BoC Decision: Another Rate Cut for the Final Policy Meeting of 2024

Central Bank

Summary:

Will the BoC deliver a single or double rate cut?BoC announces on Wednesday, at 14:45 GMT.Loonie could probably be affected.

One more rate cut before the year-end

On Wednesday, the Bank of Canada (BoC) will make its final interest rate decision for 2024. Financial markets and economists are widely anticipating another rate cut, with the consensus leaning toward a reduction of 50 basis points, bringing the policy rate down from 3.75% to 3.25%.

The BoC has already made significant cuts this year, including a 50-basis-point reduction in October. Several factors, including the latest job report that revealed weaker-than-expected employment growth, influence the decision to further cut rates. This has increased the likelihood of a more aggressive rate cut to support the economy.

Economic Outlook for 2024

Looking ahead to 2024, the BoC projects a gradual improvement in economic growth. The central bank’s October Monetary Policy Report forecasts GDP growth to pick up slowly, with inflation expected to remain around the 2% target. Core inflation is anticipated to decline gradually, reflecting easing price pressures in various sectors. The BoC’s outlook suggests that further rate cuts may be necessary to sustain economic momentum and achieve the BoC’s inflation target.

Several key factors are influencing the BoC’s decision-making process. Recent data shows that inflation has been relatively stable, but the Bank remains cautious about potential upward pressures. The labor market has shown signs of weakness, prompting concerns about economic growth. Policymakers are also considering the broader global economic environment, including the policies of other central banks like the Federal Reserve and the European Central Bank (ECB). Additionally, housing market trends, consumer spending, and business investment are all critical factors that the BoC monitors closely.

Impact on USD/CAD

The rate cut is likely to affect the dollar/loonie, potentially leading to a depreciation of the loonie. The pair reached the four-and-a-half-year high of 1.4176 early on Monday, endorsing the bullish outlook, with the next resistance coming from the April 2020 peak at 1.4265. Otherwise, a drop below the significant support line of the 20-day simple moving average (SMA) may show signs of a negative retracement until the 1.3980 and 1.3925 support levels.

BoC Decision: Another Rate Cut for the Final Policy Meeting of 2024_1

Source:XM

Risk Warnings and Disclaimers

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Alex

Economic

Forex

(Dec 10): US small-business optimism surged in November to a more than three-year high in anticipation of more favourable economic policies after Donald Trump sealed his return to the White House.

The National Federation of Independent Business (NFIB) optimism index jumped 8 points, the most on record, to 101.7 — the highest reading since June 2021. The group’s uncertainty gauge dropped 12 points after reaching a record high prior to the presidential election.

“The election results signal a major shift in economic policy, leading to a surge in optimism among small-business owners,” Bill Dunkelberg, NFIB chief economist, said in a statement. “Owners are particularly hopeful for tax and regulation policies that favour strong economic growth as well as relief from inflationary pressures.”

Nine of the 10 components that make up the overall index increased in November, led by a 41-point improvement in the outlook for US business conditions. That was the biggest rise in monthly data back to 1986 and left the metric at a more than four-year high.

A net 14% of respondents believe it is a good time to expand operations amid expectations of major shifts in tax and regulatory policies under a second Trump presidency.

The net share of small-business owners expecting higher sales climbed to the highest level since the start of the pandemic. Since the beginning of 2022, firms on net consistently expected weaker sales.

Businesses continued to cite inflation and labour quality among their top problems. A net 28% said they planned to raise prices over the next three months, the largest share since May.

While a net 18% of owners plan to create new jobs in the next three months, up three percentage points from October, owners are still experiencing difficulty attracting good talent for open positions. Some 48% reported finding few or no qualified applicants.

Results of the NFIB survey were based on 532 respondents through Nov 29.

Source: Theedgemarkets

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Warren Takunda

Commodity

Crude oil prices slid following disappointing China's international trade data in the Asian session on Tuesday.

At 6 am CET, Brent futures were down 0.37% to $71.9 per barrel, and the WTI futures slipped 0.45% to $68.06 per barrel. The swift downturn in oil prices highlighted an ongoing weak demand outlook for the traditional energy markets, driven by the global economic slowdown, particularly in China.

China's exports rose 6.7% and imports fell 3.9% from a year ago in November, both of which were significantly lower than economists' estimated 8.7% and a rise of 0.9%. On Monday, China also reported a weaker-than-expected consumer price index (CPI), underlining the ongoing sluggish domestic demands.

China's demands play a vital role in crude markets

Crude oil prices rose more than 1% rally on Monday amid China's pledge to adopt more accommodative fiscal and monetary policies to aid the economy in 2025.

The top officials said China would "implement a more proactive fiscal policy and a moderately loose monetary policy" at the Political Bureau meeting of the CPC Central Committee. The statement signalled Beijing would impose more aggressive stimulus measures, such as raising the fiscal deficit, lowering the interest rates, and increasing government borrowings to shore up its economic growth in the new year.

As the world's biggest oil importer, China's demand outlook has a direct influence on the crude markets. According to LSEG estimates, China's oil imports averaged 10.94m barrels per day (bpd) in the first 10 months of the year, a 3.7% decline from the same period last year. However, November's imports reached a four-month high of 11.62m bpd.

On a positive note, a report from S&P Global projected that China's oil demand may increase by 1.7% to 17.59 million barrels per day (bpd) in 2025.

This improved outlook likely reflects Beijing's ongoing stimulus measures, announced in September with sweeping easing policies to support its faltering economic recovery. However, analysts from Commodity Insights caution that rising production in the United States and Canada, along with output increases by OPEC+, may balance supply and demand, mitigating any price impact from increased demand.

Last week OPEC+ postponed its plan to unwind the joint output cuts last week amid a slowdown in global demand and rising US production. The organisation, supplying about half of the world's oil, decided to delay hiking its production by three months and a full recovery in output by a whole year until the end of 2026.

"Ultimately, the market will be focused on demand side factors given that OPEC has tried to tweak the supply side to boost prices, so far to no avail. The marginal driver of future demand will be China. So, for oil to continue to rally, we need steady, good news about the Chinese economy," said Kyle Rodda, a senior market analyst at Capital.com.

Middle East tensions

The only bullish factor for the oil markets is intensifying geopolitical tensions in the Middle East.

Over the weekend, Syrian rebels toppled the government and ousted President Bashar al-Assad. The event, combined with escalating military conflicts between Iran and Israel, as well as the war in Ukraine, altogether increased uncertainties in the region.

In late November, crude prices rose more than 9% during the week due to a major war escalation between Ukraine and Russia.

Ukraine launched US-made longer-range missiles targeting a military base inside Russian territory, promoting Russia to lower its doctrine to use nuclear weapons. Russia also fired a hypersonic missile at Ukraine, marking a major escalation in the geopolitical tensions between the West and Russia. However, the price surge was short-lived amid ceasefire talks in the Middle East.

Meanwhile, US President-elect Donald Trump pushed Russia to reach an immediate truce with Ukraine.

Source: Euronews

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RBA

Central Bank

As expected, the RBA Board held the cash rate steady at 4.35% following its meeting this week. The Board remains concerned that underlying inflation remains above target, with the key trimmed mean measure at 3.5% over the year to the September quarter. It infers from this level of inflation that aggregate demand continues to outstrip aggregate supply. The Board is therefore resolved to keep monetary policy restrictive until it is clear inflation is returning to target on the desired timetable.

It still expects that it will be ‘some time yet’ before inflation returns sustainably to the 2–3% target and approaches the midpoint of 2½%. However, it has changed its language and is no longer saying that it is ‘not ruling anything in or out’, as it had in every statement since March. The word ‘vigilant’ has also been cut from the post-meeting statement. Rather, the Board is ‘gaining some confidence that inflationary pressures are declining in line with these recent forecasts’. In other words, we are getting closer to the point that the RBA will be comfortable cutting rates. And in a shift in view that will surprise almost nobody, it no longer feels the need to flag the possibility of a rate hike. The post-meeting statement highlighted that ‘some of the upside risks to inflation appear to have eased’.

Indeed, some of the Governor’s answers in the post-meeting media conference opened the door to a more dovish view than we have seen from the Bank recently, including in her most recent speech. That said, her opening statement and answers today continued to emphasise the RBA’s assessment that aggregate demand exceeds aggregate supply and the current level of (trimmed mean) inflation is the best indicator of where that balance lies.

The Board assesses that monetary policy is ‘working as expected’ in bringing demand and supply into alignment, with the gap between the two continuing to close. Although there was still a nod to weak productivity growth, the post-meeting statement also highlighted the downside risks to household consumption and thus overall growth and the labour market.

Since the last Board meeting, Wage Price Index (WPI) and national accounts data have been released. The WPI data was noticeably softer than would be required to meet the RBA’s November forecast for growth over 2024, as we noted at the time. Similarly, although the RBA did flag that it expected consumption to be flat in the September quarter, GDP overall was softer than consensus and, we suspect, the RBA’s own expectations. (The RBA only publishes forecasts for June and December quarters, not the intervening March and September quarters.) A Q4 bounce large enough to match the RBA’s forecasts for 2024 growth is unlikely to eventuate for either series. Further downgrades to the RBA’s near-term forecasts can therefore be expected in the February round.

In today’s statement, the Board acknowledged that wage pressures had eased more than it previously expected. During the media conference, the Governor initially sought to characterise the data flow as showing the ‘real-side’ data (output, consumption) as soft but the nominal side – inflation – as still too high. It was only after some further questioning that the downside surprise on wages growth – an important nominal variable – got a mention.

Similar to earlier RBA communications, the Board statement pointed to the apparent stabilisation in the unemployment rate and some other measures of labour market tightness as signs that the labour market was still in a state of more than full employment. Indeed, the language of the paragraph on the labour market was only minimally changed from last month, bar some minor factual updates and a decision not to start a sentence with ‘But’.

The concentration of recent employment growth in the non-market sector did not rate a mention in the post-meeting statement. In the media conference, however, the Governor was asked about the risk that employment growth in the non-market sector slows. So far, the RBA seems content to rely on other sectors bouncing back in time, along with household consumption. We hope it is right, but we are not confident that handover will happen quickly enough.

Overall, the tone of today’s communication was less hawkish than the November round, appropriately so given the data flow since then. The ‘more than one good quarter’ language from the November minutes has again been clarified to indicate that other data matter, too, rather than the meaning some observers took (‘at least two quarters of good CPI data from here’). As we noted at the time, even if that was the right interpretation, things can pivot quickly if the data flow demands it.

We have recently revised our view of the likely path of the cash rate to a base case of a first cut in May. As we said at the time, though, we cannot entirely rule out an earlier start date of 18 February or 1 April should outcomes continue to undershoot the RBA’s expectations, especially for trimmed mean inflation. Today’s change of language represents a welcome acknowledgement that disinflation remains on track and that we are getting closer to the point that some of the current policy restrictiveness can be withdrawn. And in the media conference, the Governor conceded that there were scenarios in which the Board ended up cutting in February, while prudently choosing not to describe one.

In acknowledging that reality, the RBA has clearly tilted the probabilities back towards an earlier start date for the rate-cutting phase than where it stood a few weeks ago. It does not, however, shift that balance of probabilities enough to change our base case to be earlier than May just yet. The RBA still assess aggregate demand as exceeding aggregate supply. While ever it continues to believe this, it will be cautious about embarking on rate cuts. Any shifts back towards an earlier timetable depend on the data flow from here, especially on the labour market and trimmed mean inflation.

Source:Westpac Banking Corporation

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Justin

Economic

Forex

Upcoming CEWC likely to set a pro-growth tone and lay out stimulus plan, echoing the Politburo. Shift to an ‘appropriately loose’ monetary policy stance increases the chance of positive surprises. That said, diminishing policy room and financial stability concerns may constrain size of stimulus. We expect fiscal policy to do the heavy lifting, with increasing emphasis on boosting consumption, Standard Chartered’s economists Carol Liao and Shuang Ding note.

Stronger easing signals

“The Politburo meeting on 9 December sent strong policy easing signals, raising market hopes of a ‘big-bang’ stimulus package. The shift in the monetary policy stance from ‘prudent’ to ‘appropriately loose’ and the introduction of ‘extraordinary counter-cyclical adjustment’ beat expectations, suggesting that the government may set an ambitious 2025 growth target (likely around 5%). In addition, the meeting pledged to implement more proactive fiscal policy, stabilise the housing and stock markets, and boost domestic demand 'from every aspect.' Markets have reacted positively.”

“We think the strong tone of the Politburo is part of the authorities’ efforts to use forward guidance to revive market sentiment. While upside surprises are possible from monetary easing and broader-based stimulus, we keep our 2025 growth forecast at 4.5% given diminishing macro policy room, the ongoing property-market correction and rising external headwinds.”

“We expect the Central Economic Work Conference (CEWC), likely to be held later this week, to provide more details on what the Politburo called ‘extraordinary counter-cyclical adjustment’. We think this may include a large increase in government bond issuance, supported by regular PBoC purchases of central government bonds from the market. The new stimulus package is likely to be more focused on boosting consumption, a departure from the old stimulus model that relied heavily on investment. Monetary easing could provide positive surprises, but we do not think it will be comparable to the 2009 stimulus given diminishing policy room and concerns about financial stability.”

Source: FXSTREET

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FxPro

Cryptocurrency

The Cryptocurrency Fear and Greed Index is at 78 (extreme greed), as it was the day before, but it now looks like a lagging indicator that doesn’t account for the latest dip.

Crypto Market Spooked by Another Bitcoin Pullback Below 100K_1

The bulls in Bitcoin once again failed to consolidate above 100K on Monday, which was followed by an impressive sell-off, bringing the price to 94K at the lowest point. There is still a wall of orders clearly visible intraday, keeping the price below 95K for a long time, but the interest in selling above 100K remains unsatisfied until the end.

We still see the potential for the first cryptocurrency to rise into the 120K area once it overcomes resistance at 100k.

News Background

According to CoinShares, global investment in crypto funds rose to an all-time high of $3.851bn last week, renewing the record set two weeks ago. The positive trend continued for the ninth consecutive week. Bitcoin investments rose by $2.546 billion; Ethereum rose to an all-time high of $1.16 billion; XRP rose by a record $134 million; and Solana fell by $14 million.

MicroStrategy bought an additional 21,550 BTC for $2.1 billion at an average price of $98,783, founder Michael Saylor said. MicroStrategy now owns 423,650 BTC, purchased for $25.6 billion at an average price of $60,324 per coin.

Since 8 November, long-term investors have reduced their positions by 827,783 BTC (~$81.2 billion), which was only 30% offset by MicroStrategy and spot ETF purchases. The rest was bought up by short-term holders who are actively leveraged and vulnerable to falling quotes.

BlackRock highlighted Bitcoin’s potential as a new diversification tool alongside gold in its Global Outlook 2025. The limited supply of coins and growing investor demand drive BTC’s potential.

Source:FxPro

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Warren Takunda

Economic

European equities dipped on Tuesday, taking cues from tech-led declines on Wall Street rather than building on stimulus-fueled gains in China, while the Australian dollar slid as the central bank suggested rate cuts were finally approaching.

The main scheduled events of the week are still to come, however, with U.S. inflation data due on Wednesday, and a meeting by the European Central Bank on Thursday. With an ECB rate cut all but certain, investors will be watching for clues about its policy path.

Also top of mind for investors in emerging markets was Brazilian President Luiz Inacio Lula da Silva undergoing surgery in Sao Paulo to drain a bleed on his brain linked to a fall at home in October, according to a medical note published by the government.

MSCI's world share index was down 0.15% with Europe's broad Stoxx 600 index off 0.3%, walking back some of its gains the previous day when news from China's Politburo drove hopes of more accommodative policy in the world's second-largest economy.

State media outlet Xinhua reported on Monday that top Communist Party officials had shifted the monetary policy stance from "prudent" to "moderately loose" ahead of the target-setting Central Economic Work conference this week, mirroring their response in previous crises

Chinese bluechips, which had closed before Monday's announcement, rose 0.7% on Tuesday as did stocks in Japan and Korea, the latter up 2.4% helped by authorities' vowing measures to stabilise markets in a bid to calm investors spooked by political turmoil.

The Dow shed more than half a percent, while the S&P 500 and Nasdaq each lost about six tenths of a percent.

Though Hong Kong stocks, which had a chance to react to the news on Monday, dipped on Tuesday, and the runaway rally in Chinese bonds, which extended on Tuesday to drive 10-year and 30-year yields to record lows suggests some investors doubt the pledges are going to lift long-run growth in China.

The Politburo meeting announcement, as it related to the policy stance, "adopted (the) strongest tone in decades," said Chen Shujin, head of China financial and property research at Jefferies.

However, she added: "We still see the market repeating the pattern from the beginning of the year, driven by expectation on potential stimulus, and dragged by lower-than-expected policies."

Overnight, the S&P 500 fell 0.6% and futures dipped 0.07% in the European morning.

A 2.5% drop for chip titan Nvidia, which edged a fraction lower still in after-hours trade following China opening an antitrust investigation, weighed on the mood.

CENTRAL BANKS

Elsewhere, the Reserve Bank of Australia, which has yet to join the global rate cutting cycle, left its cash rate unchanged at 4.35% as expected.

However, the Australian dollar fell 0.7% to $0.6394 as Governor Michele Bullock left the door open to a cut in interest rates as early as February.

"The currency must now count on soft U.S. CPI tomorrow for buyers to return," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

That U.S. price data is the most important piece of global economic data this week. It is the last scheduled event that could possibly disrupt market expectations that the Federal Reserve will cut rates at its meeting next week.

Core inflation is expected to hold at 3.3% for November, and an in-line reading should be no impediment to an easing.

Traders are also expecting rate cuts in Europe and Canada later this week and are leaning towards a 50 basis point cut in Switzerland as authorities may like to tap the brakes on the franc's relentless rise against the euro .

The euro traded at $1.0529, down a touch, and 0.9264 francs. The Japanese yen , which was the best-performing G10 currency in November as expectations have grown for a December rate hike in Japan, was a touch weaker at 151.45 per dollar.

Positioning data shows speculators flipped to a long yen position last week for the first time in more than a month.

Oil prices slipped on Tuesday as concerns eased about the potential regional fallout from Syrian President Bashar al-Assad's overthrow, but China news gave some support.

Brent crude futures were flat at $72.11 a barrel.

Gold nudged up to $2,664 an ounce while bitcoin fetched $97,526.

Source: Reuters

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BoC Decision: Another Rate Cut for the Final Policy Meeting of 2024

One more rate cut before the year-end

Economic Outlook for 2024

Impact on USD/CAD

Source:XM

Us Small-business Optimism Soars To Three-year High After Trump Win

Source: Theedgemarkets

Crude Oil Prices Under Pressure Amid Disappointing Chinese Data

China's demands play a vital role in crude markets

Middle East tensions

Source: Euronews

RBA Remains on Hold, Slowly Gaining Confidence

Source:Westpac Banking Corporation

China: Cewc To Elaborate On ‘extraordinary’ Stimulus – Standard Chartered

Stronger easing signals

Source: FXSTREET

Crypto Market Spooked by Another Bitcoin Pullback Below 100K

News Background

Source:FxPro

European Stocks Dip, Ignoring China Rally; Aussie Falls After RBA

CENTRAL BANKS

Source: Reuters

Risk Disclosure