8 min readWeekly Recap
Last week saw plenty of action, with the USD, GBP, JPY, and stocks all active as the Federal Reserve, Bank of England, and Bank of Japan met for policy decisions.
The Federal Reserve’s dot plot and comments for Powell were significant market movers. While the Fed cut rates by 25 basis points, as expected, the Fed’s projections, the dot plot showed that the central bank was looking to cut rates twice next year, down from the three rate cuts that were previously expected. Equities sold off, yields surged, and the USD strengthened to a 2-year high. Risk appetite was hit with tech stocks absorbing a lot of the risk of the move. The Nasdaq 100 fell 3.5% following the rate decision.
The risk of a U.S. government shutdown didn’t help sentiment. Still, it wasn’t all bad news. Friday’s core PCE data, which is the Fed’s preferred gauge of inflation, showed that inflation accelerated at a slower pace than expected in November, rising 0.1% month over month and 2.8% year over year.
The markets are expected to be quiet this week, and liquidity may be thin, which could cause some volatility if data points come in significantly above or below expectations.
Week Ahead
Santa Rally
Investors will be watching for signs of the Santa Rally or to see whether the Fed stole the Santa Rally. The annual Santa rally includes the last five trading days of the year and the first two of the following year. Since 1950, the S&P 500 has averaged 1.3% gains during this period compared to just 0.2% gains for any other random seven-day period throughout the year. Given these timings, this year’s official seven days are from December 24th to January 3rd. While this is traditionally a bullish time of year compared to other periods, the biggest concern is if Santa doesn’t appear. Historical data regarding the performance of stock markets show that if Santa Claus doesn’t show up, the market will suffer over the coming quarters. The S&P500 is recovering at the start of the week – will the Santa rally drive the recovery back above 6000?
UK GDP (Monday)
UK Q3 GDP figures will be out on Monday after months of disappointing economic releases for chancellor Rachel Reeves. Economists expect another lackluster reading following the Labour government’s budget, which places a heavy tax burden on employers. Disappointing numbers will raise concerns over growth heading into the new year and come after the BoE lowered its Q4 growth forecast to 0%, down from 0.3%. The central bank is concerned over the growth outlook for the UK, even as inflation remains stickier than policymakers would like, raising the prospects of stagflation. Weak data could pull GBP/USD lower.
US Consumer Confidence (Monday) & durable goods orders (Tuesday)
The US Consumer Confidence Index has risen over the past two months to nearly its highest level in two years, as consumers felt more optimistic about their job prospects—expectations for US consumer confidence to rise to 113 in December, up from 111.7 in November. Improving consumer confidence often goes hand in hand with higher consumption levels, supporting higher inflation.
Meanwhile, US durable goods are expected to decline 0.4% MoM in November after a gain of 0.3% in October. However, investors tend to follow the narrower index of non-defense capital goods orders, excluding aircraft, which is used in GDP calculations.
Stronger-than-expected U.S. data could raise the market’s expectations for a rate cut in the first quarter of next year, which could drag on stocks and Gold while boosting the USD.
The data comes after the Fed cut rates by 25 basis points in the December meeting. Still, policymakers signaled a slower pace to rate cuts next year amid a solid economy and signs of sticky inflation. Gold fell 1% last week after the Fed meeting. However, XAU/USD is rising at the start of the week.
BoJ meeting minutes (Monday)
BoJ minutes from the December meeting will be released late on Monday. As expected, the central bank left interest rates unchanged at 0.25% in the December meeting; however, forward guidance left the yen falling sharply lower as investors weighed up the timing of the next rate hike. BOJ governor Ueda focused on wages, suggesting a potential pause in rate hikes until the upcoming shunto (wage negotiations). Ueda also emphasized the need to assess the impact of Trump’s policies. Given that Trump won’t take office until January 20th, this could mean that the BoJ will wait until March to hike rates as soon as possible. The yen will also be in focus, given that its recent weakness could spur intervention warnings from Japanese authorities to support the yen.
BoJ Governor Ueda will also speak on Christmas Day, and Tokyo inflation is due on Friday.
USD/JPY trades around a 5-month high at the start of the week. A dovish-sounding BoJ could see the yen slide further.
RBA minutes (Tuesday)
The minutes of the latest RBA meeting will be released on Tuesday. At the meeting, the RBA left rates unchanged at 4.35%, which is in line with expectations, but also raised expectations of a February rate cut. Recent economic indicators support near-term cuts as the labour market has started to show signs of weakening, which indicates softer wage growth could be coming. This, in turn, could weaken consumer spending, easing the strong demand-driven inflation that Australia has seen. A combination of softer wage growth and a pullback in consumer spending could support a more dovish RBA.
Should the minutes support the view that the RBA is starting to adopt a more dovish stance, AUD/USD could fall further. The pair currently trades at a 2-year low.
Oil
Oil prices tumbled over 2.5% last week after the Federal Reserve meeting raised concerns over the outlook for oil demand in the US, the world’s largest oil consumer. The selloff in oil found some support on Friday after US core PCE data and has extended that recovery at the start of the week as the US government avoided a shutdown. This week, attention will remain on US data points for further clues about the demand outlook. Heading into 2025, the demand outlook will remain in focus as China, the world’s top oil importer, signaled to more stimulus measures in the coming year.
Oil trades below 70k and within a familiar range since September.
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