In the upcoming financial week, several key economic indicators are set to be released, which will be closely monitored by market participants, here’s what to expect: US CPI, China GDP, UK CPI and GDP.
The Federal Reserve made limited progress on inflation throughout 2024, with most measures finishing the year only slightly lower than where they began. While policymakers had hoped inflation would settle around 2.0% by now, persistent upward price pressures have kept it closer to 3.0%.
However, the Fed's recent shift to a more cautious approach has revealed some encouraging signs in the November CPI report. Price increases in the shelter and broader services categories—key contributors to inflation's stickiness—are starting to ease.
This opens the door for a potential downside surprise in the CPI report set for Wednesday, although any significant slowdown is more likely to occur in early 2025 rather than December. Analysts expect a 0.3% month-on-month increase in CPI, below the 0.4% gain predicted by the Cleveland Fed’s Inflation Nowcast model. The annual CPI is projected to rise to 2.9%, up from 2.7% in November, while the core CPI is anticipated to remain unchanged at 3.3%.
With markets already pricing in fewer than two 25-basis-point rate cuts for all of 2025, a strong CPI report may not significantly impact Fed fund futures, reinforcing the recent strength of the US dollar. Conversely, a miss in CPI forecasts could expose the dollar to a notable selloff.
Before the CPI data is released, investors will be focused on December’s Producer Price Index (PPI) on Tuesday, followed by retail sales figures on Thursday. Despite a cooling labor market, US consumers appear to have finished the year resilient, with retail sales expected to increase by 0.5%, a moderation from November's 0.7% pace.
Additional releases this week include the New York and Philadelphia Fed’s manufacturing gauges on Wednesday and Thursday, respectively, as well as building permits and housing starts on Friday. Industrial production numbers for December are also due on Friday.
While the Fed confronts strong economic growth and persistent inflation, Chinese authorities are facing deflation and sluggish growth. However, following numerous policy initiatives from Beijing aimed at revitalizing the economy, GDP growth is expected to have picked up in Q4, rising to 5.1% year-on-year compared to 4.6% in Q3.
The GDP report will be released on Friday, along with December figures for industrial output and retail sales, accompanied by a press briefing. Monthly trade figures will be highlighted on Monday.
With the yuan depreciating over 4.5% against the dollar since late September, Chinese officials may aim to project a positive economic outlook, especially if the growth numbers fall short of expectations. If GDP exceeds forecasts, global equities and risk-sensitive currencies, like the Australian dollar, could benefit from improved market sentiment.
Australian traders will also keep an eye on employment statistics due on Thursday.
The British pound has faced significant pressure, reaching over one-year lows against the US dollar. While the dollar's recent strength is a major factor, the pound has been particularly targeted by investors due to renewed concerns regarding the UK government’s finances.
The pound, alongside the euro, is mired in stagflation fears. The UK economy has shown minimal growth since summer, and inflation has started to creep up again. The situation worsened following Labour's victory in the July general election. Record tax increases announced in the Autumn budget did little to address the growing deficit, and the government's rhetoric regarding the economy has dented investor confidence.
Consequently, UK government bond yields have increased, with the 10-year yield reaching levels not seen since the 2008 financial crisis. Rising yields during a period of excessive government borrowing tend to depress the currency by increasing financing costs for new debt.
Next week’s data releases could prove crucial for the pound. The CPI figures will be released first on Wednesday. The headline rate jumped to 2.6% year-on-year in November, and any further increase in December could dampen expectations for a Bank of England rate cut in February. The core and services CPI rates will also be closely watched.
Investors may prefer to await Thursday’s GDP figures, which may indicate a rebound in growth for November. A monthly GDP increase could alleviate stagflation concerns, and combined with a hot CPI report, the pound could recover some of its losses.
On Friday, the latest retail sales data will be released, and any unexpected decline during the critical Christmas period would likely exacerbate the pound's troubles.
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