This week just ended

They say good things come in threes and indeed it’s something we all share, even down to our very core, an atom consists of three particles and don’t forget we all share the same earthly existence: birth, life and death; past, present and future; mind, body and spirit. Even this article will have a beginning, a middle and an end (well close to it anyway).

As it’s that time of year, the three wise men could well be on our mind and for economists this week it has been no different, although far from the traditional gifts of Gold, Frankincense and Myrrh, we received one rate cut, the promise of an imminent rate cut and one rate hike from three heads of central banks.

Giving the green light (as opposed to orange or red) the US Federal Reserve (the Fed) won the gold as the first central bank to face the media this week, cutting rates, as expected, by 0.25%. However, it was the forward that really caught investors off guard, stating that they are no longer three bags full when it comes to the once predicted four rate cuts for the next year.

Announced on Wednesday evening, the central bank reduced the number of projected rate cuts for the coming year, with policymakers now expecting two interest rate cuts by the end of 2025, setting up the likelihood of a pause in January.

In his subsequent press conference, Fed Chair Jerome Powell offered assurances that the US economy is strong as inflation drifts towards the bank’s 2% goal.

It was a three ringed circus for markets however, with American bourses feeling the brunt of investor selling as the three main US indices all fell over 2% on the news, with the blue-chip Dow Jones, racking up a tenth daily loss in a row, its longest losing streak since 1974.

The 2-year Treasury yield, the most accurate guide to more immediate rate expectations rose to 4.329%, from 4.241%, a sign that investors quickly shed expectations that the Fed will move as quickly as it has over the past six months or so. On the news, the US dollar also rose 1% against a basket of developed currencies.

Collecting the Silver was the Bank of Japan (BoJ), giving their views on their economy early on Thursday morning. Not going three sheets to the wind on hiking rates, only one member of the banks committee voted for an increase, leaving a 8-1 majority in favour of keeping rate unchanged at 0.25%, a sign policymakers still prefer to tread cautiously.

In his accompanying press conference, BoJ Governor, Kazuo Ueda, said interest rates remained very low but acknowledged fresh risks to the outlook from Trump's proposed trade policies.

‘If the economy and prices move in line with our forecast, we will continue to raise our policy rate… As for the timing of adjusting the degree of monetary support, we need to scrutinise various data carefully in reaching a decision.’

Lastly, it was our very own Bank of England (BoE) making up the trio of central banks this week, keeping rates steady 4.75%. With the FTSE wallowing at one-month lows before the announcement, the bank’s governor, Andrew Bailey, did lift the mood a little, commenting that market expectations in the near term looked reasonable although the central bank could not give more detailed guidance about the outlook for 2025.

‘I think the path is downward but I really would caution that at this stage, with the amount of uncertainty, we can't tell you by how much or when particular moves are going to take place.’

However, his words were still enough to cause markets to price in a 45% chance of an interest rate cut by the bank’s next meeting in early February. What also gave investors hope was that the 9-person committee was predicted to be a 7-2 split in favour of a hold, whereas the vote was much closer, at 6-3, showing a growing divide for those on Threadneedle Street.

Earlier in the week, domestic inflation was shown to have jumped to 2.6% on an annual basis, an eight-month high. Offering some relief was an underlying measure of price growth holding steady, weighing on sterling and, in turn, also boosting stocks. Services inflation, which the BoE views as a key measure of underlying price pressure, held at 5.0% for November, unchanged from October.

Also muddying the waters was news this week that British pay rose by more than expected in the three months to October. Average weekly earnings, excluding bonuses, were 5.2% higher in the three months to the end of October than a year earlier and whilst the news will be greeted with three cheers from workers, it is by no means three points for the win in the bank’s battle against inflation just yet.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used, you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 20 December 2024.

abrdn Financial Planning and Advice Ltd is registered in England (01447544) at 280 Bishopsgate, London EC2M 4AG and authorised and regulated by the Financial Conduct Authority.