Markets Face Heavy Macro Risk on the Last Full Trading Week of 2024

Will investors care how FOMC and PCE inflation data shape bets on a cut in interest rates?

• Fed policy guidance will come into focus as a widely expected rate cut looms.
• The British pound is primed to move as the Bank of England walks a tightrope.
• U.S. PCE inflation data may do more with its passing than the substance

The tech-oriented Nasdaq 100 continued to outperform On Wall Street last week, scoring a gain of 0.6% while the broader S&P 500 backtracked a bit with a loss of 0.7%. Action-packed trade was centered on the bond market, where yields surged across the curve. Crude oil jumped as well, but kept to its two-month range.

Gold prices nudged higher as data from China showed its central bank resumed buying the metal for reserves in November after a pause from April. The U.S. dollar was little-changed on average, but made some headway against the Japanese yen as the rise in yields stoked the appeal of JPY-funded “carry trades.”

Against that backdrop, here are the key macro waypoints to consider in the days ahead.

Federal Reserve interest rate decision

The U.S. central bank’s policy-steering Federal Open Market Committee (FOMC) is overwhelmingly expected to deliver another 25-basis-point (bps) interest rate cut at its last conclave of 2024. The probability of the move is priced at a commanding 99.1%.

This means market-moving potential comes from the text of the policy statement, the quarterly update of the Summary of Economic Projections (SEP) and the press conference with Fed Chair Jerome Powell after the announcement. On this score, a kind of “buy the rumor, sell the fact” dynamic may be in the cards.

The markets have spent three months positioning for reflation after the U.S. central bank took a strong dovish stance in September even as the economy appeared to be accelerating. That triggered sharp rallies in Treasury bond yields and the U.S. dollar. Comments from Fed officials, including Powell, encouraged this process.

The markets are now set for just 50bps in cuts next year, down from 130bps in September. That’s the least dovish positioning since mid-April. To pace this shift, Fed officials would need to slash in half their previous estimate of 100bps, at minimum. Anything less aggressive may register as relatively dovish, boosting bonds and hurting the greenback.

Bank of England interest rate decision

The Bank of England (BOE) is expected is expected to keep the target Bank Rate unchanged at 4.75% this week. As with the Fed, this puts the spotlight on forward guidance. As it stands, the U.K. central bank is expected to deliver 70bps in cuts next year, implying at least two standard-sized 25bps reductions and an 80% probability of a third.

November’s consumer price index (CPI) figures are set to show inflation quickening to 2.6% year-on-year, the highest since March. That’s even as leading purchasing managers’ index (PMI) data shows economic activity has slowed to the weakest in over a year. The British pound looks set for fireworks as the BOE tries to reconcile this disparity.

U.S. personal consumption expenditure price index data

The Fed’s favored inflation gauge, the personal consumption expenditure (PCE) index, is expected to rise for a second consecutive month to 2.5% year-on-year. The core PCE measure excluding volatile food and energy prices—the focal point for monetary policy is seen hitting 2.9%, the highest since April. The rise would echo a similar uptick on the already-released CPI inflation gauge for the same period.

In fact, the markets can usually project PCE data with decent accuracy after CPI and PPI—the producer price index—have been published. That means this report may do more with its passing than its substance. The removal of event risk may give traders the green light to proceed with whatever emerges after the FOMC meeting across markets.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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