ECB and BoE meetings this week
The dollar and sterling both lost some ground to the euro last week, largely related to the differing monetary policy stances of the main central banks. While the Fed and Bank of England (BoE) are in easing mode with the BoE likely to follow last week’s Fed interest rate cut with a 25bps reduction of its own at its meeting this Thursday, the ECB looks firmly on hold and is widely expected to keep rates unchanged for a fourth consecutive meeting this week (also on Thursday). The Bank of Japan meets as well this week – on Friday – with a 25bps rate hike, the second this year, on the cards. There’ll be plenty of focus too on the US jobs report for October-November to be published tomorrow, as the performance of the labour market in particular is likely to determine the extent and timing of further Fed rate cuts. The euro starts the week trading just shy of $1.1750 against the dollar and at about £0.8775 versus sterling (up circa a cent and half a penny respectively from this time last week), while the pound is trading at around $1.3370 against the dollar.
Developments in government bonds markets reflected the contrasting outlooks for the central banks. US and UK yield curves both steepened last week, with 2-year yields falling by 3-4bps but 10-year yields rising by 5-7bps. In contrast, the German yield curve flattened slightly amid chat that the next move in ECB rates will be up (though not anytime soon), with 2-year yields increasing by about 7bps and 10-year yields around 5bps higher. Meanwhile, equity markets ended the week on a soft note. The Nasdaq shed 1.7% on Friday, as AI concerns were to the fore, and the S&P lost just over 1%, with both ending lower on the week overall, while European stocks fell by around 0.5% albeit they were largely unchanged on the week.
Fed member Goolsbee, who dissented in favour of keeping interest rates on hold at last week’s meeting, said in a statement on Friday that he believed the central bank should have waited to get more economic data, especially about inflation, before lowering rates further. He said he was uneasy about “too heavily front-loading rate cuts” and just assuming that the recent uptick in inflation will be transitory, particularly as inflation has been running above target for some time.
As mentioned, the central bank meetings and US jobs reports will command most attention this week. Other economic data of note due include flash PMIs for December in the main economies tomorrow; retail sales (Tuesday) and CPI inflation (Thursday) in the US; and labour market and CPI inflation reports in the UK tomorrow and Wednesday respectively. The latter are expected to show unemployment nudged up further to 5.1% in the three months to October and headline inflation edged down for a second month running in November to 3.4%, outcomes that would copper-fasten expectations for a BoE rate cut on Thursday.