Podcast: UK Inflation data. Japan’s negative interest rates.

Created: 18th December 2023

So, what do we know?

(A forex, index, and commodity market review)

US indices extended gains last week, with the S&P500 achieving a seventh consecutive positive day last Friday, touching the highest level since January 2022 and within 2% of the all-time highs achieved on 4th January 2022.

Weekly change (amount change and percentage change on the week)

FTSE       +12    +0.16%  
DAX         -61     -0.36%   
DOW        +1,116    +3.08%        
S&P          +101    +2.18%   
NASDQ    +549    +3.42%
NIKKEI      +121    +0.37%  
Hang Seng  +377    +2.31%  

Three monetary policy meetings last week yielded the same rate decision, but the outlook and guidance provided by those making these key interest rate decisions differed.

The US Central Bank, the Federal Reserve, and its rate setting committee, the FOMC, did what was expected of them and kept rates on hold at 5.25%-5.5% band. This was never in doubt with the market projecting it a near certain outcome.

What was pleasing for the markets was the guidance and comments provided in the FOMC statement and underlined in the press conference that followed the meeting. For the past month, the markets had been at odds with the rate setters – with predictions in the forward interest rate market predicting cuts in rates as early as May next year but this was not the view from the FOMC.

This all changed last Wednesday when the FOMC announced that it was likely to be cutting rates in Q2 next year as Jay Powell stated that the target rate was “likely at or near its peak for this tightening cycle”. Not only did the FOMC state that it would be cutting rates next year, the DOT plot, which gives a graphical illustration of members expectations on rates over the next 2 years, showed a faster decline in rates than the market was expecting.

By end of 2024 committee members expect rates to be at 4.5% to 4.75% band whilst forecasts for the end of 2025 were 3.5% to 3.75%.

This softening in interest rate outlook caused US stock indices to jump 1.3% following the news last Wednesday evening, a move that persisted throughout the remainder of list week.

The ECB and Monetary Policy Committee here in the UK also delivered their final rate decision of the year, which was kept unchanged, as expected. However, unlike their US counterpart, the ECB and MPC rate setters were more downbeat about the prospects for rate cuts in 2024.

Christine Lagarde from the ECB was more cautious, stating that there was still “Work to be done” bringing inflation under control whilst Andrew Bailey from the Bank of England said there was “some way to go” in the UK in bringing inflation back down to target. The MPC reaffirmed its view that interest rates would have to be kept elevated for an “extended period of time” and left the option open for further rate rises.

This more cautious approach to potential rate cuts caused markets to stall following the bullish mood created by the Federal Reserve.

In the UK, it is more understandable why Andrew Bailey was more cautious, as the OBR predicted that inflation would only fall to 2.8% by end of 2024 and hit their target as late as mid-2025. The Bank of England is even more bearish of inflation, with the Bank predicting that inflation will be still at 3.4% at the end of 2024 and at 2.2% by end of 2025. Inflation has always been more of a problem in the UK than in other developed countries and so core inflation is notably stickier than in the Eurozone and the US.

What is interesting, however, is how bond markets have reacted to the interest decisions over the past three days. Despite the ECB’s Lagarde warning that there was still work to be done, bond yields sank in the last two days last week as investors believe the struggling Eurozone economy will result in rate cuts in Q2 next year.

The yield on the 10-year German Bund, the Eurozone benchmark, fell to 2.02% on Friday following some dire PMI data, from 2.59% a month ago, as investors bet that the ECB will be forced to cut rates. The flash composite PMI index fell to 47 from 47.6, below consensus and well below the key 50 level that marks contraction versus expansion in activity.

Contrast this PMI data with the UK, where the composite PMI Index jumped to 52.7 from 50.9 the previous month. Well ahead of the consensus. Maybe Andrew Bailey is right to be cautious.

EURUSD   +1.35     +1.25%  
GBPUSD  +1.33     +1.06%  
USDJPY   -2.83      -1.95%

The US Dollar lost ground in a knee-jerk reaction to the Fed’s dovishness over rates.

Projection of future rate moves now have the FOMC predicted to cuts rates by as early as March next year. UK forward rates are not as dovish, hence Sterling relative strength, with forward swap prices implying cuts of 1.15% by end of 2024 as analyst torn between decent data and evidence from other developed economies.

The Japanese yen jumped ahead of the BoJ monetary policy meeting this week although the central bank is expected to maintain the negative interest rate policy as the economy slows more than expected. Japan has not suffered the ravages of inflation over the past 24 months and so the BoJ is presented with a distinct set of conditions to deal with. Analysts  believe that the bank will maintain their current policy with more analysts warning now against any rush to raise rates.

Gold      +14     +0.70%   
UK OIL +0.92     +1.21%
US OIL +0.56     +0.78%

What don’t we know….yet?

(What traders need to look out for in the week ahead)

Gold rebounded modestly last week as the US Dollar softened following the Fed’s dovish comments. The outlook for the US Dollar versus the majors is not certain as other developed economies will surely follow the Fed into cutting rates in Q2 / Q3 next year.

Oil recovered some of its losses although on the back of profit taking following the recent sharp falls. IEA report about OPEC+ now controls less than half the oil market, the lowest level since the OPEC plus Russia cartels were formed in 2016. Not something the greedy members of OPEC+ will enjoy reading as they lose market share and sustain falls at the same time.


Germany IFO Business climate. Less gloomy but still struggling. EURO sensitive.


Japan BoJ policy meeting. Final meeting of the year as the bank is expected to keep rates negative as data worsens. Japanese Yen sensitive.


China 1-year and 5-year loan rates. No change expected from the PBOC as the property and house building sectors go through a painful period.

UK CPI Inflation. Headline inflation expected at 4.3%, a decline from 4.6%. Core inflation expected to decline to 5.6% from 5.7%. Could this pressure the MPC to change tack. Unlikely, GBP and UK assets sensitive.

US Conference Board Consumer confidence. Improving.


US Final of three readings of Q3 GDP. No change expected from what was an extraordinarily strong quarter for the US. Backward looking.

US Philly Fed Manufacturing index. Still struggling but a gradual improvement from April low point.


US Core PCE – Personal Consumption Expenditure. The favoured measure of inflation used by the Federal Reserve. +0.2% monthly, bringing annual rate to just 3%. USD and US assets sensitive.