ECB and BoE Expected to Further Tighten Policies, Outline Needs for More Rate Hikes

The U.S. economy showed signs of slowing, with retail sales and manufacturing dropping last month. But the labor market remained resilient so far as employers largely retained their workforce intact. Initial applications for unemployment benefits fell last week to the lowest in two months. However, a separate indicator of unemployed workers who’ve been out of a job for longer has climbed to the highest since February. At the same time, U.S. retail sales fell in November by the most in nearly a year, a broad-based decline reflecting the strain of inflation and a shift toward spending on services.

As a result, the S&P 500 fell more than 2%, closing at its lowest level in more than a month. The tech-heavy Nasdaq Composite’s losses exceeded 3%, with yield-sensitive stocks taking a hit. The selloff was widespread, with every stock in the Dow except Verizon Communications (VZ) falling. Tech stocks, which become less desirable as interest rates rise, sank. Shares of Meta Platforms (META), Apple (AAPL) and Amazon (AMZN) lost 4%. Alphabet (GOOGL), Microsoft (MSFT), and Salesforce (CRM) shares dipped 3%.

Equities in Europe also closed lower after the European Central Bank’s upward revision to 2024 inflation projections. Today, the Bank of England is likely to make the ninth decision of the year on the appropriateness of rates in favor of entrenched inflation, and this process is recorded after the New Year. The British economy has been given a breather after almost stable price growth for a year and a half. The Office for National Statistics reported annual inflation of 10.7%. This is lower than October's 11.1% (a record for 41 years!), and even below market expectations: the bookmark disclosure rate of 10.9%.

Core inflation (which does not include the price of energy, food, alcohol and tobacco) fell to 6.3%, whereas in October it was 6.5%. Most likely, inflation is currently peaking out. However, 10.7% is still a high level for both ordinary people and businesses. Most likely, the Bank of England needs to tighten monetary policy in order to reduce inflationary pressure.

According to Eurostat's final report published earlier today, the annual inflation rate in the Eurozone stood at 10.1% in November, down 0.5 percentage points MoM. The final November figure was 0.1 percentage points higher than the preliminary one. The energy annual inflation rate amounted to 34.9%, making the highest contribution to the total inflation rate in the Eurozone. Food, alcohol and tobacco inflation had an inflation rate of 13.6% while services inflation stood at 4.2%. Meanwhile, non-energy inflation reached 6.1% in November.

According to the outcome of its today’s board meeting, the Bank of Russia kept its key rate at 7.5% per annum. In its press-release the central bank mentioned that it will “…make further decisions on the key rate, commensurate with actual and expected inflation dynamics relative to the target, the process of economic restructuring, as well as assessing the risks from internal and external conditions and the reaction of financial markets to them. According to Bank of Russia’s own forecast, with respect to the ongoing monetary policy, annual inflation is expected to decrease to 5.0–7.0% in 2023 and return to 4% in 2024”.

Major stock indexes in Asia-Pacific traded mostly lower on Friday morning. On the data front, private sector activity in Japan stabilized in December.

In mainland China, the Shanghai Composite fell just 0.02% at the close, with the Shenzhen Composite having remained virtually unchanged. Simultaneously, Hong Kong's Hang Seng added 0.42%, while South Korea's Kospi Composite decreased 0.04%. At the closing bell, Japan's Nikkei 225 dropped 1.87%, while the Australian S&P 200 tumbled 0.78%.