Ahead of the game: 16 December 2024

US stocks and inflation impact ahead of FOMC meeting

United States (US) stocks fell this week after warm consumer price index (CPI) and producer price index (PPI) inflation reports contrasted with an unexpected surge in jobless claims, impacting market sentiment ahead of next week's Federal Open Market Committee (FOMC) meeting.

ASX 200 pullback affected by labour data

Locally, the ASX 200 extended its pullback from its record 8514.5 high as a firmer November labour force report dented hopes for a Reserve Bank of Australia (RBA) interest rate cut in February.

Before the jobs data was released, the Australian interest rate market priced in a 63% chance of a 25 basis point (bp) RBA rate cut for February. This probability has eased to approximately 50%, with a full 25 bp rate cut not priced until May.

The week that was: highlights

• In the US, the November CPI report showed the annual rate of headline inflation rising to 2.7% in November 2024, up from 2.6% in October, meeting expectations
• US core CPI remained steady at 3.3% year-on-year (YoY) in November, sticky but in line with forecasts
• Headline PPI for November increased by 0.4%, twice the 0.2% expected, lifting the annual rate to 3.0% from 2.6% prior
• The PPI core measure climbed to 3.4% YoY in November, the highest since February 2023, surpassing market estimates of a 3.2% increase
• Initial jobless claims jumped by 17,000 from the previous week to 242,000 in the first week of December, significantly above the 220,000 expected
• The Bank of Canada cut its key interest rate by 50 bp to 3.25%
• The European Central Bank (ECB) cut its key interest rate by 25 bp to 3.15% and sounded dovish
• The Swiss National Bank (SNB) surprised the market as it cut rates by 50 bp
• In China (CN), the annual inflation rate eased to 0.2% YoY, below forecasts of 0.5%
• The Australian economy added 35,600 jobs in November, stronger than the 25,000 gain the market had expected. The unemployment rate fell to 3.9% from 4.1%, defying market forecasts of a rise to 4.2%
• Crude oil rose 4.2% to $70.00
• Gold rose 1.8% to $2680
• Bitcoin fell 0.80% to $100,269
• Wall Street's gauge of fear, the volatility index (VIX), rose marginally to 13.91.

Key dates for the week ahead

Australia & New Zealand

• Australia (AU): Westpac Consumer Confidence (Wednesday, 18 December at 10.30am AEDT)
• New Zealand (NZ): Third quarter (Q3) gross domestic product (GDP) (Thursday, 19 December at 8.45am AEDT)

China & Japan

• CN: Industrial production (IP) and retail sales (Monday, 16 December at 1.00pm AEDT)
• Japan (JP): Bank of Japan (BoJ) interest rate meeting (Thursday, 19 December, no set time)
• JP: CPI (Friday, 20 December at 10.30am AEDT)

United States

• US: Retail sales (Wednesday, 18 December at 12.30am AEDT)
• US: FOMC meeting (Thursday, 19 December at 6.30am AEDT)
• US: Core personal consumption expenditures (PCE) price index (Saturday, 21 December at 12.30am AEDT)

Europe & United Kingdom

• United Kingdom (UK): Unemployment (Tuesday, 17 December at 6.00pm AEDT)
• UK: Inflation rate (Wednesday, 18 December at 6.00pm AEDT)
• UK: Bank of England (BoE) interest rate decision (Thursday, 19 December at 11.00pm AEDT)
• UK: Retail sales (Friday, 20 December at 6.00pm AEDT)

Key events for the week ahead

• US

FOMC meeting

Thursday, 19 December at 6.30am AEDT

At its last meeting in November, the FOMC cut rates by 25 bp to a range of 4.50% to 4.75%, as widely expected.

Federal Reserve (Fed) Chair Jerome Powell noted that recent data pointed to solid economic expansion and that inflation 'has made progress toward the Committee’s 2% objective but remains somewhat elevated.'

The minutes of the FOMC’s November meeting noted that 'participants anticipated that… it would likely be appropriate to move gradually toward a more neutral stance of policy over time' if 'the data came in about as expected, with inflation continuing to move down sustainably to 2 percent and the economy remaining near maximum employment.'

Since the Fed’s rate cut in November, US inflation data has aligned with expectations, increasing confidence that inflation remains on a downward path. As such, the expectation is for the Fed to deliver a 25 bp rate cut at the December FOMC meeting.

US Fed funds rate as of 13 December, 2024

• JP

BoJ interest rate meeting

Thursday, 19 December AEDT

Expectations are for the BOJ to maintain its short-term interest rate at 0.25% next week, marking the fourth consecutive meeting without change. However, the central bank’s current inaction is unlikely to persist, with any rate hold expected to come with strong forward guidance signalling a potential January hike. Broadening underlying pricing pressures, such as service prices, continue to point towards a more persistent inflationary trend. This environment suggests conditions are ripe for another rate hike, reinforcing expectations for tighter policy down the line.

Recent remarks from BoJ Governor Kazuo Ueda, indicating that the timing of the next rate hike is 'approaching,' suggest policymakers are actively weighing another increase. Nonetheless, his confidence in an imminent move is tempered by uncertainties surrounding Trump’s tariffs, which cloud the economic outlook.

A rate hike next week, while unexpected, could be accompanied by dovish rhetoric aimed at managing market expectations. Such a strategy seeks to prevent significant overreactions in the Nikkei 225 and the Japanese yen, mirroring the central bank’s approach during July 2024’s policy adjustment.

BoJ policy rate chart

• UK

BoE interest rate decision

Thursday, 19 December at 11.00pm AEDT

The BoE is widely expected to keep its bank rate on hold at 4.75% next week. Above-target inflation in the UK, which may be further influenced by the government’s upcoming tax and spending plans, could prompt policymakers to proceed cautiously with any easing measures.

Annual inflation in the UK came in higher than expected at 2.3% in October 2024, its highest level in six months. Pricing pressures appear persistent, with UK grocery price inflation edging higher in November for the third consecutive month.

BoE Governor Andrew Bailey has previously stated that there is still 'a distance to travel,' with inflation likely to hover slightly above the BoE’s 2% target until 2027. Market expectations are for the central bank to ease rates by 25 bp only in February next year, with a cumulative 75 bp worth of cuts projected through 2025.

BoE policy rate chart

• US

Core PCE price index

Saturday, 21 December at 12.30am AEDT

October's PCE prices in the US increased by 2.3% YoY, up from a three-year low of 2.1% in September, aligning with expectations. The core PCE price index, the Fed’s preferred measure of underlying inflation, rose by 0.3% from the previous month, consistent with September’s pace and market forecasts. This pushed the annual rate of core PCE prices to 2.8% in October, the highest increase in six months, also meeting market expectations.

November's headline PCE is anticipated to rise to 2.5%. The stronger-than-expected core PPI reading adds upside risks to the core PCE figure.

US headline annual PCE price index chart