Sentiment across markets was buffeted this week by a range of crosscurrents. Equity markets were broadly mixed across regions, the US dollar remained bid while long-end yields responded to escalations in the war in Ukraine and growth concerns in Europe. Weak PMI data for the euro area sent the EURUSD cross to two-year lows as markets increased bets for a 50bps rate cut from the ECB at the December meeting.
Trump's appointment of Scott Bessent to head up the Treasury department was the major news out of the US this week amid a light data calendar. Bessent, a hedge fund manager, is understood to have received the nod over the former Fed governor Kevin Warsh who the WSJ had reported was the frontrunner to land the key role ahead of a potential move to take over from Jerome Powell as FOMC Chair at the end of his tenure in 2026.
A series of weak PMI readings renewed concerns over growth in the euro area. The composite PMI gauge fell to a 10-month low sliding from 50 to 48.8 in November, a level indicating economic activity contracted in the month. Resilience in the services sector gave way as activity declined (51.6 to 49.2) and joined the manufacturing sector (46 to 45.2) in contractionary territory. The report firmly puts a 50bps rate cut from the ECB in December on the radar. Recall that the ECB cited weakness in the forward-looking PMIs as a key factor in its decision to cut rates by 25bps in October.
In the UK, stronger-than-expected inflation data on the back of the recent Budget have firmed pricing for a gradual BoE easing cycle - markets see 2-3 rate cuts over the next 12 months. Higher energy prices pushed up headline CPI from 1.7% to 2.3%yr (vs 2.2% forecast) in October, but firmer core inflation (3.2% to 3.3%yr) and services prices (4.9% to 5.0%) will be of more concern to the BoE. Recall that Governor Bailey recently said that rates would need to 'remain restrictive' until disinflationary progress broadens. Appearing with other BoE policymakers (Lombardelli, Taylor and Mann) before the Treasury Committee this week, Governor Bailey said that a cautious approach to easing was warranted due to uncertainty around how the rise in payroll tax announced in the Budget will play out in the economy, whether firms pass through higher prices or adjust wages or employment.
The minutes of the RBA's November meeting conveyed that policymakers were still awaiting more disinflationary progress before considering rate cuts. Markets picked up on a line that for the Board to lower rates, it would need to see 'more than one good quarterly inflation outcome'. Assuming that the Q3 CPI report where headline CPI slowed sharply qualifies as a good report, the Q4 CPI report due late January could put rate cuts back on the radar. The recent hawkish repricing of the RBA outlook has seen the timing for the first cut pushed out to the second half of next year.
