Will the Bank of England deliver some Christmas cheer?

The final full week before the Christmas break will not be a quiet one. The central banks of the US and UK have their monthly meetings, and we get a host of economic data to ponder. It was a lacklustre week for the S&P 500, as the index’s leadership has once again narrowed to the Mag 7. The S&P 500 advance-decline spread remaining in negative territory for nine consecutive days. The FTSE 100 struggled to make any gains. US treasury yields rose, the 10-year yield getting close to 4.5% once again. The dollar gained on the week as we saw several central banks, including the ECB, cut interest rates, the Swiss Central Bank by 50 basis points. The ECB lowered rates by 25  basis points as the euro area economy continues to struggle for a variety of well-documented reasons, and the governments of Germany and France remain in flux. In delivering the 25 basis point cut, Christine Lagarde set a more dovish tone going forward, expressing her belief that inflation is on track to meet the ECB goal of 2% and that growth remains a concern. The market now expects 25 basis points in January, followed by a further cut in March.

It would be a surprise to the market if the Fed did not follow suit this week and cut interest rates by another 25 basis points. But in contrast to the ECB, Mr Powell’s tone is expected to be more hawkish, as the economy appears resilient and inflation is above the Fed’s target. Indeed, some could question the Fed’s cutting at all in the current financial climate. The Bank of England’s decision is the trickiest of them all; we saw that the UK economy shrank for the 2^nd consecutive month according to data released last Friday, whilst inflation remains above the Bank’s 2% target. Ahead of the meeting, there will be plenty for the rate-setting committee to ponder, which could, in turn, influence the meeting on Thursday. Later today, we get the monthly flash PMI estimates from S&P Global. On Tuesday, we get unemployment and earnings data. On Wednesday, the monthly inflation data. According to a FactSet consensus, the headline consumer price index rate is forecast to rise to 2.7 per cent in November. If the Fed is willing to cut rates despite a stronger economy and an inflation rate above target, then why should the Bank of England not follow? We shall see.

The primary data dump for the US is on Tuesday, and it will include retail sales and industrial production. We also get the monthly flash PMIs.

This morning, China released some mixed data. Industrial production exceeded expectations, but retail sales were disappointing, leading to weakness in Asian markets. Markets in Europe and the UK look to open roughly where they closed on Friday.