Early Morning Call: focus turns to BoE, ECB after Fed rate decision

Equity markets

US equity markets ended the session lower, following the Federal Reserve's (Fed) decision on Wednesday. APAC indices followed suit, and Europe opens Thursday’s session lower.

Central Banks

The Fed raised the benchmark federal funds rate by half a percentage point and signalled its intention to keep squeezing the US economy next year, as central banks on both sides of the Atlantic enter a new phase in the battle against inflation.

At its final gathering of the year, the Federal Open Market Committee (FOMC) voted unanimously to increase the federal funds rate to a target range of 4.25- to 4.5%, ending a months-long string of 0.75 percentage point rate rises. The pivot to smaller rate rises is likely to be followed internationally, with the European Central Bank (ECB) and the Bank of England (BoE) both poised to increase borrowing costs by half a percentage point on Thursday.

The BoE will announce its rate decision at noon today. The market is broadly pricing in a 50 basis point hike to take the main Bank Rate to 3.5%, a slowdown from November's 75 basis point increase, which was its largest in 33 years.

One factor in favour of a slowdown in the speed at which rates were raised last time around, was inflation. Having hit a 41-year high in October, the annual rise in the UK consumer price index slowed to 10.7% in November, undershooting forecasts.

The ECB is set for a 50 basis point rate hike on hopes that inflation has peaked. Of interest will be the degree of Quantitative Tightening or QT. It could see the ECB shrink its gigantic bond portfolio on its balance sheet. This is after years of government debt purchases and monetary stimulus. Another hot topic for the ECB's Governing Council, which concludes its meeting on Thursday with a press conference, will be inflation and possible peak inflation.

The Swiss National Bank (SNB) also makes a rate announcement today in an hour's time. As with its other recent meetings, it's expected to go for a 50 basis point hike. It comes in the context of a stabilisation of inflation at 3%.

Economists say that a further rate increase could occur in March 2023, after which rates are likely to remain unchanged. FX analysts say a further nominal CHF appreciation in the first half (H1) of 2023.

Macroeconomic indicators

Besides central banks, the markets have a long series of macroeconomic indicators to digest.

In Japan, trade deficit rose sharply to over ¥2 trillion November, more than double the deficit recorded in November 2021. This was the 16th straight month of the deficit as imports climbed 30.3% year-on-year (YoY) and exports grew at a softer 20%.

In Australia, the unemployment rate remained at 3.4% in November, matching market estimates. Employment increased by 64,000 to a fresh record peak of 13.77 million, beating market forecasts of a rise of 19,000. Full-time employment rose 34,200 while part-time employment gained 29,800.

In China, industrial production rose 2.2% in November from a year earlier, but missed expectations for a 3.6% gain, and slowed significantly from the 5.0% increase recorded the previous month.

Retail sales fell more than anticipated in November, by 5.9%. Economists had expected the index to shrink 3.7%. In October, retail sales fell by 0.5%. Fixed asset investment expanded 5.3% in the first 11 months of the year, versus expectations for a 5.6% rise and growth of 5.8% in January-October.

In the US, it will be a quite heavy day in terms of macroeconomic indicators, starting with retail sales for the month of November at 1.30pm. Economists expect the index to fall 0.1% compared to October. Also at 1.30pm, initial jobless claims and NY Empire State manufacturing Index for December.

A bit later, industrial production is forecast to rise by 0.1% in November month-on-month (MoM), and business inventories should show a 0.4% rise in October MoM.