Week ahead: Inflation and central bank rate decisions dominate big week for markets

Tuesday

UK jobs report

Watch out for potential pound volatility on Tuesday with the latest jobs report providing a particular focus on wage growth given the Bank of England’s desire to drive down inflation pressures before pivoting towards a more accommodative monetary policy stance. While headline CPI slumped to 4.6% in October, last month’s 7.9% average earnings figure highlights underlying inflation pressure that the Bank of England will want to see decline. Also watch for any notable uptick in the claimant count and unemployment rate figures, with signs of economic weakness likely to be seen as a cause for a more dovish Bank of England outlook.

US CPI inflation

The US CPI inflation gauge provides a key source of potential volatility this week, with markets growing increasingly expectant that we will see the Fed cut rates early and often next year. The ability to drive CPI back down towards target by Q1 will be key in determining whether markets perceive the current rate cut expectations as justified or overly optimistic. With energy markets hit hard of late, there is a chance we could see a negative headline reading for November. The current outlook signals a largely flat report this month, with any uptick likely to hurt market sentiment.

Wednesday

FOMC interest rate decision

The Federal Reserve look unlikely to make any shift in terms of monetary policy, but this meeting represents a key source of volatility as traders look for clues over the future pathway for US rates. As things stand markets currently price a 59% expectation of a rate cut in March (Eikon), kicking off a total 125-basis point cut over the course of 2024 (61% chance). This is highly speculative for an economy that is growing at a healthy clip and will likely continue to exhibit above target inflation in March. The outlook from the Fed will be key in adjusting or reaffirming market expectations, with the economic projections playing a key role in that job. Friday’s better-than-expected jobs report could bring a more cautious approach from the Fed, who may wish to reign in expectations somewhat.

Thursday

Bank of England rate decision

The central bank theme continues into Thursday, with BoE Governor Andrew Bailey widely anticipated to lead the bank into a third consecutive rate pause to closeout 2023. From an economic standpoint the UK appears to be in a stronger position than the eurozone while also exhibiting higher inflationary pressures. This highlights why expectations for the Bank of England are somewhat muted in comparison to their mainland European neighbours. Markets are pricing a first rate cut in June, kicking off an easing process that is speculated to bring 75 basis points worth of downside for UK rates. Watch out for commentary from the Bank of England as they seek to align market expectations with their current view over where monetary policy goes next year

ECB rate decision

Once again markets are looking out for indications from the central banks over whether the recent surge in expectations for a swift return to monetary easing are justified. While markets do attach a potential 5% chance that we see a rate cut this time around, the more likely events is a pause with a focus on the timing and pace of rate cuts next year. With the eurozone inflation standing at a mere 2.4%, the ECB appears most likely to cut swiftly next year amid fears of a below target disinflationary overshoot before long. Nonetheless markets continue to focus around the early March meeting as the likely source of the first rate cut with icons showing a 75% chance of a move lower by that meeting. The longer term outlook points towards a 50% chance that the ECB and that’s a whopping 150 basis points worth of rate cuts over the course of 2024. Are these expectations justified? The ECB meeting should give us a better idea.

Friday

Eurozone PMI surveys

Friday will be dominated by PMI data released around the globe, with the ECB hoping to see improvements given the relative weakness of the eurozone economy this year. The weakness of the manufacturing sector is particularly notable with the 44.2 figure for the wider area being heavily driven by the German reading of 42.6. Things have been moving in the right direction, but continued weakness would serve to strengthen expectations that the ECB will cut rates early as possible.

UK PMI surveys

The UK enjoyed a welcome rebound back into expansion for the key services sector last month, with the 50.9 reading coming after three consecutive sub 50 figures. Continued signs that the UK economy is holding up would further enhance the expectation that the Bank of England will remain patient as they seek to move down inflation to target. With manufacturing heading in the right direction over the past three months, continued upside would help boost expectations of a return to expansion around the end of Q1.

US PMI surveys

The US economy has been performing remarkably well as highlighted by the latest upward revision to the third quarter GDP figure. With inflation still above 3%, continued signs that the Federal Reserve have managed to achieve a perfect soft landing would ease calls for a sharp reversal in monetary policy next year. With both manufacturing (49.4) and services (50.8) close to that key 50 threshold any swings out of or into expansion could grab the market’s attention.