Fed to cut rates again
Sterling remained on the front foot yesterday following the release of firmer than expected UK wage growth data, which saw the market pare back expectations for Bank of England (BoE) rate cuts next year. This morning’s CPI inflation data in the UK were broadly in line with the consensus forecast, leaving the pound trading at around $1.2690 against the dollar and at £0.8270 vis-a-vis the euro. The latter is little changed against the US currency as it continues to hover around the $1.05 level. The Fed concludes its two-day monetary policy meeting later today – it is expected to lower its key policy rate by another 25bps, to a range of 4.25%-4.5%, so the interest will be in what it signals about the likely scale of rate cuts in 2025.
UK government bond yields jumped yesterday – by the best part of 10bps in the case of both 2-and 10-year yields – as the market reassessed the outlook for BoE rates, which it now sees being cut by circa 50bps next year, down from circa 75bps before the latest wage growth numbers. Elsewhere, US and German yields were flat to marginally lower on the day, as they continued to tread water ahead of the Fed meeting.
This morning’s CPI data in the UK were broadly in line with expectations. The headline rate of inflation picked up for a second month running in November, reaching 2.6%, while core inflation nudged up to 3.5%, with core goods inflation rising to 1.1% but core services inflation remaining at 5%. The further increase in overall inflation last month will not have come as a surprise to the BoE, unlike perhaps the latest wage growth data (the BoE will have more to say about this following tomorrow’s monetary policy meeting).
Yesterday’s economic data in the US were a mixed bag. Headline retail sales in November were stronger than expected, rising by 0.7% in value terms from October, while manufacturing output rebounded by less than expected last month, increasing by 0.2% after a fall of 0.7% in October, leaving it 1% below year-earlier levels.
Regarding today’s Fed interest rate decision, it looks set to cut its key policy rate by another 25bps to 4.25%-4.5%. This would bring the cumulative reduction since it started lowering rates in September to 100bps, in line with the “guidance” it provided in its Summary of Economic Projections at that time. The latter showed the Fed expected to cut rates by another 100bps (to 3.25%-3.5%) in 2025, though this may be pared back in its updated projections in light of firmer than expected economic growth and inflation lately.
On the economic data front today, a final CPI inflation reading for November and construction output are due in the Euro area, while housing starts and building permits are scheduled in the US.