Morning Bid: Fed looms and Europe gets inflation data

A look at the day ahead in European and global markets from Vidya Ranganathan

As a host of major central banks hold policy meetings over the next 24 hours, the U.S. Federal Reserve hogs the spotlight but it could be the Bank of Japan that surprises markets.

The Bank of England (BoE), Bank of Japan (BOJ), Norges Bank and Sweden’s Riksbank announce rate decisions on Thursday, hours after the Fed’s announcement on Wednesday. Pricing in Japan implies a 20% chance of a rate hike – but that higher rates are a matter of time with more than 40 bps of hikes priced in by the end of 2025.

Ahead of the Fed comes UK inflation data, which could cement expectations for the BoE to maintain its Bank Rate at 4.75%.

British pay rose more than expected in the three months to October, prompting investors to further rein in bets on BoE rate cuts next year, despite warning signs of a slowdown in the economy.

The unexpectedly big surge in British wages drove a wave of selling in gilts, a reduction in expectations for rate cuts and a lift for sterling, which at $1.2710 is flat for the year and the best performing G10 currency against the dollar.

Money markets show traders expect the BoE to cut rates by around 70 basis points next year, compared with expectations for roughly the same scale of cuts from the Fed and around 120 bps in cuts from the European Central Bank (ECB).

Europe also gets November inflation data on Wednesday. As per a Reuters poll, the harmonised data on November consumer prices (HICP) in the 19-nation euro zone is expected to be unchanged from October at 2.3%.

The ECB expects to cut interest rates further if inflation settles at its 2% target as it expects, and as ECB President Christine Lagarde and the bank’s most influential policy hawk, Isabel Schnabel, reiterated this week.

The Fed looms larger, however. Asian shares were down on Wednesday, extending Tuesday’s risk-off mode in global stocks. Wall Street posted chunky losses, the dollar held its ground, and the 10-year U.S. Treasury yield hit a one-month high of 4.44% before easing back.

The Dow Jones index clocked its ninth consecutive daily loss, its longest losing streak since 1978.

Later in the day, the Fed is expected to move the Fed funds rate window 25 basis points lower – from its current 4.5-4.75% range – but to offer a cautious outlook and probably lift its long-run interest rate projections.

Surprisingly strong U.S. retail sales figures didn’t derail near-certain expectations of a quarter-point U.S. rate cut on Wednesday. But it’s another solid top-tier economic indicator that will strengthen the perception of “U.S. exceptionalism” and a relatively hawkish Fed going into next year.

Indeed, assuming the Fed cuts rates by 25 basis points on Wednesday, another quarter-point move isn’t fully priced into rates futures markets until June. The 2025 curve barely implies 50 bps of easing all year.

In corporate news, Japanese auto shares leapt on headlines Honda and Nissan – Japan’s second and third-biggest automakers – are in talks to set up a holding company, according to a person with knowledge of the matter, a move that would allow them to share more resources.

Key developments that could influence markets on Wednesday:

UK and euro zone inflation

U.S. Fed interest rate decision

U.S. Housing Starts data

(Editing by Sam Holmes)