U.S. markets brace for the Fed's final meeting of 2024, with a likely third rate cut anticipated despite inflation concerns. The ECB has already cut rates to 3%, while markets eye Trump's incoming administration. Meanwhile, gold prices rise 2.3% on rate cut hopes, and oil gains 4.6% amid potential Iran sanctions, though Chinese demand remains weak.
Trump's Shadow and the Fed's 2025 Playbook: Fewer Cuts, Bigger Questions
Inflation data from the U.S. has reinforced bets that the Federal Reserve will cut its policy rate for the third time this year at next week's meeting. However, there is growing speculation that the recent uptick in price pressures could make it harder for the Fed to continue with cuts at the pace previously anticipated next year.
On Thursday, factory-gate inflation data unexpectedly accelerated, driven by a 55% surge in egg prices. According to the U.S. Bureau of Labor Statistics (BLS), more than 80% of the overall increase was attributed to rising food prices. November's data revealed that the Producer Price Index (PPI) increased by 0.4% month-over-month, translating to a 3% year-over-year rise. The core index, which excludes volatile food and energy costs, indicated that annual producer inflation rose from 3.1% to 3.4%.
Nevertheless, the PPI report showed minimal changes in categories contributing to the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index. Bank of America economists estimated that changes in PPI components would add just 0.1% to the PCE data, a six-month low. This supports expectations that the Fed will decide in favor of a rate cut next week.
A separate report released Thursday revealed that unemployment claims hit a two-month high. Initial claims rose by 17,000 to 242,000 in the week ending December 6, exceeding economists' forecast of 220,000. Continuing claims, which track the number of people receiving unemployment benefits, increased to 1.89 million in the previous week.
The rise in initial claims likely reflects seasonal volatility due to the Thanksgiving holiday. However, the persistently high level of continuing claims, which recently hovered near a three-year peak, underscores that it's taking longer for U.S. workers to find new jobs.
The progress of consumer inflation toward the Fed's 2% target has stalled in recent months, though November's figures aligned with economists' expectations. Labor market data points to a cooling trend, but it is not yet indicative of a deterioration. When considered together, many economists argue that the current outlook does not provide sufficient grounds to deter the Fed from lowering rates at next week's meeting.
Meanwhile, expectations that the economic policies of the incoming Trump administration, set to take office in late January, will lead to higher inflation have continued to fuel the view that the Fed will need to slow the pace of rate cuts next year.
According to Bloomberg, economists' forecasts for 2024 range from quarter-point cuts at each meeting through mid-year to no action at all in 2025. Additionally, swap market data indicates that traders are pricing in a total of 85 basis points of cuts by the end of 2025, which implies roughly two more cuts next year in addition to the quarter-point reduction expected next week.
On the other hand, economists at Winshore Capital Partners LP argue that while the Fed remains focused on inflation, labor market data has taken on greater importance in its decision-making process. This view is supported by Bloomberg data showing that market reactions to job reports have recently outweighed those to consumer price data.
Meanwhile, a forecast released Thursday by the Philadelphia Fed suggested that second-quarter employment in the U.S. was weaker than official BLS figures indicate. Preliminary benchmark estimates pointed to a 0.1% decline in payroll jobs compared to the 1.6% growth reported by the BLS. This raised the possibility that second-quarter figures could also be revised downward after the BLS cut its March payroll count by 818,000, further fueling concerns about labor market cooling.
In conclusion, the current state of the U.S. economy supports an additional quarter-point rate cut by the Fed next week. However, policymakers will evaluate both inflation readings and labor market data together, aiming to set their 2025 projections in a way that balances both sides of their dual mandate.
Market observers will closely watch whether the Fed sticks to the four quarter-point cuts signaled in its September projections for 2025. Sentiment suggests fewer cuts next year, providing tailwinds for the U.S. dollar to continue strengthening against its peers.
Policy Pivot: How the ECB Is Shaping 2025 Projections
The European Central Bank (ECB) implemented its fourth consecutive quarter-point rate cut this year, reducing the deposit facility rate to 3% amid progress on inflation and a contraction in economic activity. Additionally, it signaled the potential for further cuts in the coming year.
Policymakers opted to remove the statement indicating that policy would remain "sufficiently restrictive" for as long as necessary. Besides, quarterly projections were updated, with growth and inflation forecasts revised downward to reflect the fragile environment in the eurozone.
Speaking at the press conference following the decision, ECB President Christine Lagarde noted that risks to growth remain tilted to the downside. She highlighted that political turmoil in France and Germany, along with uncertainties surrounding potential economic policies from Donald Trump, have increased uncertainty and complicated fiscal forecasts.
In light of the ECB's latest move and its signals for the year ahead, traders are betting on a 125-basis-point easing by 2025. Expectations of a widening interest rate differential continue to weigh on the euro, pushing it lower against the U.S. dollar. However, the full picture will become clearer after next week's release of the Federal Reserve's projections.
Gold Prices in Flux: Fed Cuts, Strong Dollar, and Beyond
As gold traders gear up for the final Federal Reserve meeting of the year, gold prices have risen approximately 2.3% since the start of the week, supported by data that bolstered confidence in a quarter-point rate cut.
However, expectations that the Fed will implement fewer cuts next year are capping gold's gains, while a strengthening U.S. dollar continues to exert downward pressure on prices.
Looking ahead, expectations that economic policies likely to be enacted during Trump's second term will widen U.S. fiscal deficits and increase inflation are keeping gold's 2025 outlook positive.
However, a report released by the World Gold Council on Thursday suggests that any rise in gold prices driven by U.S. inflation will likely occur at a slow pace.
Additionally, geopolitical risks and central bank purchases are expected to play a critical role in influencing gold prices in the coming period. Furthermore, gold demand from Asian investors, particularly in China, will remain a key factor.
In conclusion, until Trump's proposed policies are implemented and translate into higher inflation for the U.S. economy, the strong U.S. dollar and elevated Treasury yields are likely to continue weighing on gold prices. Nonetheless, traders will closely monitor developments in other factors that could help limit downside risks.
From Sanctions to Surplus: The Dual Forces Shaping Oil Prices
Oil prices have climbed by approximately 4.6% since the start of the week, as concerns over a potential global surplus next year were tempered by the possibility of tighter U.S. sanctions on Iran and Russia.
Donald Trump's nominee for National Security Advisor pledged a return to a "maximum pressure" campaign on Iran and indicated plans to evaluate new sanctions on Russia's oil trade. This has fueled upward volatility in oil prices by balancing traders' fears of a supply surplus.
However, a report released on Thursday by the International Energy Agency (IEA) indicated that despite OPEC+ delaying its decision to increase supply, global markets are likely to face a surplus next year. As a conclusion, ongoing concerns about demand continue to weigh on oil markets, with China's demand being especially critical.
The Chinese government is struggling to restore consumer confidence after a series of stimulus packages announced since September have done little to boost demand.
Traders are awaiting more comprehensive measures from senior Chinese officials, who are meeting this week to discuss reviving the economy. Unless optimism around Chinese demand improves, the upward momentum in oil prices is likely to remain limited.
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