Weekly focus – At cut, a hike and a hold

Solid macro data and hawkish comments from ECB's Schnabel have moved investors' perception of the ECB's next move from cut to hike. This has triggered a further move higher in European bond yields this week. French bonds did experience some tailwinds, though, as the parliament narrowly approved next year's social security budget. Challenges remain ahead with the main budget up for debate next week. It has faced tougher opposition.

A not-so hawkish message from Fed chair Powell also dampened the upward trend in bond yields a bit. USD lost some ground in a week where equity markets edged higher, following the Fed communication. The Fed cut rates as widely expected and Powell made it clear that they are in no hurry to ease further. He also (against ours and markets' expectations) refrained from clearly pushing back against the market pricing, which currently sees slightly more than 50bp of additional cuts for the coming year. The JOLTS report indicated robust labour demand. Details were less rosy, though, as voluntary quits and hires declined, while involuntary layoffs increased.

In Germany, industrial production was significantly stronger than expected in October and Sentix data indicates that investors and analysts have become slightly less pessimistic on the euro area economic recovery in December. We expect PMIs will confirm the picture of decent activity next week.

More central banks will be busy taking a stance on their monetary policy. We expect to see a cut, a hike and a hold decision. The ECB will take the latter decision and reiterate that they are in a good place and signal that they will be on hold for a while. We see rates steady for the coming two years. We expect The Bank of England will deliver the cut as we have seen softer inflation, steeper job losses and GDP decline recently. The policy committee is divided, though, and we get fresh CPI data and a labour market report ahead of the meeting.

We count on the Bank of Japan to deliver the hike. In Japan, wages continue to struggle compensating for inflation with real earnings down 0.7% y/y. Besides that, the economy looks solid, though, and tightening is due to avoid further yen slide, which would be unconstructive for the aim of reeling in cost-push inflation. Ahead of the meetings, we will know more of the current shape of the respective economies with the Tankan business survey published in Japan and PMI data released for all three economies.

The data highlight of the week will be the delayed October/November jobs report from the US, where we believe the slowdown in labour supply growth will reflect in a modest 20K/50K job growth. US November CPI data will also be very interesting after the October data was cancelled. We expect core inflation steady at 3.0% yoy.

China releases their big monthly batch of data. We expect it to show more of the same, i.e. still weak consumer spending and housing market but decent increase in industrial production supported by robust exports.

Download The Full Weekly Focus