PARIS (Reuters) – The agenda will be busy for the markets next week: the European Central Bank, the Federal Reserve and the Bank of England will each hold their monetary policy meeting, while a deluge of indicators – including PCE inflation in the United States and PMI indicators in the Eurozone – is expected.

Overview of the market outlook in the coming days:

1) The Fed sets the tone

The American Federal Reserve will be the first of the three main central banks to hold its monetary policy meeting on Wednesday, December 13, and investors and economists alike are certain: the central bank will maintain its rates at their current levels.

Restrictive monetary policy is in fact weighing on activity, despite the bond easing which saw the American 10-year yield post its best monthly performance since August 2011 in November: labor markets are running out of steam, consumer spending is slowing down, while inflation continues to decelerate.

It is therefore not on the level of rates, which should be maintained in their current range of 5.25%-5.5%, that the markets’ attention will be focused but on the speech of the governor of the institution, Jerome Powell.

This will probably oppose the very accommodating positioning of investors, in order to limit the easing of financial conditions.

“We expect the Fed to be wary of anything that could push markets to bet on even deeper rate cuts next year and drive down long-term Treasury yields,” the strategists say. from ING.

Another unknown lies in the management of the Fed’s balance sheet, which can provide the central bank with additional monetary tightening leverage, while repo rates jumped at the end of November and beginning of December.

The very accommodating positioning of the markets in favor of a soft landing followed by a rate cut seems counter-intuitive in any case.

“A central bank never lowers its rates when everything is going well,” recalled Alexandre Hezez, strategist of the Richelieu Group, during a conference on Thursday, stressing that central banks would remain focused on the fight against inflation – the specter of the 1970s and a rebound in price pressures still present in the memory of central bankers.

“The markets react quite poorly to the first rate cut of a cycle, historically.”

2) ECB balance sheet

The European Central Bank (ECB) will announce its decision on interest rates on December 14 – a decision again without much at stake, because the consensus unanimously expects a pause.

Like the Fed, however, investors will focus on other aspects: updating the economic projections of the institution’s teams, first, which could signal clear progress in the fight against inflation.

“Given weakening inflation and falling oil prices, the ECB will likely revise its inflation forecast for 2024 from 3.2% to 2.9%, while keeping 2025 at 2.1 % and forecasting 2% for 2026″, calculates Allianz Trade, which specifies that these projections will remain higher than market expectations (2.7% in 2024).

“The projections will therefore serve not only as a forecast but also as a communication tool to refocus the prospects of very aggressive rate cuts in the markets.”

Monetary policy makers must indeed reframe the expectations of investors, who are betting on around five cuts of 25 bp in 2024, starting in March.

The second point of focus could be on the management of reinvestments from the Pandemic Emergency Purchase Program (PEPP).

“The governors agree that the toll remains too large and that there is little reason to delay its reduction, the time therefore seems well chosen for the institution to announce the reduction of the PEPP from March or April , as long as the markets remain stable over the coming months”, estimates Anatoli Annenkov, economist at Société Générale CIB.

3) The Bank of England (BOE)

Like the ECB or the Fed, the BOE has also reached the end of its rate hike cycle, depending on the markets; and like the ECB or the Fed, the institution must now contain the overwhelming optimism of investors who expect more than 80 basis points of rate cuts next year.

The persistence of inflation, which remains well above the 2% target, at 4.6% in October, wage growth close to its record level at 7.7% in the third quarter, and sluggish growth indeed complicate the task of the British central bank.

“The question is not how much further the BoE will increase its interest rates, but rather when the first rate cut will take place (…) Our basic assumption is that there will be no rate cut in the first half of 2024 due to inflation and wage growth remaining stubbornly high,” explains Rufaro Chiriseri, head of fixed income at RBC Wealth Management.

The central bank should nevertheless insist to investors that their positioning is too accommodating.

“The BOE should allow itself the possibility of raising rates again, but we believe that the bar remains high for further tightening and that 5.25% is probably the peak for this cycle,” confirms Rufaro Chiriseri.

4) Data deluge

The operators’ agenda will be even busier as several indicators are expected next week – this at a time when, in a context of uncertainty over the economic trajectory, central banks and investors have become dependent on data to a record degree.

In the United States, CPI inflation for November will be published on Tuesday, followed on Wednesday by producer prices, which will make it possible to judge the transmission of the disinflationary phenomenon. On Thursday, retail sales for November will be published, consumer resistance having been one of the main supports for American activity, and industrial production for November is expected on Friday.

In the euro zone, industrial production is expected on Wednesday, followed on Friday by PMI activity indicators on Friday and French inflation.

Weekly wages in the United Kingdom will be released on Tuesday, followed by GDP for October on Wednesday and PMIs for December, which could confirm the rebound in activity.

(Written by Corentin Chappron, edited by Kate Entringer)

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