It is true that headline inflation in the UK has more than halved since March last year slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. This seems unlikely with today’s December inflation numbers unlikely to show a significant enough slowdown to support the idea of a rate cut much before the end of Q2, although that’s unlikely to stop markets trying to go down that rabbit hole. While this was in line with forecasts there were some who suggested it supported the idea of an early rate cut. This caution from the likes of the ECB as well as the Fed this week is likely to be echoed by the Bank of England when it looks at this week’s economic data, after the latest UK wages data slowed to 6.6% in November. The fact is that whatever the market may like to think about a Fed cut in March, the pricing risk is very much to the downside, and them not cutting, which suggests the risk of a further squeeze higher in yields. This approach tends to push back on the idea of a March cut, and that the central bank will be very much data dependant. His comments that rate cuts ought to be done methodically and carefully, and in a calibrated fashion, spoke to a central bank that is no rush, and that rapid cuts are not necessary.

This had all the hallmarks of being a triumph of hope over expectation and so it proved with Waller pushing back on market pricing of 6 rate cuts this year, as if he was going to do anything else with the Fed dots showing 3 rate cuts.

With the Federal Reserve set to meet in 2 weeks’ time there was some hope that Fed Governor Christopher Waller would echo the tone of Powell’s post December meeting press conference in talking up the idea of US rate cuts. Even the head of the German Bundesbank, Joachim Nagel was in no mood to compromise despite a German economy that contracted by -0.3% last year and is predicted to struggle again this year. The last few days have seen several ECB policymakers pour cold water on the idea of early rate cuts even in the face of a European economy that is on its knees. The other metrics for industrial production were slightly better for December, rising 6.8% while retail sales slowed from 10.1% to 7.4%, falling short of forecasts of 8%. The weak finish in the US looks set to see European markets open lower in the wake of a softer Asia session after China Q4 GDP came in slightly short of expectations at 1%. It was another poor day for European markets yesterday, with the return of US markets unable to lift the mood, as they too finished lower, due to a continuation of the hawkish rhetoric employed by central bankers this week as they pushed back on rate cut expectations which in turn helped to push yields as well as the US dollar sharply higher.

Squeeze momentum indicator mt4