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Market Briefing: Festive Cheer Drains Out of Markets As Central Banks Remain Hawkish Into Year End

After a bruising session yesterday, risk-sensitive currencies are setting up for another day of losses. The greenback is firmer, yields are higher, and commodity prices are weaker after the Federal Reserve adopted a more hawkish-than-expected stance on Wednesday’s meeting, Europe’s central banks followed suit with their own 50-basis point hikes, and data pointed to a slowdown in American consumer spending.

November retail sales tumbled 0.6 percent from the prior month, falling more than expected as price growth slowed and spending patterns shifted. So-called “control group” sales, which exclude building materials, vehicle parts and gas station sales, dropped 0.2 percent, while big-ticket discretionary categories like electronics, furniture, and vehicles saw steeper losses. Consumer outlays remain far stronger than pre-pandemic levels, but are showing clear signs of deceleration.

The British pound is sharply lower after a split decision at yesterday’s meeting put downward pressure on yields and raised questions about the strength of the economy. Two of nine members of the Bank’s rate-setting committee voted to leave rates unchanged, and policymakers said output was likely already contracting – suggesting that previously-elevated market expectations for additional hikes in the months ahead may not pan out.

The euro remains higher as investors anticipate further tightening from the European Central Bank. Policymakers decided to lift policy rates by half a percentage point and announced plans to begin reducing the bank’s balance sheet by 15 billion euros a month in March. In the press conference following the decision, President Christine Lagarde said her institution would likely deliver half-percentage-point hikes at the next two meetings, saying “Compared with the Fed, we have more ground to cover, we have farther to go”.

Mexico’s central bank followed the Federal Reserve in raising its benchmark interest rate by half a percentage point at yesterday’s meeting, signalling a slower tightening pace ahead. The Banxico, which has tried to maintain a circa-600 basis-point spread between Mexican and US rates through the post-pandemic period, said another hike would come in February, but “Subsequently, it will assess if the reference rate needs to be further adjusted as well as the pace of adjustments based on the prevailing conditions”. The peso slipped.

Today’s Federal Reserve speakers include New York’s John Williams, San Francisco’s Mary Daly, and Cleveland’s Loretta Mester. The calendar is otherwise light on economic data, but traders will have plenty to chew on over the next week as Argentina beats France in the World Cup final (we love underdogs), a Chinese economic planning conference concludes, the Bank of Japan makes a rate decision, Canada releases its latest inflation and retail sales data, and the United States publishes consumer confidence, gross domestic product, and durable goods numbers.

Karl Schamotta, Chief Market Strategist

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