Sample Category Title

GBP/JPY's rose further to 198.93 last week as corrective pattern from 180.00 extended with another rising leg. As a temporary top was formed, initial bias is neutral this week first. Further rally will remain in favor as long as 194.04 support holds. Break of 199.79 will target channel resistance (now at 203.09).

In the bigger picture, price actions from 208.09 are seen as a correction to whole rally from 123.94 (2020 low). The range of consolidation should be set between 38.2% retracement of 123.94 to 208.09 at 175.94 and 208.09. However, decisive break of 175.94 will argue that deeper correction is underway.

In the longer term picture, considering bearish divergence condition in W MACD, 208.09 is at least a medium term top. It's still early to conclude that the up trend from 122.75 (2016 low) has completed. But it's at least in a medium term corrective phase, with risk of correction to 55 M EMA (now at 172.51).

EUR/JPY's rally from 156.16 extended higher last week. The development is in line with the case that corrective pattern from 154.04 is extending with another rising leg. Initial bias stays on the upside for 166.67 resistance next. For now, risk will stay on the upside as long as 159.79 support holds, in case of retreat.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). The range of consolidation should have been set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high. However, decisive break of 152.11 would argue that deeper correction is underway.

In the long term picture, considering bearish divergence condition in W MACD, 175.41 is at least a medium term top. It's still early to conclude that up trend from 94.11 (2012 low) has completed. But a medium term corrective phase is in progress with risk of deeper fall back to 55 M EMA (now at 147.55).

EUR/GBP rebounded ahead of 0.8201 key support again last week but upside was limited below 0.8326 resistance. Initial bias is neutral this week first. On the upside, break of 0.8326 resistance will indicate short term bottoming, on bullish convergence condition in 4H MACD. Intraday bias will be turned back to the upside for 0.8446 structural resistance next.

In the bigger picture, focus stays on whether 0.8201 key support (2022 low) is strong enough to complete the whole down trend from 0.9267 (2022 high). In any case, medium term outlook will be neutral at best until decisive break of 0.8624 key resistance. Otherwise, risk will stay on the downside even in case of strong rebound.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD's rally from 1.5963 continued last week and the break of 1.6598 resistance confirmed that correction from 1.7180 has already completed, after defending 1.5995 key support. But as a temporary top was formed at 1.6712, initial bias stays neutral for consolidations first. On the upside, break of 1.6712 will resume the rally from 1.5693 to retest 1.7180 high next.

In the bigger picture, EUR/AUD is holding on to 1.5996 key support despite brief breach. Larger up trend from 1.4281 (2022 low) is still in favor to resume through 1.7180 at a later stage. Nevertheless, sustained break of 1.5995 will indicate that such up trend has completed and deeper decline would be seen.

In the longer term picture, rise from 1.4281 is seen as the second leg of the pattern from 1.9799 (2020 high), which is part of the pattern from 2.1127 (2008 high). As long as 55 M EMA (now at 1.6052) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF reversed after edging higher to 0.9417 last week and the strong break of 0.9343 resistance suggests that corrective rebound from 0.9204 has completed already. Initial bias stays on the downside this week for 0.9254 support first. Break there will bring retest of 0.9204 low. On the upside, above 0.9340 minor resistance will turn intraday bias neutral.

In the bigger picture, a medium term bottom is probably in place at 0.9204. More consolidations would be seen above there with risk of stronger rebound to 38.2% retracement of 0.9928 to 0.9204 at 0.9481. But outlook will remain bearish as long as 0.9481 holds and another fall through 0.9204 to resume larger down trend is in favor.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Corrective pattern from 0.9407 (2022 low) might have completed with three waves to 0.9928. Decisive break of 0.9252 (2023 low) will confirm long term down trend resumption to 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. For now, outlook will stay bearish as long as 0.9928 resistance holds, even in case of strong rebound.

Monday, Dec 23, 2024

Tuesday, Dec 24, 2024

Wednesday, Dec 25 2024

Thursday, Dec 26, 2024

Friday, Dec 27, 2024

• The Federal Reserve’s policy change and economic projections have significantly impacted markets, leading to a rise in US yields.
• The US PCE data released on Friday rose less than expected, alleviating some selling pressure on US equities.
• The Bank of Japan held rates steady, defying expectations of a rate cut, while the risk of a U.S. government shutdown increased.
• The upcoming week is expected to have thin liquidity and range-bound trade due to the Christmas holiday and a bank holiday in the UK and other countries.

Week in Review: Hawkish Fed Sends Markets into a Frenzy

A week that finally confirmed the long anticipated ‘pivot’ by the Federal Reserve from a policy perspective. I do not like using the word pivot until the Fed actually confirms that rate cuts are over, however, this week’s announcement and update to the economic projections have had such an impact.

Market participants are now pricing in around 40 bps of cuts through December 2025 as a rise in US Yields has also been mooted.

Source: LSEG (click to enlarge)

The impact was widespread across markets with US equities experiencing their worst day since August. The VIX (volatility index) experienced its second largest daily jump in history as markets attempted to digest the Fed outlook.

The losses extended to global equities on Thursday and early Friday before the US PCE data provided some respite. Although the PCE (US personal consumption expenditure) remains strong it did rise less than expected which helped alleviate some selling pressure on US equities.

Similar moves were experienced on the FX front with the US Dollar strengthening across the board as the US Dollar Index breached a crucial resistance area. EUR/USD was back in the 1.0300 area while Gold prices plummeted, surrendering the $2600/oz handle before bouncing back above on Friday as well.

Oil prices continue to feel the weight of growing demand concerns. Given the change in rate cut expectations for 2025, markets are even more concerned about the impact this will have on demand moving forward.

In Asia, the Bank of Japan (BoJ) held rates steady and defied growing expectations of a rate cut. Improving data in Japan did not do enough to convince the BoJ yet, but a rate hike in early 2025 looks probable.

As the Japanese Yen continues to weaken this might also play a role in when the BoJ may decide to hike rates. The Central Bank has said that the decision will not be based on exchange rate, but if anything has become clear, it is that what the BoJ says and does are usually not the same.

The risk of a U.S. government shutdown went up this week after President-elect Donald Trump told Republican lawmakers not to back a temporary funding bill that was expected to pass in Congress. With no backup plan in place, the government is once again at risk of shutting down. While it might not hurt the economy as much as the 2018 shutdown, it’s still a tough situation for public workers, especially during the holiday season.

We are heading into a relatively quiet week for markets with Christmas on Wednesday. There is some high impact data next week but I expect thin liquidity and a lot of rangebound trade.

The Week Ahead: Thin Liquidity Expected with Japanese Inflation and UK GDP Data

Asia Pacific Markets

The week ahead in the Asia Pacific region still brings some high impact data from Japan.

Tokyo inflation data is due out on December 26th and this will come just one day after a speech by BoJ Governor Ueda. Markets might look toward the Ueda speech for more clues on when the BoJ might finally make its policy move.

An uptick in inflation could also be seen as a positive for a potential rate hike early in 2025.

Europe + UK + US

In developed markets, it is a quiet week as well with the biggest data release being UK GDP Q3 data due out on Monday. The UK has a bank holiday on December 26 along with a host of other countries which makes the week a short one as well.

The Turkish Central Bank will have its rate cut meeting next week. The Central Bank of Turkey hinted that it might start cutting interest rates soon, with a possible move in December. The bank explained that any rate cuts will depend on both current and expected inflation levels. This means they will carefully consider inflation data before and after making any changes.

As things stand, a rate cut does appear likely with my best estimate in the range between 200-250 bps of cuts.

Chart of the Week

This week’s focus is on US Equities and the S&P 500 in particular following its worst day since August.

Despite the selloff this week, there remains significant optimism for the US Equity market and thus the S&P 500. The S&P has just enjoyed back to back years of tremendous growth and yet the historical data supports further gains.

The S&P 500 has gained an average of 12.3% following the eight instances of back-to-back 20% annual gains since 1950, according to Ryan Detrick, chief market strategist at Carson Group, compared to a 9.3% overall average increase over that time. The index increased six of the eight times.

The biggest concern is that weighting of the index is providing a skewed view of actual performance given the Magnificent 7 accounts for more than 30% of the index. Until Friday, the S&P had 13 straight days with a greater number of S&P 500 components closing lower than those closing higher, the longest streak since 1978. This is a concern in my humble opinion.

Source: LSEG (click to enlarge)

The S&P 500 looked in danger of a deeper correction early on Friday having breached the weekly low. The index touched a daily low of 5789 and came within a whisker of the 100-day MA.

The rally late on Friday has changed the outlook given the size of the rally with the index up around 1.5% at the time of writing.

The PCE print may have had a hand in the rise while there are also options worth $6.6 TRILLION in notional value expiring today which could be having an impact as well.

Looking ahead and a daily hammer candle close as things stand will alter the outlook and likely embolden bulls once more. On the daily timeframe this could be seen as a pullback following the break of bullish structure on Wednesday.

However, if you drop down to a four-hour timeframe (H4), structure has changed to bullish once more with the previous lower high being broken by the current H4 candlestick.

However, caution may still be the smart play if the index approaches the 6000 and 6030 handles respectively. A clean break and H4 candle close above the 6060 handle could bring the 6170 handle back into focus.

S&P 500 Daily Chart – December 13, 2024

Source: TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

• 5910
• 5871
• 5828

Resistance

• 6000
• 6030
• 6093

Canadian Highlights

• The Fall Economic Statement (FES) was delivered amid a chaotic week for the federal government. Larger deficits and modest stimulus were features, although the FES is unlikely to change the Bank of Canada’s thinking on policy.
• Data on the real economy was mixed, with gains in home sales and starts in November, but flat retail volumes in October and (potentially) November.
• Core inflation was sticky in November, strengthening the case for a patient approach to rate cuts next year.

U.S. Highlights

• The Federal Reserve cut its policy rate by 25 basis points to 4.25-4.5%, as expected. But, updated forecasts showed that FOMC members now expect inflation to be a bit hotter next year, and as a result expect to make only 50 basis points in cuts next year, down from 100 bps in September.
• Economic growth was revised upwards in the third quarter. Real GDP rose 3.1%, up from 2.8% previously.
• There was also good news on the Fed’s preferred inflation gauge. The Core PCE Deflator held steady at 2.8% in year-on-year terms in November, but cooled noticeably on a month-to-month basis.

Canada – Capping the Year Off with a Bang

What a year this week was! The show stealer was Minister Freeland’s surprise resignation the day she was set to deliver the Fall Economic Statement (FES). What’s more, the Canadian dollar fell below the psychological 70 U.S. cents mark (as of writing), weighed down by the prospect of a slower pace of U.S. rate cuts.

Amid the federal government chaos, the FES was tabled (see here). As expected, the Liberals blew through one of their self-imposed fiscal guideposts (FY 2023/24 deficit was $60 billion, a 50% miss relative to the guidepost), but could still hit the other two (declining net debt-to-GDP and a deficit-to-GDP ratio below 1%). Even with one of these guideposts missed, the reality is that Canada’s fiscal position is strong relative to its international peers and the federal government maintains its a AAA rating on its debt.

About $20 billion in net new measures were announced in the update, including $18.4 billion to extend the accelerated investment incentive and immediate expensing measures (under the capital cost allowance rules) that were due to be phased out. These measures have lowered the marginal effective tax rate on investments by 3.1%, on average. The government will also spend $1.3 billion on border security to ease President-elect Trump’s concerns. The GST holiday is slated to cost $1.6 billion, and we envision it offering a marginal lift to economic growth in early 2025, but not enough to significantly move the dial. For the Bank of Canada, there was probably not much in the FES to significantly alter their thinking on monetary policy. However, Canada’s fiscal situation is worse off than what was expected in the spring (Chart 1), offering less space to offset negative economic developments.

On the data front, home sales posted a firm gain in November, and benchmark home prices jumped 0.6% on the month. That’s likely to catch the Bank of Canada’s attention given the upside potential for shelter cost inflation. Homebuilding was also solid last month, with starts climbing 8%. However, they continue to retrench in Ontario, which is the market that can least afford a slowdown given affordability challenges. On the softer side, retail sales volumes were flat in October (and could be again in November), although this followed hefty monthly gains in the prior three months.

November’s inflation report was the marquee release of the week. Overall inflation dipped to 1.9% in November. However, the Bank of Canada’s core inflation measures stalled at 2.7%. Also concerning was a back-up in shorter-term metrics. The 3-month annualized change in core inflation pushed above 3%, and the less volatile 6-month trend points to further upward pressure in 12-month core inflation ahead (Chart 2). These trends are certain to unsettle policymakers and support the Bank of Canada’s position that it will be more patient on future interest rate cuts. We think the Bank will proceed more slowly in 2025, with one 25 bps cut per quarter (see our updated Quarterly Economic Forecast). However, the U.S. tariff threat makes the outlook for the economy, and monetary policy, highly uncertain.

U.S. – Fed Signals a More Cautionary Stance on Rate Cuts Next Year

The Federal Reserve delivered some sour candy to cap off 2024, cutting its policy rate by 25 basis points, but signaling a more moderate pace of cuts next year. This hawkish tilt sent Treasury yields higher, with the 10-year rising from just under 4.4% to briefly over 4.6%. Equity markets took the news hard, with the S&P 500 down roughly 3.5% from pre-meeting levels at time of writing. Part of the weak equity market performance may also have to do with a looming government shutdown. Washington has only a few hours to pass a funding bill into law. Failure to do so will lead to a partial government shutdown. Essential services would continue, but most federal workers wouldn’t receive a paycheck. In addition, some workers would be furloughed until Congress passes new funding. The Bipartisan Policy Center estimates that some 875 thousand federal workers would be furloughed.

The Fed’s quarter point interest rate cut was as expected, but the accompanying Summary of Economic Projections (SEP) raised a few eyebrows. While the median forecasts for economic growth and the unemployment rate were little changed, the outlook for inflation and the policy rate were raised noticeably (Chart 1). Focusing on the year ahead, the median projection now has the Fed Funds Rate ending next year 50 basis points higher than expected in September. This is in tune with a firmer outlook for core inflation. Asked about the more cautious stance on rate cuts, Fed Chair Powell listed several reasons. These included the economy growing at a better pace and inflation coming in a bit hotter than expected recently. Powell also highlighted an elevated uncertainty around the inflation projections – a theme that was visible in the SEP document, with uncertainty and upside risks to core PCE inflation both up noticeably since September. Pressed on how much of the difference could be explained by the evolving data versus potential policy changes from the new Trump administration, the Fed Chair acknowledged that some policymakers did take preliminary steps to incorporate “highly conditional estimates of economic effects of policies into their forecast at this meeting”.

This week’s economic data buttressed several of Powell’s comments. The third estimate of Q3 GDP indicated that the economy grew at an improved pace of 3.1% annualized, up from 2.8% previously. At the same time, the November personal income and spending report indicated that consumer spending should end the year on solid footing. Consumer spending is on track for a solid 3% pace in the fourth quarter of 2024. That is only a small downshift from 3.5% pace in the third quarter. The November report also carried some better news on inflation, with the Fed’s preferred inflation gauge – core PCE – cooling noticeably in November, up a modest 0.1% month-over-month. While the annual pace remained at 2.8%, this latest cooldown helped reverse near-term trends lower (Chart 2).

Overall, with the economy remaining on decent footing and inflation seemingly having resumed its downward path, there is room for further policy normalization next year. But, the potential for major policy changes from the new U.S. administration remains a wildcard.

Summary

United States: That's a Wrap

• The outlook for 2025 is riddled with uncertainty, yet data released this week demonstrate a U.S. economy that retains momentum. Ascertaining what level of policy restraint achieves the careful balance of keeping inflation in check and easing stress on interest-rate sensitive sectors will dominate the monetary policy discussion come 2025.
• Next week: ISM Manufacturing & Services (Jan 3, 7), Employment (Jan 10)

International: Brazilian Real Responds to a Lack of Fiscal Credibility

• The Brazilian real sold off sharply late last week on fiscal deficit worries, and the selloff continued into this week as markets lost more confidence in Brazil's ability to achieve its budget targets. These spending concerns drove Brazil's currency to a new low against the U.S. dollar this week.
• Next week: Brazilian Policymakers (Mon-Fri), Mexico Inflation (Mon), Turkish Central Bank (Thu)

Interest Rate Watch: FOMC Cuts Rates, but Pace of Easing Ahead Likely Will Slow

• As widely expected, the Federal Open Market Committee (FOMC) cut the target range for the federal funds rate by 25 bps at its meeting this week. The FOMC has now cut its target range by 100 bps from its peak of 5.25%-5.50% through moves of 50 bps in September, 25 bps in November and 25 bps on Wednesday.

Credit Market Insights: Household Net Worth Climbs in Q3 on Strong Equity Markets

• Household net worth climbed $4.77 trillion in the third quarter according to data released last week from the Federal Reserve. Net worth has now risen in four consecutive quarters and in seven of the last eight, with strong performance in corporate equities and mutual fund shares doing a lot of the heavy lifting.

Topic of the Week: Will Federal Government Spending Be Slashed in 2025?

• The outlays of the federal government totaled roughly $6.8 trillion in the fiscal year that ended on September 30. With a new president and Congress taking control of Washington D.C. in January, focus has turned to whether significant spending cuts are on the horizon.

Full report here.

The final major data point from Statistics Canada in 2024 will be Monday’s gross domestic product release for October, which will be the last GDP print before the Bank of Canada’s Jan. 29 meeting. We look for a 0.2% increase that would be the strongest monthly gain since April, and firmer than the 0.1% advance estimate a month ago.

Activity in both the goods and services sectors will likely show an uptick in October. Early data is showing a rise in oil production in Alberta. The manufacturing sector posted a stronger month with sales (excluding price changes) up 1.4%. Retail sale volumes held steady in October but wholesale sales edged up and residential real estate posted a notable jump.

Still, softer momentum in earlier months means the tick higher in October output would leave GDP growth in Q4 as a whole tracking below the BoC’s 2% forecast—something the central bank already acknowledged when it made another 50 basis point cut to the overnight rate in December.

We expect the early estimate for November GDP will show limited growth, even with a likely boost in the entertainment sector from a fortnight of unusually well-attended concerts in Toronto. A 0.2% pull-back in November hours worked was partially related to labour disputes at ports and the Canada Post strike. Our tracking of consumer spending also looked softer in November with early holiday shopping potentially delayed ahead of a GST holiday that started mid-December.

The BoC signaled firmly in December that policymakers are planning a more gradual pace to interest rate cuts going forward, but we continue to expect the overnight rate will ultimately need to fall to net stimulative levels (below the BoC’s current 2.25% to 3.25% estimate of the neutral range) to allow the economy to strengthen and prevent inflation from running significantly below the 2% target.

Week ahead data watch