Last decisions of the year for central banks

The US dollar has been fluctuating with expectations regarding interest rates in the United States, but, overall, it remains weak. Now that the market expects the Fed to slow down its pace of hikes, the euro has pushed well above parity against the dollar. After the release of the monthly employment figures on Friday, which showed that job creation slowed down in November but less quickly than expected and that wage growth remained high (+0.6% against +0.3% expected), a slowdown in the Fed’s pace of hikes is no longer so certain. The strong job creation figures are a real problem for the US central bank in its quest to bring down inflation and wages, among other things, by cooling down the labour market. These latest data could thus dissuade the Fed from reducing the size of its rate hikes despite the latest statements by Fed Chairman Jerome Powell. On Wednesday, Mr Powell spoke of a possible rate hike of only 50 basis points at the last Federal Open Market Committee meeting of the year on 13-14 December, compared to 75 basis points at the previous four meetings. All scenarios remain possible for December. Other published data does bring good news for the Fed as, in the third quarter, GDP growth was a little more sustained at 2.9% compared to 2.6% previously on an annualised basis. Figures for consumer spending have been revised upwards, as have those for investment, government spending and exports. On the services side, too, the news for the US economy is reassuring. The monthly ISM survey shows that the services PMI rose to 56.5 from 54.4 in the previous month, above the expected 53.3. The market, however, is eagerly awaiting the inflation data published on 13 December, the first day of the meeting, which will be a final indicator of the extent of the next rate hike.

Paradoxically, the euro is benefiting from this uncertainty, even though inflation is much higher in Europe despite the recession there and euro yields are much lower. Inflation still fell for the first time since June 2021. It was a small fall in prices over one month in November (-0.1%), but a much more significant one over one year, from 10.6% to 10%. The focus this morning will be on growth, which is expected to hit 0.2% for the third quarter. This encouraging news on the inflation front could prompt the ECB to also cut back by only raising its key interest rate by half a percentage point at its meeting on 15 December. For ECB chief economist Philip Lane, the consumer price index is probably near its peak. ‘But whether this already is the peak or whether it will arrive at the start of 2023, is still uncertain’, he said.

In Switzerland, GDP grew by 0.2% in the third quarter compared to the previous quarter. But the slowdown on an annual basis is significant: growth reached 0.5% compared to 2.8% previously. A deterioration in the economic situation is expected in the coming months. The KOF Economic Barometer fell for the fifth month in a row, with the services category in particular taking a beating. The manufacturing PMI fell from 54.9 to 53.9 points in November, the first contraction in orders since the summer of 2020.

In Australia, the central bank raised its base rate by 25 percentage points to 3.1%, as expected. This is the eighth consecutive increase and the highest level since November 2012. With an overall increase of 3% since May, it is also the largest annual increase since 1989. The Governor, Philip Lowe, has indicated that further rate hikes are expected in 2023 but the extent of the hikes will depend on future economic data.

In China, the yuan is recovering as health restrictions are eased in more cities including Beijing and Shanghai, a week after historic protests. In the Chinese capital, many businesses reopened this weekend and residents were able to use public transport. It required as much as 7.25 yuan to buy a dollar last week. It is now trading at less than 7 for a dollar.

Lastly, following an OPEC+ meeting earlier this week, which kept production unchanged, and despite the capping of Russian crude oil prices, oil prices fell. The WTI fell from $82.72 a barrel on Monday to $73.41 yesterday afternoon.