Daily Points

ON DECK FOR WEDNESDAY, DECEMBER 18

KEY POINTS:

• It feels like a typical FOMC day in the markets
• FOMC Preview: Cut, and just ignore the rest…
• …as the January meeting will incorporate key post-inauguration information
• UK CPI: Ignore the base effects, core inflation was weak again
• Four days of UK data should embolden the BoE’s doves tomorrow…
• ...as my reading of the data differs from traders
• Canada calendar quiet, with the focus on the order of operations
• BoT, BI hold as expected

This feels like a typical FOMC day by way of a generally cautious market tone. Equities are slightly bid across most benchmarks, sovereign bonds are not doing much, and currencies are mixed. In my opinion, this FOMC meeting is just about ticking the box in order to buy time until Committee members have more vital information at the next meeting post-inauguration. Otherwise, UK core inflation was soft unless we still haven’t learned the lesson about not being fooled by base effects, and a pair of Asian central banks held policy rates as expected (BoT, BI).

There is nothing calendar-based to consider in Canada but expect ongoing intense speculation around a potential cabinet shuffle, whether PM Trudeau will stay on, and the exact order of operations behind the G&M’s story mid-day yesterday about how Trudeau demoted Freeland to appoint Carney which either jumped the gun on Trudeau’s part or Carney changed his mind. Or the sources are incorrect with a whole lot of political finger pointing going on which is also possible in the small gossipy world of Ottawa.

FOMC PREVIEW—CUT, IGNORE THE REST FOR NOW

See the section in my Global Week Ahead that was issued last Friday for a more thorough Fed preview (online here).

The Statement and full Summary of Economic Projections arrives at 2pmET followed by Chair Powell’s presser 30 minutes later.

A -25bps cut is widely expected and priced. The dots are likely to remove one or two cuts from the median projection for the fed funds target rate by the end of 2025 with chart 1 showing our best guess compared to the prior FOMC projection. One key reason for doing so is that recent data has been more resilient than they thought it was going to be including GDP growth, wages, core PCE and the unemployment rate with some of that shown in chart 2. Powell was fooled by seasonal adjustment problems in inflation and jobs data in my opinion.

We may hear more about adjusting the ON RRP facility rate to equal the bottom of the target range for fed funds but actual adjustment is more likely in January or maybe later given the November minutes’ reference to “at a future meeting.”

The SEP may upgrade near-term forecasts for 2024 GDP growth and inflation and lower the UR estimates. See charts 3–6 that compare our fresh estimates and projections to the FOMC’s September SEP. 

Nevertheless, as argued in my weekly, the SEP will be DOA.

Why? We’ll hear Powell hem and haw about tariffs and all the stuff they don’t know about the probability, scope, duration and retaliation plus the things they don’t know about other prospective changes in US fiscal and regulatory policy. On that, there may be a bit of a divergence between staff forecasts and the forecasts submitted by Committee participants. Staff projections may lean further toward incorporating some assumptions than the Committee members.

Because of this massive uncertainty surrounding the incoming administration’s policies, what effect they may have on markets and data, when such effects may arise, and how other countries may respond, the SEP and the dot plot shouldn’t be treated with much seriousness at this point. The bigger focus will be upon how the FOMC shifts at the next decision on January 29th—nine days after inauguration day—and in the next SEP and dot plot in March.

Ergo, for now, cut, waffle, hem, haw, and wish everyone a happy new year. The FOMC is as much in the dark as I am right now staring our my window at pitch black skies with the shortest day in the northern hemisphere just three days away. There will be more light by the end of January.

UK CPI—IGNORE BASE EFFECTS, CORE INFLATION WAS WEAK

Ahead of tomorrow’s BoE decision, gilts and sterling largely ignored UK inflation that came in soft in terms of underlying pressures at the margin.

Key is that core CPI was flat at 0% m/m NSA which is a touch weaker than a normal month of November and among the weakest months on record when comparing like months of November. If you squint when looking at chart 7, then you may notice that the 2024 reading hugs the axis way over to the right. Headlines were all about a rise in the y/y rates, but they’re driven by base effects, including headline (2.6% y/y from 2.3% prior) and core (3.5% y/y from 3.3% prior).

We get the same picture with services inflation that in y/y terms held at 5%, but in m/m NSA terms comparing like months of November across time posted one of the weakest months of November on record (chart 8).

And so the picture since last Friday has involved a series of updates that have been mostly dovish in nature in my opinion including today’s core CPI print. GDP unexpectedly shrank in November and this was driven by softness in services and a contraction in industrial output and construction. Wage growth was solid again in m/m SAAR terms, but total employment was only up by 21k in October after 1k the prior month while payrolls fell 35,364 in November as a bad omen for the next total employment reading for November.

The BoE has a tendency to surprise, but the more likely outcome tomorrow is they meet everyone’s expectation for a hold but more explicitly tee up a cut in January and we’ll hear from a more emboldened dissenter. This is predicated upon my very different reading of the data we have gotten of late than how traders have been looking at the measures. There is nothing in the wide swatch of data updates since last Friday that should sway the BoE away from the gradual cut guidance provided by Bailey and if anything it may support doing more than he guided. Like the FOMC, however, we’ll learn more about how bad disruptions to global trade may become in the new year and that matters a lot to a trading nation like the UK.

For now, BoE guidance that policy adjustments will be ‘gradual’ is interpreted to mean it’s time to skip as the next step in the oscillating hike-skip pattern. Governor Bailey’s recent FT interview that guided 4 cuts over 8 meetings in 2025 signals an extension of this kind of pattern.