Week of DECEMBER 15

Over the last week, markets focused on the outcome of the FOMC policy meeting and on fluctuations in the AI-driven tech space ahead of UK GDP figures. While the S&P 500 and Dow clinched fresh records on a rotation into value, the narrative under the hood has fractured. Oracle plunged, while Broadcom's margin warning has reignited the 'AI capex' debate, forcing investors to weigh record valuations against a backdrop of delayed economic data and diverging central bank policies.

Traders head into the new week digesting a Federal Reserve that has officially cut rates into a 'data fog' and a tech sector suddenly waking up to the cost of its own intelligence as precious metals accelerate. The week is set to be busy, with US payroll and CPI data, along with rate decisions from the ECB, BOE, and BOJ.

Week in Review

Markets were in a holding pattern ahead of the week's main event: the Fed's policy decision on Wednesday. The FOMC cut interest rates as expected but also sent mixed signals about its policy outlook. The vote had two dissenters in favour of holding rates, underscoring growing division among policymakers, with Fed Chair Jerome Powell suggesting the central bank has made enough rate cuts for now. On the other hand, the summary of rate expectations known as the "dot plot matrix" suggested at least one rate cut next year. The FOMC also resumed bond purchases, allocating $40 billion to its quantitative easing programme.

 The bank said it was a technical measure targeting short-term bills and meant to support liquidity. The initial market reaction was positive, but the gains were erased a few hours later after Oracle reported disappointing sales. The earnings report shook confidence in the AI market, dragging on the tech-heavy Nasdaq. The Dow and S&P 500 managed gains amid a rotation towards value after the Fed announced its "QE-lite" programme. Outside of tech, US energy markets were under pressure after US natural gas prices dropped 20% in a week amid favourable weather and record production, which has helped swell inventories.

The pound stumbled on Friday after the UK's October GDP disappointed, coming in at -0.1% versus the 0.1% expected, but still closed a third week in gains. Slower economic activity was attributed to uncertainty ahead of the Autumn Budget announcement. The FTSE underperformed peers but was still in the green as investors look forward to a BOE rate cut next week.

The loonie was unchanged after the BOC kept rates unchanged, as was widely anticipated, but USDCAD declined for its third consecutive week, supported by the Fed’s decision. The BOC also revised its outlook, noting a near-term uptick in inflation, which conveyed a modest hawkish tone.

In geopolitics, Mexico's Congress approved 50% tariffs on imports in a move seen as targeting China as the country comes under pressure from the Trump Administration ahead of renegotiating the USMCA trade deal next year.

Biggest Market Movers

• The dollar declined for the third consecutive week after a more dovish-than-expected Fed rate decision, with gold at a 7-week high.
• The Swiss franc is the best-performing major currency once again after the SNB refused to cut rates into negative territory.
• The euro rose amid growing speculation that the ECB's next move will be a rate hike, as inflation remains slightly above target.
• The yen underperformed despite expectations that the BOJ will raise rates next week, as JGB yields rise amid concerns about the nation's spending and high debt.
• Silver hit consecutive record highs through the week, leading precious metals higher, supported by Fed easing and strong industrial demand.
• Crude prices trended lower amid concerns of oversupply after the OPEC monthly report raised the supply forecast for the current year.

Top Events in the Week Ahead

Central bank decisions are likely to be the theme of the coming week, with the ECB expected to hold, the BOE anticipated to cut, and the BOJ projected to hike. New inflation and jobs data, the first since the end of the US government shutdown, will also attract significant trader attention.

BOE to Cut Rates amid Sluggish Economy

Britain's central bank is widely expected to cut rates at its meeting on Thursday, as softer economic data outweighs persistent inflation. The last vote to hold was razor-thin, and markets will be closely watching the vote split to gauge appetite for further easing in the new year. The bank will benefit from analysing the latest job and inflation data, released on Tuesday and Wednesday, respectively.

The UK's labour market is projected to remain slack, with the October unemployment rate rising to 5.1% from 5.0% in the prior month. The November inflation rate is expected to fall to 3.4% from 3.6%, while the core rate is expected to decline to 3.3% from 3.4% a month earlier. Despite hitting October highs, cable formed a spinning top candlestick pattern, with focus below 1.3440 and the 1.3400 handle on 1.3300.

ECB to Hold Rates for Now

Europe's central bank is expected to keep rates unchanged on Thursday, with inflation just above target and slow but steady economic growth. However, traders will watch for signs that officials address rising speculation that the ECB may need to raise rates at some point to prevent inflation from remaining above target for too long. A hawkish interpretation could see the eurodollar extend recent gains past 1.1800 unless bears reclaim 1.1680.

BOJ to Hike for the Last Time in a While

There is consensus among economists that the BOJ will raise rates by 25 bps at its Friday meeting, after repeatedly threatening to do so throughout the year. Recent surveys show the economy is stepping up, and there is increasing price pressure which will force the BOJ to hike and likely provide a hawkish message. However, economists don't see rates rising again until towards the end of 2026. With USDJPY consolidating between 154.30 and 157.00, a break outside the tight range may be imminent.

US November Data Showing Weakness

The reopened BLS will release the delayed November NFP on Tuesday, with consensus for 55K jobs added, compared with 119K in September, the last month for which official data are available. Meanwhile, the unemployment rate is forecast to rise to 4.6% from 4.4%. On Thursday, the November CPI is expected to remain at 3.0%, unchanged from September, the last month of official data. The core rate is also projected to be unchanged at 3.0%.

Other Events and Earnings

Monday has Canadian inflation figures. Select flash PMIs come out on Tuesday. Wednesday includes Japan's trade balance and Germany's Ifo Business Climate survey. Friday sees UK retail sales and US existing home sales data. Earnings reports are expected to wind down through the week ahead of the year-end holidays, with some notable names scheduled to update investors, including Lennar, Micron, General Mills, Accenture, Nike, and Curry's.