Week of DECEMBER 8

Last week, markets digested more delayed US economic data, with the main themes being rising government bond yields amid PMIs that generally disappointed, as well as stalled peace talks in Ukraine.

The week ahead is pretty busy on the macroeconomic front, with the Fed's rate decision standing out amid other central bank meetings, as China trade data and UK GDP figures are on tap.

Week In Review

The central theme of the week was concern over bond markets, which started on Sunday with a sharp increase in JGB yields to 20-year highs. The proximate cause was more hawkish-than-expected commentary from BOJ Governor Ueda, as the market priced in a BOJ rate hike this month, and strong fluctuations in the yen. Japan's PM Sanae Takaichi's spending plans have left markets worried that she might be facing a "Truss shock," as traders note Japan's high debt-to-GDP ratio. The episode left markets more focused on yield movements through the week, compounded by disappointing macro data, with both the dollar and gold underperforming.

The AI-backed stock complex shuddered midweek amid reports that Microsoft was seeing customers hold off on adopting new products, a claim the company later denied. Consolidation in the AI space was also noted after the launch of Google's latest Gemini and DeepSeek pushed OpenAI to refocus on its core development to keep pace with its rivals. Reportedly, site visits to ChatGPT fell for two consecutive months. Microsoft shares dropped over 1% on Wednesday following the news.

On the economic front, China's manufacturing PMIs unexpectedly fell back into contraction, followed by Europe and the US manufacturing PMIs staying in contraction. Equities declined in the early part of the week after the disappointing data, but later advanced on the prospect of more easing. ADP employment numbers for November came in negative again, with the most significant number of job losses in the US since 2020. The data painted a picture of global economies struggling, despite persistently high inflation, leaving central banks more hawkish ahead of the December rate decision next week. Markets are still pricing in around a 90% chance of a Fed rate cut next Wednesday. 

In geopolitics, oil was in focus, as Russia did not appear receptive to the latest White House peace proposal, which Ukraine had accepted. Additionally, the Trump Administration ramped up pressure on Venezuela, blocking flights and giving an ultimatum to Venezuelan President Nicolas Maduro to resign by Friday. Analysts have concluded that Trump has all but officially decided to nominate the current National Economic Council Chair, Kevin Hassett, as Powell's replacement.

Biggest Market Movers

• The dollar underperformed during the week amid weaker-than-expected economic data and increased focus on a dovish Fed.
• AUD was the strongest of the major currencies after RBA Governor Michelle Bullock surprised markets by emphasising the rise in CPI and suggesting the economy may be running above potential.
• Crude was headed for a weekly gain amid rising geopolitical tensions and slowing output from OPEC members during November.

Top Events in the Week Ahead

The main focus for the coming week will likely be the Fed, with not just the rate decision but also guidance for the rate outlook. More delays in US data reports will disrupt the economic calendar. Talks on ending the war in Ukraine are expected to continue this week, and oil markets will likely pay close attention to developments in Venezuela.

Fed to Cut and Pause

There is a solid consensus that the Fed will cut rates at the end of its two-day policy meeting on Wednesday, completing its September forecast of three cuts for 2025. Focus will turn to what happens next, with three-quarters of the market anticipating a pause at the January meeting. The Fed will publish an update to its dot-plot matrix and staff projections, providing more clarity on what to expect from the Fed in 2026. Maintaining the status quo could finally see gold establishing support at $4160 per ounce and moving towards record highs.

RBA and BOC to Hold the Line

There is a strong consensus that both the RBA and the BOC will keep rates unchanged at their respective meetings on Tuesday and Wednesday. However, given Governor Bullock's recent comments, markets might be expecting a more hawkish tone from the RBA's monetary policy statement, opening the door to 0.6700 for AUDUSD. The reverse could happen with the BOC, as slow economic performance might leave Governor Tiff Macklem returning to a more dovish outlook amid the Fed's easing, which begs the question of whether 1.3900 holds firm in USDCAD.

UK October GDP Treading Water

Now that the Autumn Budget is out of the way, markets can return to focusing on UK growth and whether it will be sustained enough to pay the government's bills. After a disappointing Q3, the consensus is that the final quarter will start subdued, with October GDP growth projected to be flat. However, that would be an improvement over the -0.1% from the previous month, with GBPUSD holding the 1.3300 line acting as a potential bullish catalyst towards 1.3500.

China Trade Expected to Pick Up

On Monday, China's trade surplus is expected to widen slightly amid an acceleration in both imports and exports. October data was affected by tensions with the US during the final trade negotiations, with analysts projecting November trade to rebound.

Other Events and Earnings

Monday has the release of the Japan Tankan index. Tuesday includes Australia NAB business confidence and the US JOLTS number. China's CPI comes out on Wednesday. For Thursday, the US trade balance is expected. Friday sees China's new yuan loans.

Corporate events are expected to slow as the days count down to the year-end holidays. Notable names expected to update investors include Toll Brothers, AutoZone, Oracle, Adobe, Broadcom, Costco, British American Tobacco, and Tui.