Not the most thrilling start to the week but that’s to be expected given the number of major events over the last few sessions and the absence of anything significant today.
The second half of last week was quite the ride, with the Fed going further than many expected on rate cuts for next year, the ECB then pushing back stronger than anticipated, and the BoE proving they’re not even up for discussion yet as three policymakers voted to hike.
That said, it’s almost like the latter two never happened as markets are still pricing 150 basis points of cuts from the Fed and ECB next year and 100 basis points from the BoE.
There’s every chance the ECB messaging was designed to prevent a repeat performance of how markets responded to the Fed. And with the former not releasing a dot plot as their US counterparts do, it was easier to take that position. A lot is now priced in and the ECB was likely driven by the desire to stop conditions easing any further.
We’ve seen more pushback from policymakers on both sides since which suggests no one is particularly pleased with just how carried away investors have got. But as yet, it hasn’t had too great an impact and it may take a much bigger effort and some disappointing economic figures to kill the buzz.
We have inflation data from the US and UK this week which could easily do just that, although in the case of the former, the CPI numbers released a couple of weeks earlier tend to be more impactful even if these are the Fed’s preferred measure.
The BoJ overnight tonight will also be interesting given the amount of speculation about ending negative interest rates in the new year and further tweaks to yield curve control. This week probably still comes too soon but I would say this is still very much a live meeting that could surprise a few, if not in the form of the decisions then potentially the messaging.
Oil recovers as markets price in more rate cuts
Oil prices are recovering a little but remain broadly under pressure after falling 20% over two months from the middle of October. There’s still a lot of uncertainty and debate around the demand outlook for next year and it would appear the prospect of many rate cuts has boosted the odds of a softer landing which could support demand and may have done the same to the price in recent days.
But there are clearly risks to that, not least that markets may have become overly optimistic about cuts next year. Then there’s also the risk that past cuts could have an even more dampening impact on the global economy or that OPEC+ compliance is as weak as the deal indicated it could be. There are of course upside risks too, that demand and the economy outperform as they have this year which much lower interest rates could support.
Gold back above $2,000 but can it hold?
December has been a volatile month for gold, with the yellow metal kicking things off with new record highs before immediately giving those gains back to move below $2,000. The last week has seen it bounce back above $2,000, the question now is whether it’s a sustainable rebound. While the environment looks favorable for gold, recent moves suggest traders aren’t convinced at these levels and I’m not sure how much more optimistic on rates markets can reasonably become. A weaker dollar could help but if recent days are anything to go by, this may well become the season of pushback from central banks desperately trying to manage expectations.