit rate on hold at 4%
• In the UK, the BoE kept its official cash rate on hold at 5.25%
• Australia's unemployment rate rose to 3.9% - a seventeen-month high
• In New Zealand, the economy contracted by 0.3% in the September quarter, missing forecasts of +0.2% growth
• Crude oil fell to $67.71, its lowest level in six months before rebounding
• Gold gained after the dovish FOMC meeting, supported by lower US yields and US dollar
• Wall Street's gauge of fear, the Volatility (VIX) index, remains near four-year lows.
  

• AU: RBA meeting minutes (Tuesday, December 19 at 11.30 am AEDT)

• JP: BoJ interest rate decision (Tuesday, December 19th at 2.00 pm AEDT)
• JP: Inflation rate (Friday, December 22nd at 10.30 am AEDT)
  

• US: Core PCE (Saturday, December 23rd at 12.30 am AEDT)
• US: Durable goods (Saturday, December 23rd at 12.30 am AEDT)

• GE: IFO (Monday, December 18th at 8 pm AEDT)
• GE: GFK Consumer Confidence (Wednesday, December 20th at 6 pm AEDT)
• UK: Inflation (Wednesday, December 20th at 6.00 pm AEDT)
• UK: Retail sales (Friday, December 22nd at 6.00 pm AEDT)

• AU

RBA meeting minutes

Date: Tuesday, 19 December at 11.30 am AEDT

The minutes from the Reserve Bank's meeting in November are scheduled to be released Tuesday, 19 December at 11.30 am.

At its meeting in November, the RBA kept its official cash rate on hold at 4.35%, supported by a string of cooler-than-expected data across house prices, retail sales, and inflation. The RBA retained a tightening bias, using the same watered-down wording in the November statement:

"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."

The board meeting minutes will be closely scrutinised around what options it considered at the meeting, the factors that would prompt the RBA to act on its tightening bias in 2024, and any clues that might suggest the RBA feels its tightening cycle is close to completion.

RBA cash rate chart

• Japan

Bank of Japan (BoJ) interest rate decision

Date: Tuesday, 19 December at 2.00 pm AEDT

For the upcoming meeting, consensus is for the BoJ to keep its short-term interest rate target unchanged at -0.1%, and for the 10-year bond yield around 0%, but maintain a flexible band of 1% as ‘reference’.

Similarly to previous meetings, key focus will revolve around any tweak in policy wordings from the central bank or any adjustment to its yield curve control (YCC) policy, as the BoJ continues to take intermittent steps towards policy normalisation.

Thus far, communications of a policy-pivot timeline from BoJ officials have been muddled, which leaves sentiments highly sensitive to any verbal cues from policymakers. At the upcoming meeting, markets will be on the lookout for policymakers’ views as to whether its wage growth condition for a policy pivot has been met. For now, broad market expectations are priced for Japan to scrap its negative rates only in the second quarter of 2024.

Bank of Japan’s policy rate chart

Inflation rate

Date: Friday, 22 December at 10.30 am AEDT

Japan’s headline inflation has eased from its peak in January 2023 to 3.3% in October 2023, while the core-core inflation (excluding food and energy prices) has also turned a corner lately, easing to a nine-month low at 4.0% in October.

Ahead, expectations are for November headline inflation to moderate further to 2.7% from previous 3.3%. The core aspect (excluding food prices) is expected to ease to 2.5% from previous 2.9% as well, while the core-core aspect (excluding food and energy prices) is expected to head lower to 3.8% from previous 4.0%.

Thus far, the BOJ has insisted that the rise in inflation has been driven by cost-push factors, rather than demand-driven, and is therefore not a sign of sustainable price gains. A softer inflation read may provide some validation to that and offer room for the BoJ to exercise patience in its policy settings for further wait-and-see.

Japan’s inflation rate YoY chart

• US

Core PCE

Date: Saturday, 23 December at 12.30 am AEDT

As widely expected, the Fed kept its Federal Funds target rate unchanged in December at 5.25%-5.50%. Notably, the Fed's all-important median "dot" showed no more rate hikes expected for the first time since March 2021, and three rate cuts are expected in 2024.

The completion of the Fed's dovish pivot, which started in October, was preceded by a soft patch of data that supports the soft-landing outlook for the US economy and the idea that inflation is on track to return to the Fed's 2% target.

In contrast to the Fed's projection of three rate cuts in 2024, the interest rate market expects six rate cuts in 2024, with the first one priced for March. The Fed's preferred measure of inflation, the Core PCE, has the potential to either validate or move the dial around both the timing and depth of rate cut expectations.

The consensus expectation is for core PCE to increase by 0.2% in November, which would ease the annual rate ease to 3.4% from 3.5%, the lowest rate since April 2021. Headline PCE is expected to rise by 0.1% in November, with the annual rate moderating to 2.8% from 3.0%.

Core PCE inflation MoM chart