Rise and shine everyone.

It’s Central Bank day, and we have the Fed’s rate decision at 2pm ET time today - all signs point to a 25 bps cut.

But before that, we just got the Bank of England’s rate decision - as expected we got a 25bps cut, bringing the Bank Rate down to 4.75%. However, it was a hawkish as the statement warned of keeping rates restrictive long enough to tame inflation, and that they will be careful not to cut too fast or by too much. They also talked about how the latest budget is provisionally expected to add nearly 0.5 percentage points to inflation at its peak between mid-2026 and early 2027.

I wonder if Chair Powell will be asked about his opinion on future fiscal spending or the potentially inflationary impact that we may see with Trump coming back to power. The Fed has historically refrained from commenting on fiscal policies (mostly) and definitely don’t like to comment on the political stance. It should be an interesting press conference.

In other news, Sweden’s Riksbank cut rates by 50bps down to 2.75%, while Norway hasn’t even started their easing cycle and holds firm at 4.5%. Brazil on the other hand hiked the Selic rate by 50 bps to 11.25% aiming to bring inflation back to target and support economic stability.

Markets are still reflecting the Trump victory. Yesterday markets reached an all time high, led by what everyone considers the Trump trades. Retail participation in the market surged to 26%, about 5% higher than after the 2020 election, according to JPM.

But there is also some debate about what will happen to inflation and the bond market continues to reflect that. The 10Y rate surged yesterday, taking out a key trendline, and continues to hover just below 4.5%. As we said, crossing above could make it challenging for small caps and unprofitable companies.

Chinese stocks, however, saw a pullback on the news yesterday but recovered some of those losses today. The Shanghai Composite closed higher +2.2%. Perhaps the news of China’s trade surplus increasing month-on-month helped. Steel exports were the highest for a single month since Sept 2015.

Korean shipbuilders saw stock increases of 6-18% after Trump reportedly asked South Korean President Yoon for support with U.S. initiatives. And Thailand anticipates benefiting from the expected U.S.-China rivalry, aiming to increase exports to the United States.

Japan saw yields rise and cross 1%, the highest since Aug 1. Japan’s labor cash earnings came in below expectations, though this initially had little effect on USD/JPY. Later, top FX diplomat Mimura described recent market movements as “excessive” and emphasized that authorities are “closely watching markets with a very high sense of urgency,” warning of potential action to counter any extreme fluctuations. As a result, USD/JPY saw a slight decline of 0.2%.

European markets are higher today, including Germany, even after the political turmoil taking place there. German opposition leader Friedrich Merz has called for snap elections in January after Olaf Scholz dismissed finance minister Christian Lindner amid policy disputes. Scholz scheduled a confidence vote for January 15, but Merz and his coalition seek an earlier vote to hold elections sooner. Jörg Kukies, a former Goldman Sachs banker, will replace Lindner.

Chart of the Day

A look at some commodity inventory levels in China, courtesy of GS.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)