🔍 The focus this week: Central banks

After keeping borrowing costs at a two-decade high for over a year, the Fed began slashing rates in September, driven by worries that a cooling US labor market might be nearing a dangerous tipping point. That half-percentage-point trim was followed by a smaller quarter-point cut in November. And on Wednesday, the central bank is widely expected to make another quarter-point snip, with inflation still running faster than it’d like.

What happens next year with interest rates is anyone’s guess: the president-elect’s plans for steep new tariffs could trigger another sharp spike in inflation, which could prompt the Fed to pause or even reverse its rate cuts. But at least traders will get some clues about the Fed’s current thinking on Wednesday when it releases its closely watched “dot plot”, which shows where its members see interest rates moving in the medium term.

When it comes to the BoE and BoJ, investors widely expect both to hold borrowing costs steady on Thursday.

Britain’s central bank has already delivered two quarter-point cuts this year. However, at its most recent meeting in November, the Bank said that the government’s new budget will likely increase inflation and economic growth. That’s made the central bank cautious about cutting rates too aggressively: policymakers have said any further reductions will have to wait until next year.

In contrast, the BoJ has been the only major central bank that’s been raising interest rates, having done so twice this year. The latest, a surprise hike, sent shockwaves through financial markets. So the Bank is likely in no rush to rock that boat again…

📅 On the calendar

• Monday: China industrial production and retail sales (November), eurozone PMIs (December), UK PMIs (December), US PMIs (December).
• Tuesday: China foreign direct investment (November), UK labor market report (October), US retail sales (November), US industrial production (November).
• Wednesday: Japan trade balance (November), UK inflation (November), Fed interest rate announcement. Earnings: Micron Technology.
• Thursday: BoJ interest rate announcement, BoE interest rate announcement. Earnings: FedEx, Nike, Accenture.
• Friday: Japan inflation (November), China one-year loan prime rate announcement, UK retail sales (November), US personal income and outlays (November), eurozone consumer confidence (December).

👀 What you might’ve missed last week

US

• US inflation sped up, as expected.

Europe

• The European Central Bank cut interest rates for the fourth time.

Asia

• Chinese inflation decelerated, unexpectedly.
• Chinese authorities adopted a more stimulative, “moderately loose” policy stance.

✍️ What does all this mean?

US consumer prices increased by 2.7% last month from a year ago – in line with economist expectations but higher than October’s 2.6%. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, was unchanged at 3.3%. Overall, the in-line figures are unlikely to change the Fed’s near-term plans for interest rate cuts.

The European Central Bank cut borrowing costs for the fourth time this year, taking its key interest rate to 3%, from 3.25%. The Bank also warned that the eurozone economy would grow by just 1.1% next year, down from its previous estimate of 1.3%. Reading the tea leaves, traders now expect the ECB to deliver five more cuts by September, leaving the rate at just 1.75%.

Annual inflation in China unexpectedly declined to a five-month low of 0.2% in November, despite a huge new stimulus package that aimed to get folks spending again. On a month-over-month basis, consumer prices worryingly dropped by 0.6% in November. What’s more, producer prices, which reflect what factories charge wholesalers for products, fell for the 26th consecutive month, declining by 2.5% in November from a year ago. The disappointing data did little to ease investor concerns that the world’s second-biggest economy faces the risk of becoming mired in deflation.

Keen to avoid deflation risk, Chinese authorities announced last week that they’re changing their stance on monetary policy from “prudent” to “moderately loose”. The shift suggests that the central bank will be more willing to aggressively trim interest rates and slash the amount of money that banks are required to hold in reserve. China hasn’t had a “moderately loose” stance since late 2010, when it was recovering from the global financial crisis.