Pas de vacances de Noël anticipées pour les banquiers centraux

Even central bankers may want to believe in Santa Claus sometimes, and after four gruelling years – moving from another episode of extraordinary intervention to the steepest tightening in decades – they could be forgiven for hoping to descend slowly into the festive break torpor without having to say much in their December meetings. Alas, the world is not often kind to them, and their last policy communication of the year is taking place amid aggressive expectations from the markets for significant cuts quite early in 2024, at least for the Federal Reserve, the ECB, and the Bank of England, which they can’t completely ignore.

We focus here on the first two institutions. Jay Powell will probably try to steer the market towards more prudence, in line with his last public statements. We think the Fed will use its updated “dot plot” to signal to the market that, indeed, cuts are coming, but not as many as what is currently priced. While a move in early spring rather than in June – our baseline – is gaining in plausibility, we fail to see what the upside for the Fed would be to give a nod to the current market pricing while the economy remains strong enough to keep inflation risks alive. The ECB does not have an equally simple communication tool at its disposal, and the big difference with the Fed is that the real economy in the Euro area is in a much worse state. We think Christine Lagarde will be able to use the new forecasts to signal that, while hikes are no longer on the table – even hawks such as Isabel Schnabel have given up on that option – it will take until 2025 to get inflation back to target, a prospect which does not warrant early cuts.

While the bond market in the US and Europe remains of course tuned to even minute change in the communication of the Fed and the ECB, potential moves by the Bank of Japan are getting increasingly relevant. The market is now considering that the BOJ meeting on 19 December could be “live”. We stick to our view that the BOJ will wait until April as it will want to tread carefully amid mixed domestic data while it needs to take on board the ramifications of tightening when the western central banks would be about to cut. Still, the BOJ is indeed preparing minds.