BoE set to cut, and BoJ set to hike as markets drift into Christmas

1) Bank of England rate meeting – 18/12 – At the last Bank of England meeting the MPC voted by a slim margin of 5-4 to keep rates unchanged at 4%, with Alan Taylor, Swathi Dhingra, Alan Taylor and Dave Ramsden all voting to reduce by 0.25%. The central bank appears to think that inflation has peaked and that disinflation is now starting to kick in. With the November budget now in the rearview mirror there is a little less uncertainty around the economic outlook, with some on the MPC suggesting that some of the measures in the budget could exert some downward pressure on prices. The main risk in November which prompted the likes of Governor Bailey, as well as Pill, Lombardelli, Greene and Mann to vote to keep rates where they are was concerns that inflation may well be stickier than they would like. This fear of inflation persistence which in some parts of the economy has eased could well prompt Governor Bailey to shift his vote towards a cut, however the jury remains out on the others like Megan Greene who appears to be of the opinion that could well be some upside risk. The recent budget is likely to play into some of those concerns with yet more minimum and living wage increases, which could well get passed through in the form of higher prices. There is of course another risk, and that could be that instead of passing through increased costs in the form of higher prices, employers could merely cut costs in the form of headcount and drive the unemployment rate higher. As things stand the odds look set for a 25bps rate cut, albeit with a split vote of 5-4 or 6-3.

2) ECB rate meeting – 18/12 – Although we are seeing evidence that headline CPI is starting to edge higher there is little indication that the ECB will do anything other than hold rates where they are as we head into 2026. Having been one of the first central banks to start cutting rates back in 2024, the ECB has now been on hold since June when the headline rate was due to 2.15%. Some market pricing for 2026 has suggested that the ECB could be forced to push rates higher on the potential for a possible economic rebound, largely on the back of recent remarks from German ECB board member Isabel Schnabel earlier this month that she was comfortable with the idea of a 2026 rate hike. While this comes across as unlikely it does make some sense given that the ECB was the frontrunner of the recent rate cutting cycle and also the first to signal a pause. It therefore stands to reason it could lead the way in hiking, especially since services inflation in the EU area is starting to accelerate higher again.

3) UK Unemployment/Wages (Oct) and UK /CPI (Nov) – 16/12 and 17/12 – With the UK unemployment rate already at 5% and the highest level since May 2021 there is a risk that we could well edge towards the levels we saw at the end of 2020 when we peaked at 5.3% in the aftermath of the Covid lockdowns. Some in the government would like you to believe that the labour market is in better health than is being suggested, with Parliamentary Secretary in HM Treasury Torsten Bell citing the employment rate of 75%, however this figure doesn’t include the long term sick which has risen sharply higher in recent years, and completely ignores the fact that since July 2024 unemployment has risen from 4.1%, an increase of almost 25%. On the plus side inflation does appear to be showing signs of slowing, however the slowdown is glacial in nature with headline CPI in October slowing to 3.6%, and back to the levels we saw in June, having spent 3 consecutive months at 3.8%. While the slowdown to 3.6% was broadly welcomed it was still slightly above expectations of 3.5% and it is this stickiness that was behind the decision by the Bank of England to hold rates where they were at the last meeting. Core prices also slowed in October, slipping slightly to 3.4% from 3.5%, however the good news ended there, given that food inflation, after slowing in September to 4.5%, rose to 4.9% in a sign that while inflation may well be slowing, consumers once again appear to be the last to feel the effects of it. There was some good news on services inflation which slowed as well, slipping to 4.5% from 4.7%. While the odds have shifted towards a rate cut this coming week the continued resilience of food inflation is likely to continue to give headaches to UK policymakers as that will be the main area that could put upward pressure on wages. Food inflation has been above 4% for the last 6 months and shows little signs of a move back to the levels it was at the end of last year when it was 2%.   

4) US Payrolls & CPI (Nov) and (Oct) estimate - 16/12 and 18/12 – Having seen the Fed cut rates by 25bps earlier this month, the US government shutdown is likely to have had a material impact on the latest November, as well as the October estimates of the US labour market. Furloughed employees, while technically still employed and likely to receive back pay can impact the household survey. This is because they can show up as being counted as temporarily laid off, and therefore unemployed, which could push the unemployment rate up temporarily. These sorts of anomalies are likely to cause a skew in the data which can be difficult to measure and as such could mean that these delayed data points are unlikely to be as meaningful in the short term, until the data settles down again, probably in the New Year, once any possible seasonal boost has also subsided. With US CPI also due this week we could see a similar narrative play out when these numbers are released on the 18^th. The most recent CPI numbers were from September when inflation was at 3% - is it higher or lower now? Who knows, and quite honestly who cares given the Fed cut rates last week on concerns over the labour market. Merry Xmas and a Happy New Year. ;) 

5) UK Retail Sales (Nov) – 19/12 – With the November budget still front and centre of people's thinking it’s quite likely that the weakness seen in the October retail sales numbers could well continue into November. Last year saw a similar pattern play out as uncertainty ahead of the October 2024 budget saw retail sales in the final quarter of 2024 post 3 consecutive months of declines of -0.3%, -0.3% and -0.4% respectively, as consumers hunkered down in the face of rising inflationary pressures across the board. From September 2024 there followed 5 consecutive months of weakness, before February 2025 saw a sharp rebound of 1.5%. Having seen consumers hunker down in the face of the chaotic economic briefings seen at the end of last year, it almost defied belief that the government repeated the very same approach that killed business and consumer confidence back then, although the steep decline in October of -1.1% did come off the back of a strong run of 4 consecutive months of gains. That said it's hard to be optimistic about the latest November retail sales numbers given the backdrop that led-up to the November budget with the early briefing from Chancellor Reeves at the beginning of the month, followed by the heavy leaking of possible policy moves and U-turns that ensued in the lead up to the actual budget itself. The hope is that we might see a post-budget rebound as a result of the ensuing clarity around the outlook, however we won’t know that for sure until the beginning of January when many of the major retailers announce their post-Christmas trading updates.     

6) US Retail Sales (Nov) – 16/12 – The lead-up to Thanksgiving generally tends to offer a significant lift to US retail sales, and with the US government shut down ending on 12^th November we could well have seen a collective sigh of relief boost to US spending in the lead-up to this year’s annual US holiday. We have seen a pick-up in consumer confidence since the shutdown ended, although headline CPI did edge back to 3% in the most recent numbers, although those were the September numbers. It’s hard to say where headline inflation is now given the lack of data since then which means the underlying economic numbers are much harder to assess.  

7) Bank of Japan rate meeting – 19/12 – Unlike many of its peers the Bank of Japan is in rate hiking mode, albeit from a much lower base, from -0.1% at the end of 2024, to 0.5% now and with the prospect we could see an increase this week to 0.75%. This expectation of further rate increases has driven a sharp rise in JGB yields with the 10-year JGB rising to its highest level since 2007, while the 20- and 30-year yields are at or close to record highs. The 30-year JGB recently popped above 3% and is rapidly closing in on the 3.5% area, up from 2.25% at the end of 2024. Compare that to the US 30-year yield which while still at a heady 4.8% is little changed from where it was at the end of 2024. This continued erosion in long term yields, if continued, could have profound implications for global bond markets if Japanese investors take the view that yields have risen far enough to justify repatriating some of their overseas holdings of US treasuries, and other foreign owned government bonds. For a start the currency risk becomes much less if yields start to become more equal. There is also the risk that a continued rise in JGB yields will manifest itself in rising yields across the globe as investors look to extract a higher risk premium for supporting indebted governments, of which Japan is one of the highest.

8) Currys H1 26 – 18/12 – When Currys reported in the summer there was optimism that the electrical retailer would be able to build on a solid end to 2025 with a similarly strong performance in 2026. Full year group revenue of £8.7bn was solid, with the UK business driving the improvement with a 4% increase in like for like sales, which saw revenue there rise from £4.97bn to £5.29bn.  Group adjusted profit before tax came in at £162m, an increase of 37%, while cashflow rose to £149m an increase of 82%. A 1.5p final dividend was also announced. In September the shares rose strongly after the company carried on in a similar vein and a 3% increase in like-for-like sales in Q1, driven primarily by the UK and Ireland business. Management said trading was in line with expectations with net year end cash expected to be at least £100m. In a boost for shareholders the company also announced a £50m share buyback, which helped the shares rise to their highest levels since April 2021 back in October.  

9) FedEx Q2 26 – 18/12 – The FedEx turnaround story continued apace in Q1 after the logistics company beat forecasts despite a fall in international export volumes due to US tariffs on China. Q1 revenue came in at $22.24bn while profits jumped to $912m up from $892m a year earlier with the shares seeing some solid gains over the past 3 months with the shares back close to their highest levels this year. While there was an acknowledgement that international trade pressures had added an extra $1bn to its costs this year, its drive to cut costs as well as a stronger domestic market was helping to offset that. Domestic parcel volumes rose by 4%, helped by the duty exemption on goods valued under $800. Its $1bn cost cutting plan is also helping to protect its margins, and which saw operating margin increase to 6% from 5.2% during the quarter. For Q2 FedEx says it expects profits to come in above the $4.05 level we saw at the same time last year. For the full year FedEx said it expected revenues to rise between 4% and 6% and an EPS range of between $17.20 and $19 a share.

10) Nike Q2 26 – 18/12 – Nike shares got a brief lift at the start of October after reporting Q1 results that were better than expected, however the boost proved to be brief with the shares now down at their lowest levels since June.  A 1% increase in revenue was much better than the 7% decline which had been forecast, while its forecast for Q2 was in line with forecasts at -3%. The company said that tariffs were still weighing on its business, saying that they expect the hit to be $1.5bn, and hit its gross margin by 1.2% in the current fiscal year, a significant deterioration compared to their Q1 forecast. Q1 revenue came in at $11.7bn, up from $11.59bn a year ago and well above forecasts of $11bn. Net income came in at $727bn, down from over $1bn a year ago. The business in China has continued to be its Achilles Heel with revenue down 9% there, while its direct-to-consumer business saw sales fall by 4% to $4.5bn.