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Asian equity markets are mostly lower this morning after a big fall in the US equities yesterday. Reports suggest that markets were disappointed that this week’s central updates did not provide clearer signals of the possibility of a near-term ‘pivot’ in monetary policy. In China, government officials have hinted at the likelihood of more support for the ailing property market. December PMI data in Australia and New Zealand were consistent with a contraction in economic activity, while the Japanese index suggested that growth had stalled.
Data released this morning provided further timely information on UK consumer trends. The December reading for the GfK consumer confidence measure posted a third successive monthly improvement. However, at -42, it is still close to an all-time low reflecting consumers’ concerns both about their own finances and wider economy. Meanwhile, retail sales fell by 0.4% in volume terms in November, which suggests that the Christmas shopping season got off to a weak start.
The key data releases for the rest of the day are the December PMI measures for the Eurozone, UK, and the US. These are expected to indicate that both manufacturing and services are under pressure across all three economies.
In the UK, both the manufacturing and services headline readings have been below the 50 expansion/contraction level for the last two months and, in the case of manufacturing, for the last four. Further sub-50 readings are expected for December signalling that GDP probably declined again in Q4.
In the Eurozone, the manufacturing index has been below 50 for the past five months and services for the last four. Despite that GDP rose in Q3 but the expected outcome of the PMIs staying below 50 December would point to the risk of a GDP decline in Q4. In the US, both indicators were also below 50 in November and are forecast to stay there in December. However, other data releases suggest US GDP will have risen in Q4.
The November Eurozone CPI inflation is a second reading, which is not expected to be revised from the first estimate. That showed inflation down from October but still at a very elevated level. Finally, after a busy week of monetary policy updates from central banks there are now not many speeches scheduled from policymakers between now and the new year. However, today Federal Reserve policymaker Daly will offer some insights on the latest policy moves in the US.
Sterling fell against both the euro and the US dollar yesterday following the Bank of England’s latest monetary policy update. A split vote by policymakers on the need for another rate rise may have caused some confusion in markets about what will happen next to rates, while ECB signals of future policy was more hawkish than expected.
Equities across the Far East are trading lower in response to last night’s more hawkish-than-expected US Fed policy announcement. Although the pace of tightening was reduced, with interest rates going up by 50bp (to a range of 4.25-4.50%) compared with the 75bp hikes seen at the previous four meetings, the Fed’s latest guidance pointed to rates peaking at a higher level than previously indicated. The median estimate of Fed policymakers’ forecasts, from the so-called ‘dot plot’ envisaged rates peaking at 5.00-5.25% in 2023. In the press conference, Fed Chair Powell said that the central bank had a “ways to go” in its bid to rein in inflation.
Following the Fed, the attention turns to policy announcements from central banks across Europe. The ECB raised rates by 75bps at each of its last two meetings. However, recent comments from officials suggest that they will now slow their pace and market expectations are centred on a 50bp hike today. Some policymakers are calling for another 75bp rise and this cannot be ruled out, but it seems as though the hawks may settle for an announcement that Quantitative Tightening will start next year. ECB President Lagarde recently confirmed that details on the principles for balance sheet reduction will be announced at today’s meeting, but it is unclear whether a specific start date will be given or whether some other guidance will be provided. The forward guidance on rates may again be that this is now ‘data dependent’ but that seems unlikely to dampen expectations for further hikes.
The Bank of England is also expected to announce its latest policy decision at midday. The guidance at the last meeting that a further limited rise in interest rates will probably be necessary is an indication that they are likely to go up again and markets have priced in a 50bp increase. However, another split vote seems likely with two or possibly three members voting for a smaller move, given that two Monetary Policy Committee members voted against last time’s decision to hike by 75bp, while some could vote for a bigger hike. This is not one of the meetings when the BoE updates its forecasts and there will not be a press conference. The guidance on further rate moves may be a repeat of previous comments that these are ‘data dependent’ but that further increases are still likely although probably by less than markets currently expect.
Ahead of both the ECB and Bank of England, the Swiss National Bank (SNB) and Norges Bank are expected to hike policy rates by 0.5% and 0.25% respectively at their final meetings of the year. For the former, that would mean that it will have raised by 175bp over the course of the year. Data wise, a busy US slate will see retail sales, industrial production, weekly jobless claims data and regional Fed surveys (Philadelphia and New York state) released.
Overnight, we expect UK GfK consumer confidence survey for December to report a fall in confidence, from -44 to -46. Meanwhile, early tomorrow, we forecast UK retail sales to have fallen in November.
In response to the ‘hawkish’ Fed announcement, 2yr US Treasury yields are currently around 6bp above their pre-announcement level, at 4.23%, but the dollar has strengthened.
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