ECB and BOE follow Fed in keeping rates on hold

Both the European Central Bank and the Bank of England kept policy unchanged at their respective policy meetings overnight. For the ECB, the bank held its deposit facility at 4% and noted that while inflation had “dropped in recent months, it is likely to pick up again.” The ECB forecast inflation slowing over 2024 but still not reaching its 2% target until 2025. The ECB also plans to accelerate its pace of quantitative tightening, reducing asset purchases by EUR 7.5bn per month in the second half of 2024 before bringing reinvestments to a complete stop by the end of next year. Markets are expecting to see a first cut in ECB policy by early Q2 next year with as many as five cuts priced in for 2024 as a whole.

For the Bank of England, it held the Bank Rate at 5.25% with three members voting for a 25bps hike. Given the relatively higher inflation profile in the UK than in peer economies (UK inflation was at 4.6% in its most recent print compared with 3.1% in the US), the BoE is maintaining hawkish language in its statement, saying that “monetary policy is likely to need to be sufficiently restrictive” and also seemed to look through the recent deceleration in wage growth in the UK. Markets are pricing in a first cut from the Bank of England as early as May next year.

US retail sales increased by 0.3% m/m in November, ahead of market expectations, while sales ex-gasoline rose a healthy 0.6% m/m. Sales at sporting and book stores as well as online purchases showed the strongest growth, suggesting some buying ahead of the holiday season. Control group sales, which are imputed into GDP calculations, rose by 0.4%. The sales numbers give more evidence that a soft landing is underway in the US even amid the headwinds facing the US economy. Elsewhere in the US, initial jobless claims dropped last week to 202k, down 19k w/w. Continuing claims for the week ending Dec 2 however, increased by 20k to 1.876m.

Industrial production data out of China improved for November, rising by 6.6% y/y and taking the year-to-date number to 4.3%, ahead of expectations. Retail sales, however, missed expectations, coming in at 10.1% but still ahead of the prior months 7.6%. Fixed asset investment eased, taking the year to date measure to 2.9%.

Today’s Economic Data and Events

12:15 FR HCOB composite PMI Dec (P): forecast 45

12:30 GE HCOB composite PMI Dec (P): forecast 48.2

13:00 EC HCOB Eurozone composite PMI Dec (P): forecast 48

13:30 UK S&P Global/CIPS composite PMI Dec (P): forecast 51

18:15 US industrial production m/m Nov: forecast 0.3%

18:45 US S&P Global US composite PMI Dec (P): forecast 50.5

Fixed Income

• US Treasuries extended their gains following the Fed earlier this week with the 2yr UST yield dropped a bit less than 4bps to 4.3882% while the 10yr UST yield fell about 10bps to 3.9208%. Markets will likely trade sideways with limited major data points until the end of the year and will be looking for forward-looking indicators to provide some sense on the timing of any initial Fed cuts.
• European bond markets were stronger overnight as the market seemed to accept the ECB’s stand-firm policy for now. Bund yields were lower by 6bps to 2.105% while in the UK gilt yields dropped almost 5bps to 3.779%.
• Emerging market indices were higher overnight. GCC credit rallied about 2.9% according to a Bloomberg index with gains across all economies.

FX

• The dollar sold off sharply for a third day running as markets absorbed the still hawkish messaging from the ECB and Bank of England, even if rate cuts are still priced in for next year. EURUSD jumped more than 1% to 1.0993 while GBPUSD added even more, up 1.2% to 1.2767. USDJPY dropped 0.7% with eyes to next week’s Bank of Japan meeting.
• Commodity currencies also fared well with USDCAD down 0.8% and AUDUSD adding 0.6% while NZDUSD gained 0.5%.

Equities

• Global equity markets extended their gains overnight with the Dow Jones in the US up 0.4% while the S&P 500 gained 0.3% and the NASDAQ limited its gains to 0.2%. In Europe, the FTSE added 1.3% while the EuroStoxx market gained 0.2%.
• Regional markets were all positive with the Tadawul gaining 1.2% while the DFM rallied more than 1% and the ADX rose 0.4%.

Commodities

• Oil prices rose strongly overnight, recovering some of their recent losses with Brent up 3.2% at UDS 76.61/b and WTI adding 3% to USD 71.58/b. The IEA revised their demand growth estimate for Q4 2023 lower by 400k b/d as the agency noted that “evidence of a slowdown in oil demand is mounting” thanks to a “deterioration in the macroeconomic climate.” The IEA also said that the OPEC+ production cuts may end up squeezing their market share as non-OPEC+ supply is set to continue performing well in 2024.