Canada Lowers Rates by Half Point Again; Switzerland Delivers Bumper Rate Cut; ECB Decision Eyed By Vicky Ge Huang
Bank of Canada on Wednesday delivered a second straight half-point interest rate cut. Gov. Tiff Macklem said the rate cuts are necessary to absorb excess capacity that is weighing on economic activity and risks posing too much downward pressure on inflation.
Also on Wednesday, Brazil's central bank raised its benchmark rate by a greater-than-expected full percentage point and said similar moves are likely in the next two meetings. Banco Central do Brasil's steepening sequence of interest-rate increases contrasts with most other central banks.
European interest-rate decisions are in focus today, ahead of the Federal Reserve's meeting next week. The Swiss National Bank surprised markets by opting for a bumper half-a-percentage-point cut, knocking the Swiss franc. Next up is the European Central Bank's rate decision.
Meantime, another inflation reading is due from the U.S., this time the producer-price index for November. The consumer-price index came in as expected yesterday, and was viewed by traders as making a Fed cut a near certainty next week.
Heard on the Street's Aaron Back looks at whether the Fed could be done reducing rates after December. Don't expect the central bank to keep merrily cutting in the early months of next year, he says.
Top News ECB, Fed to Cut Rates. But Their Economies Have Different Outlooks.
The European Central Bank is making its last interest-rate decision of the year a week ahead of the Federal Reserve-and the two are likely to look very similar. Below the surface, though, they are worlds apart, writes Brian Swint for Barron's.
Both are expected to lower their key rates by a quarter percentage point-traders have priced in an 85% chance that the ECB moves its key policy rate to 3% from 3.25%. But whereas the Fed might start slowing down reductions next year, the ECB is more likely to plow ahead.
The difference is that, while interest rates on both sides of the Atlantic are considered high enough to be constricting the economy, growth in the U.S. has been substantially stronger and the inflation rate is still well above the Fed's target. Growth in Europe is tepid and inflation has been slower than in the States, even if it hasn't yet sustainably hit the ECB's 2% target.
The possibility that President-elect Donald Trump may put tariffs on European exports further darkens the outlook, throwing up new barriers to world trade and denting global expansion. On top of that, political crises in France and Germany, the two biggest economies of the 20-nations sharing the euro, have left both countries without functioning governments.
In fact, there's some debate about whether the ECB might opt for a half-point cut on Thursday-traders give it odds of 15%, according to LSEG data. Policymakers have been divided in the run up to the meeting, with some ruling out a bigger move while others say the rate-setting council should consider it.
"Negative risks have clearly increased" since the October meeting, said ING's Carsten Brzeski. "It will all come down to the question whether the ECB will follow its gut feeling on everything that could happen over the coming months" or "whether it sticks to the reality reflected in the staff projections, not taking into account all eventualities."
Swiss Central Bank Cuts Key Rate, Reining in Appreciating Franc
Switzerland's central bank cut its key interest rate for a fourth straight meeting Thursday, seeking to rein in its strengthening currency and protect its exporters amid high levels of uncertainty about the future of global trade.
The Swiss National Bank cut the rate to 0.5% from 1% , matching the half-point move announced by Canada's central bank Wednesday. Most investors expect the European Central Bank to announce a quarter-point cut later Thursday.
Bank of Canada Delivers Second Straight Half-Point Interest Rate Cut
For the second time in a row, the Bank of Canada cut its main interest rate by a half-percentage point , saying lower rates are needed to address weaker-than-expected growth and a softening labor market.
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Brazil's central bank lifted its Selic benchmark rate to 12.25% from 11.25%. Economists were already expecting a harsh move, but the pledge by the bank's monetary policy committee, the Copom, to keep hiking rates at a fast pace was unusual .
U.S. Economy Strengthening Inflation Poses Challenge for Trump, Fed
Progress on bringing down inflation stalled in November , with the consumer-price index of goods and services costs ticking up to a 2.7% increase.
Prices of consumer goods-everything from cars to living-room furniture, but excluding food and energy-increased at the fastest month-over-month pace in a year and a half, led by a jump in vehicle prices. That was partly because drivers replaced damaged cars and trucks after recent devastating hurricanes.
The rise is notable because prices for many goods had generally been falling or flat for about a year through August. That trend appears to have now reversed.
Inflation Is Stuck. Can Trump Unstick It? Producer Inflation Expected to Remain Hot in November
Wholesale inflation data on Thursday are likely to be the latest setback in the last mile of the Federal Reserve's inflation fight, but a December interest-rate cut will remain all but assured. The Bureau of Labor Statistics will release the producer price index for November on Thursday at 8:30 a.m. ET. The consensus estimate among economists according to FactSet calls for a 0.3% increase in the PPI last month, after a 0.2% rise in October. It is expected to be up 2.6% from a year earlier, versus a 2.4% annual increase a month earlier. (Barron's)
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Forward Guidance Thursday (all times ET)
8:15 a.m.: ECB interest rate announcement
8:30 a.m.: PPI
8:30 a.m.: Unemployment Insurance Weekly Claims Report - Initial Claims
10 a.m.: Quarterly Services
Friday
8:30 a.m.: Import & Export Price Indexes
Commentary Investors Shouldn't Count on Much Help From the Fed Next Year
Could the Federal Reserve be done cutting rates after December? That shouldn't be ruled out, writes Aaron Back for The Wall Street Journal.
Markets seemed undisturbed by Wednesday's inflation data, which showed consumer prices rising 2.7% in November from a year earlier, up from 2.6% in October. The S&P 500 rose 0.8%, and the Nasdaq closed above 20,000 for the first time. Perhaps that reflected relief that the reading was merely in line with expectations instead of ticking even higher and delivering a nasty surprise.
Nonetheless, the data confirms an unsettling trend that inflation's decline has halted, or at least stalled. Core consumer prices excluding food and energy rose 3.3% from a year earlier, similar to the pace at which they have been rising for several months now. Of particular concern was services inflation which, excluding energy services, clocked in at 4.6% year over year.
That doesn't seem like enough to discourage the Fed from plans to cut rates at its December meeting. As of Wednesday, futures markets were pricing in a 96% chance of that happening, according to the CME FedWatch tool. Markets are betting that the gradual slowdown in hiring over the past few months makes the Fed still comfortable with some additional easing. Month-to-month swings in such factors as labor strikes and hurricanes have made the data somewhat hard to read, but the underlying trend is still clear: The three-month average for job gains is down to 173,000 in November from 243,000 at the start of 2024.
Beyond December, futures prices now imply two or three more quarter-point cuts by the end of next year, assigning a roughly 30% chance to each scenario.
That could be too optimistic. Despite the slowdown, jobs are still posting decent gains, and overall economic momentum remains strong, with real gross domestic product growth clocking in at an annualized 2.8% in the third quarter. With inflation now clearly stuck at around 3%, above the Fed's 2% target, what compelling reason is there to keep cutting? Read more .
Research November CPI Cements Fed's Quarter-Point Rate Cut Next Week
The case for a 25-basis-point Fed cut next week was "cemented by the unexpected rise in unemployment, to 4.2% in November," Pepperstone's Michael Brown writes. November's CPI, which shows resilient inflation but not more than expected, isn't enough to change that prospect. Going into 2025, "policymakers will be concerned about the potential upside inflation risks." Brown says the Fed could hold rates steady in January or March. "On the whole, the pace of policy normalisation is likely to be much slower in 2025" that it has been this year, he says. - Paulo Trevisani
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12-12-24 0715ET
