Hawkishly Easing Into Holidays
It’s been a packed week for policy announcements and data releases ahead of market liquidity drying up for the festive holiday period. Remarkably, all of the interest rate decisions matched expectations. Conformity didn’t prevent markets from moving as uncertainty dissipated with the outcome and updated guidance. Almost a full rate cut was priced out for the Fed and BoE with nearer half that for the ECB, stretching the spuriously dovish relative policy outlook. Whereas the Fed and BoE are priced to stop cutting at around 4%, the ECB’s cycle extends well below 2%.
Repricing for the BoE is odd in isolation, given the extra dovish dissents at its meeting. However, that news was dominated by the Fed’s hawkish cut, with only two more projected by policymakers, allowing the market to drift towards our call for a final cut in March. The Riksbank also delivered a hawkish cut with little more easing left in its projections. Expected cuts also came from Chile and Mexico, while unsurprising holds were in Thailand, Indonesia, and Norway. New forecasts show the latter ready to start cutting soon, while the BOJ didn’t hike and rowed back from doing so.
The BoE’s three dovish dissenters to its on-hold decision exceeded the two we expected (consensus was for one). Surprisingly high wage growth reinforces most members' gradualist urge, but softer labour market conditions will likely be used to justify a February rate cut. We maintain our call for BoE cuts in February and May before an extended pause that may end with rate hikes to remove accidental stimulus amid high neutral rates (see BoE Doves Frame Cut For February).
Despite the dovish reliance on softer labour market conditions, the UK unemployment rate stopped rising in October, with the 4.3% rate close to the average of the past 18 months. We see the underlying trend as only a slight weakening after strength. Employment and hours worked are booming, partly owing to recent revisions. The poor productivity performance also raises the hawkish pressure from these activity data. Resurgent wages compound the hawkish news as private pay jumps before public sector rises are captured (see UK Wages Torch Dovish Feathers).
UK inflation matched expectations by increasing to its highest headline pace since March, although this doubled the BoE’s forecast error to 0.2pp (0.1pp in services). Only one division contributed much less to the monthly impulse than last year, with the median rate remaining excessive at 3% amid broadly high unit labour cost rises. An early December index date will likely be used, weighing on airfares in the short term. Our forecast still gaps higher than others in 2025 despite the consensus rising (see UK Inflation Extends Broad Rebound).
Recommended by LinkedIn
Elsewhere, November's final Euro area inflation print trimmed its rise by 4bps, rounding it down to 2.2% y-o-y. Revisions were broadly spread over the special aggregates. Median inflation remains close to annualising at 2%, although Germany is excessive like the UK. Our projections for underlying pressures softened slightly over the past month. We believe EA inflation will still slow to the 2% target in a few months and stay near there through 2025. Forceful ECB easing could break that benign outlook (see EA Inflation Less Excessive Near Peak).
On the activity side, Flash PMIs for December broadly exceeded expectations in the services sector, with the UK and EA rebounding and the US surging to highs more consistent with hikes than cuts. A slight trend rise in the US unemployment rate suggests strength is partly structural but could be noise around cyclical strength. Global rates still don’t look tight. We expect persistent underlying price and wage inflation to truncate easing cycles earlier than most expect, following the norm for cuts without recessions, like in 1998 (see PMIs Serve A Festive Party).
Finally, on the political front, the week ended with disappointment over the failure to raise the US debt ceiling. Alastair Newton also looked at how the consequences of the Syrian civil war spread much more widely even than its immediate neighbourhood. The collapse of the Assad regime stands to have a similarly widespread impact, including on the Russia/Ukraine war, the prospects for reform of Germany’s debt ceiling, and oil (see Syria, The World And Markets).