China began the week with underwhelming economic data, reigniting concerns about its faltering recovery. Retail sales for November rose just 3.0% year-on-year, falling short of the median forecast of 4.6%. Additionally, house prices continued their downward trend, further exposing the cracks in China’s property sector. Industrial output offered a slight silver lining by holding steady, but the overall data underscored ongoing economic fragility.
While officials continued to promise stimulus measures—including potential cuts to bank reserve requirements—credit data revealed a more troubling trend: lower borrowing costs are proving ineffective when businesses remain unwilling to invest.
Chinese bond yields fell to fresh record lows, prompting the central bank to check positions with commercial banks to prevent further volatility. The timing could not have been worse for the yuan, as 10-year Chinese bond yields saw their largest weekly decline since 2018, coinciding with a sharp rise in U.S. Treasury yields.
Yuan Under Pressure Amid Trade Rhetoric
Adding to China’s challenges, reports suggest Beijing is contemplating allowing the yuan to weaken to support its economy. However, this move may be politically fraught. President-elect Donald Trump’s trade adviser, Peter Navarro, wasted no time in issuing a broadside against the idea, signaling that trade tensions between the U.S. and China could soon escalate.
South Korea Steadies Amid Political Upheaval
South Korea, meanwhile, offered a steadier outlook. With Han Duck-soo assuming leadership following the impeachment of President Yoon Suk Yeol, political stability appears within reach. The Constitutional Court now has six months to decide Yoon’s fate, whether to remove him permanently or reinstate him.
Authorities moved quickly to stabilize financial markets, helping the KOSPI hold its ground on Monday.
Markets Focus on the Fed’s Decision
Global markets are now squarely focused on the Federal Reserve meeting scheduled for Wednesday. A quarter-point rate cut is already priced in with 97% certainty, making it unlikely that the central bank will disappoint such overwhelming market consensus.
The real intrigue lies in the Fed’s forward guidance. Markets are eagerly awaiting updated “dot plots” and commentary from Chair Jerome Powell, which could reveal the Fed’s rate expectations for 2024. Analysts now predict the Fed may signal three cuts next year, down from four previously forecast. However, some speculate the terminal rate could rise to 3.0% or higher, compared to the September projection of 2.875%.
In contrast, market sentiment remains more hawkish, pricing in a floor for interest rates closer to 3.80%. This disconnect is one reason bonds suffered steep losses last week, with longer-dated Treasury yields posting their largest weekly surge this year.
Other Central Banks Hold Steady
Several other central banks are also in focus this week. The Bank of Japan, Bank of England, and Norges Bank are widely expected to keep rates on hold. Meanwhile, Sweden’s Riksbank may move in the opposite direction, with some analysts anticipating a rate cut of up to 50 basis points.
Bitcoin Surges on Trump’s Comments
Cryptocurrency markets also made waves to start the week. Bitcoin surged above $106,000 after President-elect Donald Trump proposed a plan to create a U.S. strategic bitcoin reserve, similar to the existing strategic oil reserve. This unexpected endorsement sent ripples through crypto markets, signaling increased political recognition of digital assets.
What to Watch on Monday
Several key developments could influence European and global markets at the start of the week:
- Appearances by European Central Bank (ECB) President Christine Lagarde, Vice President Luis de Guindos, and board member Isabel Schnabel.
- Flash PMIs for Europe and the U.S., offering insights into manufacturing and services activity.
- A speech from Bank of Canada Governor Tiff Macklem.
- The Empire State Manufacturing Survey for December, which will provide a snapshot of economic conditions in New York state.
With the Fed’s decision looming and China’s economy showing signs of further weakness, investors will remain cautious as they gauge monetary policy shifts, economic resilience, and geopolitical tensions in the days ahead.
