Key events this week – US durable goods orders, RBA & BoJ minutes
Recap from last week: Fed signals shift to a cautious approach to further rate cuts.
The FOMC decision last week signaled a more hawkish shift in the Fed’s stance. Even the decision to cut rates by 25bps last week was described as a “closer call” by Fed Chair Powell. There was one dissenting vote – Beth Hammack preferred to keep policy settings unchanged.
The Fed’s Dec decision reflected a shift away from ‘recalibrating policy’, to being “at or near a point at which it will be appropriate to slow the pace of further adjustments”. After 100bps of cuts over the last three meetings, the Fed signaled that it is now “significantly closer” to the neutral policy rate, and it will be moving cautiously on further rate cuts. The SEP reflected fewer rate cuts for 2025 – with 50bps of cuts penciled in at this stage.
“Nonetheless, we see ourselves as still on track to continue to cut.” Fed Chair Powell, Press Conference 18 Dec 2024
This shift partly stems from a change in the Fed’s view on the upside risk to inflation. While the Fed maintains its belief in the disinflationary trend, it acknowledges that more work needs to be done to bring inflation down. PCE inflation is likely to end the year higher than expected, and FOMC members now project higher headline inflation at the end of 2025, with a longer path back to the 2% target according to the latest SEP. The stalling progress on inflation was acknowledged at this meeting;
So you’ve got, you had two months of higher inflation, September and October, as I mentioned November is back on track but once again we’ve — we’ve had a year-end projection for inflation and it’s kind of fallen apart as we’ve approached the end of the year.
“…inflation has once again underperformed relative to expectations.” US Fed Chair Powell, Press Conference 18 Dec 2024
However, the slower rate cut path also considered that the growth outlook is likely to remain stronger and unemployment stable, while near-term, policy uncertainty remains elevated. New guidance reflected this firmer growth backdrop and slower progress on inflation, emphasizing the need to carefully consider the “extent and timing” of further rate cuts. Fed Chair Powell noted that the FOMC will be looking for further progress on inflation and continued strength in the labor market before considering additional rate cuts.
The Nov PCE inflation report showed some improvement on a monthly basis, with headline inflation moderating to +0.1%. However, the annual inflation rate increased from +2.3% in Oct to +2.4% in Nov, highlighting the Fed’s ongoing concerns. While headline inflation was +2.7% a year ago, most of the 0.26 percentage point decline since then occurred in the first half of the year. Moreover, the projection for headline PCE inflation in 2025 has been revised upward to +2.5%, exceeding the +2.1% projected in Sept.
Core PCE inflation has remained firm, posing a challenge for the Fed. While acknowledging this, Fed Chair Powell highlighted progress in certain areas. In Nov, core PCE inflation remained unchanged at +2.8% year-over-year, with the monthly rate easing to +0.1%. A year ago, core PCE was at +3.2%, with most of the 0.4 percentage point decline occurring in the first five months. This context informs the Fed’s 2025 projection. Core PCE is projected to reach +2.5% by the end of 2025, representing a decrease of only 0.3 percentage points from the November 2024 level. This slower pace of deceleration compared to earlier in the year underscores the challenge for the Fed. Despite this, Fed Chair Powell emphasized that a decline to +2.5% core PCE inflation by the end of 2025 would still represent “significant progress.”
So we and most other forecasters still feel that we’re on track to – to get down to 2 percent it might take another year or two from here, but I’m confident that that’s the path we’re on. US Fed Chair Powell, Press Conference 18 Dec 2024
Both measures of PCE inflation were projected to be at 2% at the end of 2026, as recently as the September projections. The projection of 2% inflation has now been pushed out to the end of 2027.
There was a varied emphasis regarding the other central bank decisions last week.
The BoE kept rates unchanged as expected, however, that decision was based on a 6-3 majority. There seems to be a narrowing path for the BoE; inflation is firm and domestic price pressures are “resolving more slowly” than expected, while near-term activity has been weakening. This is against a backdrop of elevated levels of policy uncertainty based on the Autumn budget measures, geopolitical uncertainties, and trade policy uncertainty.
The BoJ also kept policy rates unchanged and tended to emphasize maintaining more accommodative settings for now. Accommodative financial conditions are aiding the recovery, while inflation is forecast to reach the price stability target in H2 2025. Risks and uncertainty over trade policy remain elevated. Governor Ueda’s press conference seemed to be setting up for a later rate hike;
Ueda said more information on Japan’s wages and the policies of US President-elect Donald Trump is needed before the BOJ can decide on a rate hike. Source: Bloomberg
Outlook for the week ahead; Holiday week, US durable goods orders, and RBA/BoJ minutes.
It will be a short week with a quiet data calendar. US data highlights will be limited to the advance durable goods orders and new home sales – both of which will add to a further update to the Atlanta Fed GDP nowcast for Q4 growth. Several central banks will release minutes this week.
Key factors to watch this week:
- US Durable goods orders for Nov are expected to fall by -0.4% in Nov after increasing by +0.3% in Oct.
- New home sales are expected to increase at an annualized rate of +0.66m in Nov, up from 0.61m in Oct.
This data will top up the robust update on the US Q4 GDP run rate from last week. The Atlanta Fed GDP nowcast has the US Q4 growth run rate currently at +3.1%.
- The Tokyo CPI for Dec will provide an advance read on Japanese inflation for Dec. Tokyo core CPI ex fresh food is expected to increase to +2.5% in Dec, up from +2.2% in Nov.
There will be several central bank minutes released this week;
- The BoC will release the summary of deliberations for its 11 Dec meeting.
- The RBA will release the minutes of its latest meeting in Dec. This should provide some further background behind the shift from a restrictive outlook to a more dovish tone.
- The BoJ will release the minutes of the Oct meeting.
This week, the US Treasury will auction and settle approx. $513bn in ST Bills and FRNs, with a net paydown of -$42bn. The 2-year, 5-year, and 7-year Notes will be auctioned this week and will settle on 31 Dec.
QT this week: Approx $4.6bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
From our team to yours, we extend warmest wishes for the holidays. May the New Year bring you health and happiness!
