Central banks stand firm amid economic flux

RBA pauses rate hikes, all eyes on BoC and BOJ ahead of US jobs report

RBA holds rates steady (5 Dec)

The Reserve Bank of Australia (RBA) kept its official cash rate (OCR) unchanged at 4.35%, signalling a potential pause in its aggressive tightening cycle.

RBA Governor Michele Bullock acknowledged that inflation has eased from its peak but noted that it remains above the RBA's target of 2-3%. She emphasised that the bank will continue to monitor economic conditions closely and adjust policy as necessary to bring inflation back to target.

The decision to hold rates steady comes as economic data suggests that Australia's economy is starting to cool. Retail sales fell in October, and the labour market is showing signs of softening. These developments may have given the RBA pause for thought as it weighs the need to combat inflation against the risk of stifling economic growth.

The RBA's next policy meeting is scheduled for 7 February 2024.

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The AUD/USD pair failed to break above the resistance of the downward channel this week, indicating no reversal of the downtrend. This is further supported by the overbought condition of the stochastic indicator, which suggests that the pair may be due for a pullback.

Bank of Canada’s interest rate decision (7 Dec)

Annualised GDP growth in Canada contracted by 1.1% in the third quarter of 2023. A number of factors contributed to the contraction, including weaker consumer spending and business investment. 

As a result, market analysts expect the Bank of Canada (BoC) to keep the rate unchanged at 5%. 

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Japan’s GDP (7 Dec)

Japan's GDP numbers for Quarter 3 will be released on Thursday, 7 December. A preliminary report on 15 November indicated a 2.1% annualised contraction in the Japanese economy. The weak reading was due to a decline in exports and private consumption, suggesting that accelerating inflation and weakening demand in China are taking a toll on a fragile economic recovery.

The weak GDP reading could change the Bank of Japan's (BOJ) calculus. The decision of whether to maintain or abandon its negative rate policy will have a substantial impact on the value of the Japanese yen.

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US non-farm payroll (8 Dec)

The US November employment report will be released on Friday, 8 December. This closely watched economic indicator will provide crucial insights into the health of the US labour market and will likely influence the Federal Open Market Committee's (FOMC) upcoming policy decision in their meeting on 12-13 December.

Market analysts expect the report to show a modest increase of 180,000 non-farm payrolls in November, slightly higher than the 150,000 jobs added in October.

The FOMC will be closely scrutinising the employment report as the results will impact decisions on monetary policy adjustments and whether there will be a need to further tighten policy to combat inflation against the risk of slowing economic growth. A strong jobs report could reinforce the FOMC's hawkish stance, while a weaker-than-expected reading could signal a pause or even a pivot towards a more dovish policy stance.

Other reports that will be closely watched include the unemployment rate, wage growth, and labour force participation rate. These metrics provide a more comprehensive picture of the overall health of the labour market.

The release of the US November employment report is one of the most significant economic events of the month. It will have a profound impact on financial markets and will shape the FOMC's policy outlook for the near future.

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The prospect of lower interest rates can exert a dual positive influence on stock prices. Firstly, it alleviates the financial burden on businesses by reducing the cost of capital. This enables them to allocate more resources towards expansion, investments, and, ultimately, generating higher profits. 

Secondly, it lowers the discount rate used to value future earnings, making stocks appear more attractive relative to fixed-income investments. In essence, lower interest rates make businesses more profitable and stocks more valuable.

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The Fed's policy trajectory and US Treasury yields are shaped by a complex interplay of domestic and global factors. The relative yield differentials between US Treasuries and sovereign debt from other major economies, along with the shifting policy stances of foreign central banks, can significantly influence the broader impact of the Fed policy on the US economy. Additionally, fiscal fundamentals, such as the US government's budget deficit and debt levels, can introduce countervailing forces on yield movements.

Stay tuned for an eventful week in the financial markets.