ECB officials signal more rate cuts Ahead, gradual path to neutral

    A day after ECB reduced its deposit rate by 25 basis points to 3.00%, key ECB officials provided insights into the central bank’s outlook, reinforcing expectations for further easing in 2025. Comments from various members of the Governing Council suggest a shared commitment to a cautious but consistent approach to policy normalization.

    French ECB Governing Council member François Villeroy de Galhau explicitly stated, “There will be more rate cuts next year, more rate cuts plural,” emphasizing alignment with market forecasts. The swap market currently prices around 120 basis points of rate reductions by the end of 2025.

    Similarly, Spanish member José Luis Escrivá noted the prevailing consensus for “moves of 25 basis points downwards,” allowing for regular assessment of disinflationary progress.

    Irish ECB member Gabriel Makhlouf highlighted the clarity in the rate trajectory while maintaining a data-driven approach: “The exact pace and number of further reductions depend on inflation outturns continuing to move in line with our projections.”

    Portuguese member Mário Centeno added that rates could approach the 2% level within a few quarters, barring new economic shocks.

    Comments from Luxembourg’s Gaston Reinesch pointed to the possibility of reaching a 2.5% deposit rate by early spring, implying consecutive 25bps cuts in January and March.

    Latvian member Martins Kazaks kept the door open for larger adjustments if warranted, while Austria’s Robert Holzmann reiterated alignment with forecasts, noting that rates would ultimately settle closer to neutral.

    Eurozone industrial production stagnates in Oct

      Eurozone industrial production stagnated in October, recording 0.0% mom growth, in line with expectations. The data reflects mixed performance across sectors. While output for capital goods rose by 1.7%, intermediate goods production remained unchanged. On the downside, energy production dropped sharply by -1.9%, while durable and non-durable consumer goods contracted by -1.8% and -2.3%, respectively,.

      Across the broader EU, industrial production showed a modest increase of 0.3% mom, driven by strong gains in select countries. Ireland led the pack with a 5.7% increase, followed by Denmark at 5.4% and Poland at 3.5%. However, significant declines were observed in Lithuania (-7.5%), Belgium (-6.2%), and Croatia (-3.9%).

      Full Eurozone industrial production release here.

      UK economy contracts -0.1% mom in Oct, dragged down by weak production

        UK GDP fell by -0.1% mom in October, disappointing expectations for 0.1% mom growth. The decline was primarily driven by a -0.6% mom contraction in production output, with no growth observed in services and a -0.4% mom decline in construction output.

        On a rolling three-month basis, GDP showed a marginal increase of 0.1% in the period ending October, compared to the prior three-month period. This modest growth was supported by a 0.1% expansion in services and a 0.4% rise in construction output. However, production output contracted by -0.3%, weighing on overall performance.

        Full UK GDP release.

        Japan’s Tankan Survey: Manufacturing Confidence Improves to 14

          Confidence among Japan’s major manufacturers showed a modest recovery in Q4, breaking a two-quarter decline. The Tankan large manufacturing index rose to 14 from 13, slightly exceeding market expectations. However, the outlook dipped marginally from 14 to 13, though still better than the anticipated 11.

          In contrast, the non-manufacturing sector, which includes services, saw its index decline to 33 from 34, marking the first deterioration in two quarters. The outlook for non-manufacturers held steady at 28.

          On a bright note, large Japanese companies across sectors plan to boost capital expenditure by 11.3% in the fiscal year ending March 2025. This is a notable increase from the 10.6% projection in the September survey and surpasses market forecasts of 9.6%.

          NZ BNZ PMI falls to 45.5, 21st month of contraction

            New Zealand’s BNZ Performance of Manufacturing Index dipped from 45.7 to 45.5 in November, marking its lowest reading since July 2024 and extending the contraction streak to 21 consecutive months. Despite some improvement in select components, the sector remains under significant strain, highlighting the challenges of achieving a meaningful turnaround.

            Production weakened further, dropping from 44.0 to 42.5, signaling continued struggles in output. New orders also plunged from 48.5 to 44.8, underlining the persistent lack of demand. In contrast, employment improved modestly from 46.0 to 46.9, and finished stocks edged higher from 47.8 to 49.3. Deliveries saw the most notable recovery, rising from 44.9 to 49.9, yet still narrowly missed returning to expansion territory.

            The sentiment among respondents remains predominantly negative, with 56% of comments in November reflecting pessimism, slightly up from 53.5% in October. Recurring concerns revolve around weak order volumes and the enduring pressures of high living costs. However, this negativity has moderated from its peak of 71.1% in mid-2024, suggesting some stabilization.

            Doug Steel, Senior Economist at BNZ, noted that while manufacturers are beginning to show improved confidence about the future, “the main message of a manufacturing sector still under significant pressure remains. There is scant evidence of a general turnaround in activity to date.”

            Full NZ BNZ PMI release here.

            US PPI up 0.4% mom, 3.0% yoy, highest annual rise since Feb 2023

              US PPI for final demand rose 0.4% mom in November, above expectation of 0.3% mom. Nearly 60% of the broad-based rise in final demand prices can be attributed to a 0.7% mom increase in goods. Prices for final services moved up 0.2% mom. PPI less foods, energy, and trade services inched up 0.1% mom.

              On an unadjusted basis, PPI advanced 3.0% yoy for the 12 months period, well above expectation of 2.5% yoy. It’s also the largest rise since moving up 4.7% yoy in February 2023. PPI less foods, energy, and trade services advanced 3.5% yoy.

              Full US PPI release here.

              US initial jobless claims rise to 242k, above exp 221k

                US initial jobless claims rose 17k to 242k in the week ending December 7, above expectation of 221k. Four-week moving average of initial claims rose 6k to 224k.

                Continuing claims rose 15k to 1886k in the week ending November 30. Four-week moving average of continuing claims rose 3.5k to 188k, highest sine November 27, 2021.

                Full US jobless claims release here.

                ECB cuts to 3.00%, projects inflation steady around target through 2027

                  ECB cut its deposit rate by 25bps to 3.00%, aligning with market expectations. The overall decisions and economic projections reflect confidence in the ongoing disinflation process. Yet, he Governing Council reiterated its “data-dependent and meeting-by-meeting approach,” refraining from pre-committing to any specific rate path.

                  In its statement, the ECB highlighted that the “disinflation process is well on track.” The bank’s updated projections show headline inflation averaging 2.4% in 2024, moderating further to 2.1% in 2025 and 1.9% in 2026.

                  Inflation excluding energy and food is expected to average 2.9% in 2024, easing to 2.3% in 2025 and stabilizing at 1.9% by 2026 and 2027.

                  ECB added that inflation is projected to settle around its 2% target “on a sustained basis.”

                  However, growth expectations were revised downward, reflecting continued economic challenges. ECB now forecasts the Eurozone economy to expand by just 0.7% in 2024, improving modestly to 1.1% in 2025 and 1.4% in 2026.

                  Growth is expected to rest primarily on rising real incomes, which should bolster household consumption, alongside gradual increases in business investment. Additionally, ECB noted that the fading effects of restrictive monetary policy should support a recovery in domestic demand over time.

                  Full ECB statement here.

                  Ifo flags structural risks as German economy faces subdued 0.4% growth next year

                    Germany’s economy is forecast to contract by -0.1% in 2024, according to the Ifo Institute. The economy has been “treading water for five years”, with growth stalled amid structural challenges.

                    The institute presents two possible trajectories for 2025: sluggish growth of just 0.4% if structural issues persist, or a recovery to 1.1% if economic policy reforms support industrial revival.

                    Timo Wollmershäuser, Head of Forecasts at Ifo, stated, “It is not yet clear whether the current phase of stagnation is a temporary weakness or one that is permanent and hence a painful change in the economy.”

                    He noted that Germany’s export sector, once a key driver of growth, has become “increasingly decoupled from global economic development,” with competitiveness eroding, particularly in industrial goods outside Europe.

                    In a pessimistic scenario, this weakness could lead to “creeping deindustrialization,” while an optimistic outcome would depend on supportive policies enabling manufacturing to expand production capacities. Such measures could, in turn, boost private consumption and reduce the high savings rate, providing further stimulus to the economy.

                    Full ifo Economic Forecast Winter 2024 here.

                    SNB cuts by 50bps, projects weaker inflation and modest growth in 2025

                      SNB took a decisive step by lowering its policy rate by 50 basis points to 0.50%. In its accompanying statement, the central bank highlighted that underlying inflationary pressures have “decreased again” this quarter, warranting the larger-than-expected rate cut. SNB reiterated its commitment to “monitor the situation closely” and stated that it would “adjust its monetary policy if necessary.”

                      The latest conditional inflation forecasts reflect a significantly subdued outlook, even with interest rate down from 1.00% to 0.50%.

                      For 2025, inflation is now projected at just 0.3%, a notable downgrade from the 0.6% forecast in September. However, the 2026 outlook saw a slight upward revision to 0.8%, from 0.7% previously.

                      Looking at some details, inflation is expected to decline sharply from 0.7% in Q4 2024 to a low of 0.2% in Q2 2025, before gradually recovering to 0.8% in 2026 and 0.7% in 2027. These figures underscore the SNB’s view of persistent deflationary risks, necessitating its proactive policy stance.

                      In terms of economic growth, SNB estimates GDP growth for 2024 to come in at around 1%, with a modest pickup to 1-1.5% expected in 2025. Despite this improvement, challenges remain, including slightly rising unemployment and declining utilization of production capacity.

                      Full SNB statement here.

                      SNB and ECB in spotlight as markets gauge depth of cuts and dovish signals

                        Today’s focus is firmly on the monetary policy decisions from SNB and ECB, with markets eager to gauge not just the magnitude of the expected rate cuts but also the tone of their forward guidance. Both central banks are expected to ease, but the precise depth of the cuts and their outlook on future policy will drive market reactions.

                        SNB is widely anticipated to cut its policy rate by 25bps 1.00% to 0.75%. However, speculation of a more aggressive 50bps cut persists, with financial market pricing increasingly leaning toward this scenario.

                        SNB has considerable room to maneuver, given Switzerland’s inflation rate of just 0.7%—the lowest among major economies. However, with rates already close to zero, SNB must balance immediate economic support with preserving policy ammunition for the future.

                        After all, today’s move will not mark the end of the easing cycle of SNB, as economists project further reductions through 2025, driving the policy rate to 0.25% or even zero by the end of next year.

                        For ECB, the debate has also revolved around the scale of its next move. Recent speculation about a 50bps cut has largely been dismissed following comments from ECB officials, leaving a 25bps reduction in the Deposit Rate to 3.00% as the more probable outcome.

                        However, market participants are paying close attention to the tone of ECB’s statement and press conference. With inflation expected to settle earlier at target by mid-2025 amid weak economic activity, ECB would signal explicitly the need for sustained easing into next year.

                        Investors currently expect a cut at every meeting until mid-2025, with the Deposit Rate potentially reaching 1.75% by year-end. However, such an aggressive pace could bring rates below the neutral level.

                        In terms of market impact, EUR/CHF is the currency pair to watch. Outlook is clearly bearish with EUR/CHF staying well below falling 55 D EMA. However, in case of another dive, 0.9209 key support might continue to provide support for a bounce a second time, barring any drastic surprises. Meanwhile, there would be no clear confirmation of bullish reversal until decisive break of 55 D EMA (now at 0.9362).

                        Australia’s employment data beats expectations, unemployment drops below to 3.9%

                          Australia’s labor market showed surprising resilience in November as employment grew by 35.6k, surpassing expectations of a 29.6k increase. The standout figure was the 52.6k gain in full-time jobs, offsetting a decline of -17k in part-time positions.

                          Unemployment rate fell significantly, dropping from 4.1% to 3.9%, well below the anticipated 4.2%. However, a slight dip in the participation rate, from a record high of 67.1% to 67.0%, tempered the optimism.

                          Employment-to-population ratio nudged up to 64.4%, matching levels from a year ago and maintaining its position 2.2% above pre-pandemic levels. Monthly hours worked showed no growth, indicating stability in workforce activity despite the overall gains in employment.

                          David Taylor, Head of Labour Statistics at the ABS, noted that an unusually high number of unemployed individuals transitioned into employment during November. This dynamic contributed to both the rise in job creation and the sharp fall in unemployment. Taylor also highlighted the role of population growth, which has bolstered labor supply and helped maintain the balance between employment growth and demographic expansion.

                          Full Australia employment release here.

                          BoC eases 50bps but signals end to continuous rate reductions

                            BoC cut its overnight rate by 50 basis points to 3.25% as anticipated, but a notable shift in tone suggests a loosening of its easing bias. The central bank stated that interest rates have been reduced “substantially” since June, signaling that future cuts would be evaluated “one decision at a time.” This marks a clear pivot toward a more cautious, data-dependent approach, and rate reduction is no longer in auto-pilot.

                            Also, in the accompanying statement, BoC highlights a number of factors that introduce uncertainty surrounding both growth and inflation outlook, including the array of policy measures introduced by the federal and provincial governments.

                            The reduction in immigration targets is expected to dampen GDP growth next year. While this lower growth could temper inflationary pressures, the Bank noted that the effect would likely be “more muted” due to immigration’s impact on both demand and supply. Additional measures, such as the suspension of the GST on certain goods, direct payments to individuals, and adjustments to mortgage rules, are expected to create temporary fluctuations in demand and inflation.

                            The statement also highlighted increased uncertainty surrounding trade. The possibility of new tariffs from the incoming US administration adds a layer of complexity to the economic outlook, particularly given Canada’s reliance on exports to its southern neighbor.

                            Full BoC statement here.

                            US CPI accelerates to 2.7% in Nov, core CPI unchanged at 3.3%

                              November’s US inflation data came in line with expectations, showing no significant progress toward easing price pressures further. Headline CPI rose 0.3% mom, supported by a 0.3% mom rise in the shelter index, which accounted for nearly 40% of the monthly increase. Food prices rose by 0.4% mom, while the energy index rose 0.2% mom. Core CPI, excluding volatile food and energy prices, also rose by 0.3% mom.

                              On an annual basis, headline CPI ticked up from 2.6% yoy in October to 2.7% yoy in November, aligning with market forecasts. Core CPI, excluding the volatile food and energy components, remained steady at 3.3% yoy. Among key categories, food prices increased 2.4% yoy, while energy prices remained a deflationary force, falling -3.2% yoy.

                              Full US CPI release here.

                              RBA’s Hause: Australia more seriously affected by global trade war because of China reliance

                                RBA Deputy Governor Andrew Hauser addressed the implications of US President-elect Donald Trump’s proposed tariffs at an event today. He highlighted that while higher global tariffs could depress activity across supply chains, the full extent of the effects would depend on various factors, including currency adjustments and fiscal responses in affected economies.

                                “Given this uncertainty, it is important that we don’t prejudge the implications of tariffs for policy but monitor developments closely and stand ready to respond appropriately as the facts emerge,” Hauser stated.

                                Hauser pointed out Australia’s unique vulnerability due to its trade exposure, with over 80% of its iron ore exports destined for China, which accounts for three-quarters of global iron ore imports.

                                This heavy reliance on China increases the risk of significant disruptions if Beijing becomes the target of punitive tariffs or if global trade realigns along geopolitical lines.

                                “This seems to suggest that Australia could find itself more seriously affected by a global trade war than some of the average exposure data suggest,” Hauser noted.

                                US CPI sets to drive EUR/USD for downside breakout

                                  The spotlight today is firmly on the release of US CPI data for November. Expectations are for headline inflation to tick up from 2.6% to 2.7%, continuing its rebound from the September low of 2.4%. Meanwhile, core CPI is forecast to hold steady at 3.3%, staying in the 3.2%-3.2% range it has maintained since June.

                                  Unless today’s data deviates significantly from expectations, it is unlikely to deter Fed from delivering a widely anticipated 25bps rate cut next week, bringing the federal funds rate to 4.25-4.50%. Fed fund futures currently reflect an 86% probability of this move.

                                  But more critically, today’s readings could solidify the case for a pause in January, supported by futures pricing nearly 80% probability of such an outcome.

                                  A pause would allow policymakers to digest the inflationary implications of upcoming fiscal and trade policies under President-elect Donald Trump. Current Treasury Secretary Janet Yellen cautioned that Trump’s tariffs pose a dual risk of “derail the progress” on inflation and have “adverse consequences on growth”, creating a potential headache for Fed as it balances these challenges.

                                  Technically, EUR/USD would be a key to watch in reaction to US CPI. Recovery from 1.0330 short term bottom is seen as a corrective move, might could have completed at 1.0629 already. Break of 1.0471 support will suggest that fall from 1.1213 is ready to resume through 1.0330. Next target will be 61.8% projection of 1.0936 to 1.0330 from 1.0629 at 1.0254.

                                  BoC to flash rates by 50bps again in quick path to neutral

                                    BoC is widely anticipated to lower its overnight rate by another 50bps at today’s meeting, reducing the policy rate to 3.25%. This follows a similar move in October, aimed at addressing a cooling economy where inflation has been at or below 2% for three months already, and core measures remain slightly above target. Last week’s data showing unemployment rate jumping to 6.8% from 6.5% solidified expectations of a significant rate reduction.

                                    A recent Reuters poll highlighted this expectation, with 21 of 27 respondents predicting a 50bps cut and the remainder forecasting a more modest 25bps reduction. The primary argument for aggressive easing centers on the need to return interest rates to a neutral range, estimated between 2.25% and 3.25%. Following today’s expected cut, rates would align with the upper bound of neutral, still potentially exerting a mildly restrictive effect on the economy.

                                    However, there is an opposing view that recent resilience in consumer spending, inflation, and labor market data could justify a slower pace of easing. This argument suggests that BoC could take a more measured approach, affording time to assess the economy’s response to October’s 50bps cut before making further moves.

                                    Regardless, the debate now shifts to determining the eventual terminal rate, with clarity likely, hopefully, to emerge only in January’s Monetary Policy Report.

                                    Technically, similar to other Yen crosses, CAD/JPY’s corrective rebound from 101.63 should have completed with three waves up to 111.55. Further decline is expected as long as 55 D EMA (now at 108.65) holds. Break of last week’s low at 105.75 will resume the fall from 111.55 towards 101.63 low, and possibly through it to resume the larger decline from 118.85. However, the speed of the decline could more hinge on the development in Yen than Loonie.

                                    China’s trade data highlights persistent import weakness amid export slowdown

                                      China’s trade data for November showed weak signals as exports grew 6.7% yoy to USD 312.3B, down sharply from October’s 12.7% yoy expansion and missing expectations of 8.5% growth.

                                      Export performance varied across key regions, with shipments to the US rising 8% yoy, to the EU up 7.2% yoy, and to ASEAN growing by 14.9% yoy. However, exports to Russia declined by -2.5% yoy.

                                      On the import side, the picture was decidedly more negative. Imports fell by -3.9% yoy, marking the steepest decline since September 2023, and missing expectations of a slight 0.3% yoy increase.

                                      Weakness was broad-based, with imports from ASEAN dropping -3% yoy, the US contracting by -11% yoy, and the EU and Russia both registering declines of -6.5% yoy. These numbers underscore persistent weak domestic demand, consistent with recent data showing subdued consumer inflation.

                                      Trade balance widened from USD 95.7B to 97.4B, above expectation of USD 92.0B.

                                      Australia’s NAB confidence turns negative to -3 as business conditions deteriorate

                                        Australia’s NAB Business Confidence index slid sharply to -3 in November, down from 5 in October, returning to below average levels. Business conditions also weakened notably, dropping from 7 to 2, marking declines across trading, profitability, and employment metrics. Trading conditions fell to 5 from 13, profitability shifted into negative territory at -1 from 5, and employment conditions edged down to 2 from 3.

                                        Cost pressures showed little relief, with input costs largely unchanged. Labor cost growth held steady at 1.4% in quarterly terms, while purchase cost growth edged slightly higher by 0.2 percentage points to 1.1%. On the pricing side, output price growth remained unchanged at 0.6% in quarterly terms, with retail price growth retreating to 0.6% and recreation and personal services easing slightly to 0.7%.

                                        Full Australia NAB business confidence release here.

                                        RBA holds rates steady, dovish shift raises odds of Feb cut

                                          RBA held its cash rate steady at 4.35% as widely expected, but the accompanying statement marked a clear pivot towards a more dovish stance. While May remains the more likely timing for the first rate cut, February is now emerging as a real possibility, depending on upcoming Q4 jobs and inflation data from Australia.

                                          The most striking change in the RBA’s statement was its removal of the phrase “not ruling anything in or out” regarding future monetary policy decisions. This change aligns with the board’s growing “confidence that inflationary pressures are declining.” RBA acknowledged that some upside risks to inflation have eased and noted the gap between aggregate demand and supply capacity is continuing to narrow.

                                          Recent activity data, according to the RBA, has been “on balance softer than expected,” with the central bank pointing out risks of a slower-than-anticipated recovery in consumer spending. These factors collectively suggest a step away from inflation vigilance and a move closer to easing policy.

                                          Governor Michele Bullock later emphasized that the wording adjustments in the statement were deliberate. While she clarified that a rate cut was not discussed during today’s meeting, she acknowledged uncertainty over whether one could occur as early as February.

                                          Markets responded swiftly, with swaps traders raising the probability of a February rate cut to over 60%, up from 50% the previous day. Market expectations now fully price in two rate reductions by May.

                                          Full RBA statement here.