KUWAIT: This week, global markets witnessed significant developments shaped by economic data releases and central bank decisions. US inflation ticked up to 2.7 percent in November, in line with expectations, whilst jobless claims increased to 242K, reflecting a cooling labor market. These indicators strengthen expectations that the Federal Reserve will implement another rate cut in its upcoming meeting to support growth.
US dollar has strengthened significantly since late September, driven by expectations of trade tariffs, and looser fiscal policy under US president-elect Donald Trump. Meanwhile, the Bank of Canada reduced its policy rate by 50bps to 3.25 percent, citing subdued economic momentum and signaling more gradual monetary easing going forward. In Europe, the ECB lowered its deposit rate by 25bps to 3 percent amidst lowered growth forecasts for the Euro-zone and recent EUR depreciation, while the Swiss National Bank surprised markets with a larger-than-expected 50bps rate cut, responding to falling inflation.
Elsewhere, the UK economy contracted by 0.1 percent in October, adding pressure to the Labour government’s efforts to revitalize growth amidst lingering challenges. In the Asia-Pacific region, China’s CPI fell to 0.2 percent y/y in November, a five-month low, whilst PPI declined by 2.5 percent y/y, prompting authorities to adopt a "moderately loose” monetary policy stance. Meanwhile, the Reserve Bank of Australia held its cash rate steady at 4.35 percent but hinted at potential rate cuts in 2025, supported by an improved unemployment rate of 3.9 percent. These events prompted recalibrations in global growth expectations and monetary policy trajectories, influencing market sentiment across regions.
United States and Canada
President-elect Donald Trump announced he would not seek to remove Federal Reserve Chair Jay Powell before his term ends in May 2026, easing concerns about the Fed’s independence. Trump, however, outlined plans to enact sweeping tariffs, mass deportations, and tax cuts upon assuming office in January. Economists warn these measures could heighten inflationary pressures, constraining the Fed’s ability to lower interest rates overall. The Fed has already reduced its benchmark rate by 75bpsacross two cuts since September and hinted a slower pace of cuts in 2025. Trump has reiterated his intentions to curtail aid to Ukraine, reduce government spending, and deport undocumented immigrants while negotiating pathways for some. DXY was last seen at 107.003.
US Consumer Price Index
US inflation rose to 2.7 percent y/y in November, slightly up from October’s 2.6 percent, according to data from the Bureau of Labor Statistics. Core inflation, excluding food and energy, increased 3.3 percent y/y. The Federal Reserve is expected to make an additional quarter-point interest rate cut next week, which would lower rates to a target range of 4.25-4.5 percent.
However, officials remain cautious about the pace of future rate adjustments to balance inflation control with labor market stability. November saw robust jobs growth, but the unemployment rate rose to 4.2 percent. US Treasury Secretary Janet Yellen warned that President-elect Trump’s proposed tariffs could undermine control on prices and increase costs for households. Markets are currently pricing 73bps of cuts to the US benchmark rate through 2025 year-end.
US Producer Price Index rises
The US Producer Price Index (PPI) rose 3 percent y/y in November, up from 2.6 percent in October, significantly outpacing the forecasted 2.6 percent, according to the Bureau of Labor Statistics. On a monthly basis, the index increased by 0.4 percent, following gains of 0.3 percent in October and 0.2 percent in September. This marks a sustained upward trend in wholesale inflation, underscoring heightened producer costs. Analysts view the data as a potential precursor to increased consumer inflation. Indeed, the surge in PPI reflects rising input costs across sectors, with potential implications for monetary policy as the Federal Reserve evaluates the inflation trajectory ahead of its decision next week. Businesses may increasingly pass costs onto consumers, intensifying inflationary pressures.
US jobless claims rise
Initial jobless claims in the US increased by 17K to a seasonally adjusted 242K for the week ending December 7, exceeding economists’ forecast of 221K, according to the Labor Department. Continued claims, representing individuals receiving benefits after an initial week of aid, rose by 15K to 1.886 million, suggesting longer durations of unemployment for some workers. The unemployment rate edged up to 4.2 percent in November after holding steady at 4.1 percent for two months, reflecting a cooling labor market. This easing increases the likelihood of a Fed rate cut next week, despite limited progress in lowering inflation, as the central bank’s benchmark rate remains at 4.50-4.75 percent.
Canada cuts policy rate
The Bank of Canada reduced its key policy rate by 50bps to 3.25 percent, marking its fifth consecutive cut in six months, totaling 175bps. Governor Tiff Macklem signaled a shift toward a more gradual approach to future rate adjustments. Canada’s economy has been shrinking per capita for six consecutive quarters, with limited growth driven by population increases. Inflation is now at the 2 percent target, but growth slowed to 1 percent annualized in Q3. Additional risks include planned immigration reductions, federal tax rebates, and potential US tariffs on Canadian exports. Currency markets now price a 74 percent chance of a 25bps rate cut in January, with the bank’s policy rate near the so-called neutral range. Macklem noted that the central bank would prioritize long-term trends over temporary factors in future decisions.
Europe and United Kingdom
The European Central Bank (ECB) reduced its benchmark deposit rate by 25bps to 3 percent, marking its fourth rate cut since June. This move, reflecting softened hawkish language, comes amidst lowered growth forecasts, with the Euro-zone economy now projected to grow just 1.1 percent in 2025, down from 1.3 percent previously. Additionally, the 2026 and 2027 growth forecasts were reduced to 1.4 percent and 1.3 percent, respectively. ECB President Christine Lagarde indicated that while some officials had supported a 50bps cut, a unanimous agreement was reached for the quarter-point reduction. The ECB’s stance now suggests a potential for further borrowing cost reductions, with markets anticipating a total of 118bps of cuts through year-end 2025.
Inflationary pressures
The Swiss National Bank (SNB) reduced its key policy rate by 50bps to 0.5 percent, exceeding market expectations of a 25bps cut. Inflation in Switzerland continues to decline, with consumer price inflation falling from 1.1 percent in August to 0.7 percent in November, remaining within the SNB’s price stability range of 0-2 percent. Inflation forecasts for 2025 were revised downward to 0.3 percent, with expectations of 0.2 percent by Q2 2025. The SNB cited the appreciating Swiss franc, import price pressures, and economic uncertainty as contributing factors. While negative interest rates remain unlikely, the probability has increased. The euro briefly strengthened against the franc following the announcement but faces downward pressure moving forward. USD/CHF was last seen at 0.8927.
UK GDP contracts 0.1 percent
The UK economy unexpectedly shrank by 0.1 percent in October, following a similar contraction in September, according to the Office for National Statistics. The decline, falling short of economists’ expectations for a modest 0.1 percent expansion, signals a challenging start to the fourth quarter. Output in the services sector stagnated, while production and construction contracted by 0.6 percent and 0.4 percent, respectively. The OECD recently downgraded the UK’s 2024 growth forecast to 0.9 percent from 1.1 percent, citing weaker data, though a recovery to 1.7 percent growth is projected for 2025. Chancellor Rachel Reeves reaffirmed the government’s commitment to long-term growth, despite the setback to Labor’s promise of delivering the highest sustained growth in the G7.GBP/USD was last seen at 1.2619.
UK staff demand falls
Demand for staff in the UK declined to its lowest level in four years in November, with the vacancies index dropping from 46.1 to 43.9, reflecting the sharpest contraction since August 2020, according to a KPMG and Recruitment and Employers Confederation survey. October 30’s £40B tax-raising Budget’s £25B increase in employer national insurance contributions, combined with low consumer confidence and rising labor costs, has significantly dampened hiring activity.
Seasonal job postings fell 39 percent compared to 2023, while overall vacancies in retail declined by 27 percent y/y between August and October. Employers are favoring existing staff over temporary hires, with flexible contracts becoming more prevalent. Meanwhile, supermarket chains such as Tesco and Sainsbury’s reported scaling back seasonal hiring compared to last year, citing cautious hiring strategies.
Asia-Pacific
In November 2024, China’s consumer price index increased by 0.2 percent y/y, slowing from 0.3 percent in October and below the forecasted 0.4 percent, due to a 2.7 percent drop in fresh food prices from favorable weather. Core inflation edged up to 0.3 percent from 0.2 percent, indicating limited impact from stimulus measures. Meanwhile, the producer price index fell 2.5 percent y/y, extending a 26-month deflationary trend, though easing from October’s 2.9 percent decline.
Beijing’s recent debt package of 10 trillion yuan ($1.37 trillion) aims to address local government financing strains but has yet to yield significant economic benefits. Economists anticipate subdued inflation into 2025 amidst overcapacity, weak domestic demand, and expected US tariff hikes. Fitch Ratings downgraded China’s 2025 growth forecast to 4.3 percent, citing persisting economic challenges. USD/CNY was last seen at 7.2736.
China adopts monetary policy
China’s Communist Party shifted its monetary policy stance to "moderately loose” from "prudent” marking the first such adjustment in 14 years. The decision, announced during a politburo meeting this week, aims to bolster domestic demand amidst persistent deflationary pressures and economic challenges. The announcement emphasized "extraordinary countercyclical adjustments” and prioritized boosting consumption alongside improving investment efficiency, and expanding domestic demand. Following the policy shift, 10-year bond yields fell to a record low of 1.77 percent, whilst the Hang Seng China Enterprises Index rose before retreating after the Central Economic Work Conference which did not offer sufficient details on stimulus measures. Economists note that implementation will be crucial in determining the success of stimulus, as private sector confidence remains fragile.
RBA holds cash rate at 4.35 percent
The Reserve Bank of Australia (RBA) maintained its cash rate at 4.35 percent in its December meeting, softening its hawkish tone and indicating a closer likelihood of rate cuts in 2025. Weaker Q3 GDP growth of 0.3 percent q/q and subdued wage growth have added to the case for easing, with markets now assigning a 53 percent probability of a February cut. Headline inflation slowed to 2.1 percent y/y in October, within the 2-3 percent target, but the trimmed mean ticked up to at 3.5 percent. RBA Governor Michele Bullock emphasized that further decisions would depend on upcoming labor market, inflation, and consumption data. Market analysts noted the statement marked a deliberate shift in response to softer economic conditions. Bond futures rallied on the dovish signals. AUD/USD was last seen at 0.6362.
Australia’s labor market
Australia’s employment surged by 35.6K in November, surpassing forecasts of a 29.6K increase. Full-time roles grew by 52.6K, offsetting a decline of 17K part-time jobs. The unemployment rate fell to 3.9 percent, down from 4.1 percent, beating the projected 4.2 percent, while the participation rate eased slightly to 67.0 percent from 67.1 percent. The employment-to-population ratio rose to 64.4 percent, sustaining levels 2.2 percent higher than pre-pandemic figures. Monthly hours worked showed no growth, reflecting stable workforce activity. Statisticians attributed the sharp unemployment drop to a high transition of unemployed individuals into jobs, supported by population growth, which balanced employment expansion with labor supply.