ECB to cut rates again; US inflation in focus ahead of next week's FOMC meeting

09 December 2024

Chris Scicluna; Emily Nicol
Euro area: ECB to cut rates for a fourth time this year, while updated projections should justify more dovish forward guidance

The main focus in the euro area will be Thursday’s ECB monetary policy decision, which will be accompanied by updated macroeconomic projections. Despite the confirmation of a pickup in euro area GDP growth in Q3 and headline inflation edging back above the 2% target, the Governing Council will cut rates for the third successive policy-setting meeting and fourth time this year. While certain Governing Council members, such as Banca d’Italia Governor Panetta, might articulate the case for an increment of 50bps this month, we expect the Deposit Rate again to be cut by just 25bps to take the deposit rate to 3.00%. Nevertheless, we expect the Governing Council to adjust its forward guidance to give a clearer sense of the likely future path of policy. Given the uncertainty of the economic outlook, it is likely to reiterate that it will continue to follow a data-dependent and meeting-by-meeting approach. But we also think it will acknowledge the increasingly two-sided nature of risks to inflation over the medium term, and that a greater emphasis on forward-looking indicators will be required from now on.

More dovish forward guidance should be justified by the ECB’s updated projections, which will likely revise down the inflation outlook. The ECB’s updated projections will likely bring forward from Q425 to mid-year the date at which inflation is expected to return to target. They should also retain a sub-2.0% full-year inflation projection for 2026. And in our view, there is a case for the inflation projection for 2027 – to be published for the first time – also to be slightly below 2.0%. Please see Friday’s Euro wrap-up for a more comprehensive look ahead.

Japan: GDP growth revised a touch higher in Q3, BoJ Tankan in focus at end of week

The second estimate of Japanese Q3 GDP growth was revised marginally higher from the flash release, up 0.1ppt to 0.3%Q/Q and 1.2%Q/Q annualised, albeit a notable slowdown from Q2 (0.5%Q/Q) due to one-off factors relating not least to weather disruptions. Despite being revised a touch softer from the first estimate, household consumption rose for a second successive month and by a solid 0.7%Q/Q, the most in six quarters. The decline in non-residential investment was a touch smaller than initially estimated and negligible (-0.1%Q/Q) to leave it up 2.6%Y/Y and some 2% above the 2019 benchmark. And residential investment was also revised higher (0.4%Q/Q), albeit remaining some 11% below the 2019 benchmark. The drag from net trade (-0.2ppt) was also smaller than initially estimated and reflected a drop in services exports in part due to overseas visitors being deterred by typhoons and warnings of a mega earthquake.

Sentiment indicators have been mixed so far in Q4. But while the PMIs point to stagnation, the Cabinet Office’s economy watchers survey (published overnight) saw the headline current conditions index rise to an eight-month high (49.4), comfortably above the long-run average. The government’s quarterly business survey for Q4 will be published on Wednesday. But most focus this week will be on the BoJ’s comprehensive Tankan survey on Friday. This is expected to show that sentiment among large manufacturers (DI of +13) was unchanged for a third consecutive quarter at the joint-highest level since Q122. And the equivalent DI for large non-manufacturers is forecast to have eased only very slightly from the 33-year high recorded in Q3. As such, firms’ capex intentions for the current fiscal year are likely to remain solid. Ahead of the BoJ’s Policy Board meeting next week, developments in firms’ inflation expectations will also be closely watched. Separately, goods producer prices data for November are due on Wednesday.

US: CPI and PPI inflation figures in focus ahead of next week’s FOMC meeting

Ahead of the FOMC meeting on 17-18 December, the main focus in the US will be November’s CPI inflation report on Wednesday. Daiwa America’s Lawrence Werther expects consumer prices to rise 0.2%M/M in line with the monthly increase in the previous four months but a touch below the Bloomberg survey consensus (0.3%M/M). While energy prices are expected to have risen, the increase in prices of core goods and services are also expected to remain stubborn at 0.3%M/M for a fourth consecutive month, with ongoing stickiness in services inflation. Overall, this would take the annual headline CPI rate up 0.1ppt to a four-month high of 2.7%Y/Y, while core inflation would remain steady at 3.3%Y/Y. Producer prices (figures due Thursday) are expected to rise 0.2%M/M in November – unchanged from October – with core producer prices up 0.3%M/M. Certain PPI components – including hospital prices, airfares and portfolio management fees – that feed into the Fed’s preferred core PCE deflator will be closely watched. In addition, tomorrow’s revised productivity figures are likely to confirm a modest stirring in Q3, while a downwards revision to unit labour cost growth would also be welcomed by the Fed.

UK: GDP growth likely remained subdued at start of Q4

The main UK release will be October’s monthly GDP data on Friday, which will provide the first official signpost for Q4 growth after the first estimates for GDP last quarter surprised to the downside (0.1%Q/Q). Overall economic activity softened in September (-0.1%M/M). And a decline in retail sales (-0.7%M/M) and less optimistic PMIs point to the likelihood of only a modest rebound in October (perhaps no more than 0.2%M/M) to maintain the three-month growth at just 0.1%3M/3M. Friday will also bring December’s GfK consumer confidence indices, while the BoE’s quarterly consumer survey will provide a timely update on households’ inflation expectations. Following the budget-led upward revisions to headline inflation in the Bank’s latest forecasts, now due to peak in Q325, policymakers will hope to see some confirmation that expectations remain well anchored. Finally, the RICS survey of surveyors (Thursday) will provide further update on housing market developments.

Euro area: October industrial production remained soft at start of Q4

A relatively quiet week for euro area economic news kicked off with the results of the Sentix survey for December, where investors judged current economic conditions to have deteriorated significantly, with the respective index the lowest for more than two years. The deterioration in part reflected a further weakening in German conditions, with the respective index the lowest since June 2020 and the global financial crisis before that. Meanwhile, the euro area’s aggregate industrial production data for October are due Friday. While the outcome will in part depend on Irish IP figures (due today), the downside surprises to both German (-1.0%M/M) and French (-0.1%M/M) output last week suggests that euro area production fell back slightly at the start of Q4. Final German inflation estimates for November are due tomorrow. After the flash release signalled that headline inflation moved sideways in the euro area’s largest member state last month, the final release should offer more encouragement that underlying inflation continues to soften. Notwithstanding the upward effects of energy-base effects to the headline measures, the final French and Spanish inflation estimates (Friday) should also reaffirm this more benign trend.

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