As Bank of England gets set to deliver another rate cut, a more hawkish Bank of Japan could unsettle global bond markets

Michael Hewson (00:00)
Hello, welcome to this week’s podcast brought to you by the Good Money Guide and our sponsors Pepperstone who are a multi-regulated CFD broker trading in multiple destinations trading in Forex stocks and commodities. I’m Michael Hewson. I nearly forgot who I was then. I know, I know. And joining me once again is Pepperstone’s senior market strategist, Michael Brown. Hi, Michael.

Michael Brown (00:16)
It’s been a long year, mate. We can let you off. I’m Mike Brown before you forget that one as well.

Yeah, very good afternoon to you, mate. ⁓ I’ll let you off. It’s been a long month. It’s been a long year. I think we’re all ready for a nice little festive break. And that’s exactly what we’re going to have at the end of next week.

Michael Hewson (00:38)
Absolutely one probably one more podcast before the Christmas break and in that we’ll probably just look back at the year just gone and Try and take a gander or what to expect in 2026 when obviously First week of 2026 there’ll be the trading updates for some of the major retailers So we might sort of just go over them a little bit ⁓ But other than that, I think you know, this is probably them the last meaningful consequential podcast for this year

given that we’re going to be looking to a really busy week next week.

Michael Brown (01:11)
Well, you’re making

the perhaps slightly generous assumption that the remainder of the podcasts have been meaningful throughout the year, but otherwise I do agree with you.

Michael Hewson (01:17)
Of I have.

I’m not going to say otherwise anyway. Let’s crack on with the risk warning. ⁓ Yeah, absolutely. Yeah, indeed. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any security financial product or instrument or to participate in any particular trading strategy. We advise any readers, viewers or listeners of this content to seek their own advice.

Michael Brown (01:23)
Yeah.

Yes, that is meaningful and consequential before anyone wonders about that.

Michael Hewson (01:49)
Spread bets and CFDs are complex instruments and come with a high degree of risk of losing money rapidly due to leverage. 72 % of retail investor accounts lose money when trading spread bets and CFDs with this provider. Okay, Michael, markets haven’t really done anything this week. And to be fair, I’m not surprised by that. And I’m guessing neither are you. The only event of consequence was obviously last night’s Fed meeting. We’ll talk about that in a minute. We’ll look at

What’s happened in the UK this week? Not that much. I would suggest much or do about nothing apart from three very disappointing employment surveys. And then we’ll look ahead to next week. And obviously that will be a host of UK data from CPI, wages, retail sales. Obviously we’ve got the Bank of England. So we’ll talk about that. We’ve got the Bank of Japan where we could see a rate hike. What potentially that could mean for bond markets next year. We’ve got the ECB.

We’ve got non-farm payrolls and US CPI, though I did make a comment on my sub stack about that. ⁓ And basically it’s probably going to have the sum total of, I was going to say, yeah, some total of nothing when it comes to how markets react to it given the Fed cut rates last night. So quite a lot to plow through. So let’s get started.

Michael Brown (03:02)
a word you can’t say on the podcast, won’t you?

Michael Hewson (03:18)
Your thoughts on last night’s rather divisive Fed meeting?

Michael Brown (03:22)
Yeah, I mean, I’ll get to that in a second. I was just gonna say I fully agree with you. I’m not at all surprised that markets have done.

almost exactly nothing this week. And I think the general vibe, as we’ve spoken about for quite some time now among market participants, is that the year is over. Either participants have had a very, very good year and they are not wanting to put those gains at risk as we enter the real home straight of 2025. And for those participants who maybe haven’t had quite as good a year, I think there’s a sort of common knowledge and it’s a correct view that you’re not going to make your year back in the last two

weeks of December either so there’s not especially much point in chasing things so it’s no surprise that things have been relatively calm and actually speaking to no surprises we certainly didn’t get any surprises from the Fed last night a 25 basis point cut as expected a third straight rate reduction and Powell and co building in a greater degree of optionality in terms of

when they move next, that the next move is going to be lower. Powell was very clear about that and how a rate hike is not anyone’s base case. But the Fed are back in this sort wait and see data dependent mode. They are going to let primarily labor market data now lead the way. If they see a further deterioration in employment conditions, they’ll deliver another cut. If things start to recover, then I think they believe they’ve taken out enough insurance that they don’t necessarily need to do anymore. And that’s pretty much in line.

with what we were expecting to be completely honest with you.

Michael Hewson (04:53)
Okay, explain this to me because I must admit I was a little bit confused by the market response to last night’s ⁓ meeting because the dot plots project a wide range of, I think, views when it comes to what rates are going to do next year. But essentially it’s one cut for next year as per the dot plots. And obviously there’s a wide range of views. We had Austin Galsby and the Kansas City Fed, Jeffrey Schmidt, who called for no change, which I thought was actually quite interesting because

Austin Galsby has generally tended to lean dovish over the course of the last few years and yet here he is and he’s probably one of the most hawkish. I do detect a little bit of a political element in that given that he used to be Barack Obama’s economic advisor but ⁓ but nonetheless I think for me the market reaction was rather strange because Dow went up S &P went up yields came off the dollar came off.

Michael Brown (05:25)
Hmm.

Yes, you’ve beaten me to it on that one.

Michael Hewson (05:50)
That doesn’t come across as a particularly dovish fed decision.

Michael Brown (05:55)
No, I’ll forgive you for mentioning the Dow and hope you never mention it on this podcast again because it’s an entirely pointless and useless index that should have been retired But I do agree with you. The market reaction was a little bit perplexing. I think it was more a case if there was just a

there wasn’t anything explicitly hawkish. know, Powell did not stand up and say, we’re done and dusted. He didn’t say, you know, policy is in a good place, which is the language that the ECB are using to indicate that there are no further cuts on the cards.

Michael Hewson (06:24)
He did say the bar

was high though.

Michael Brown (06:26)
I think the bar is high. I don’t think that’s particularly surprising. You you look at where markets were priced in terms of rate markets were priced before the FOMC. We didn’t have another cut fully priced in the curve until June anyway. The next cut is still priced in the curve for June. ⁓ You know, so I think it was almost that reassurance that the direction of travel is still lower. That was enough to sort of soothe a few nerves in terms of the equity complex. The treasury complex is a little bit different because you’ve got some sort of systematic

things going on there with the Fed now announcing some purchases of Treasury bills, which is not QE before anyone goes down that path. It’s simply to try and ensure that reserves remain at an ample level. But nonetheless, you’ve got a price insensitive buyer coming in at the super front end of the market, which is naturally going to drag yields a little bit lower and dragging the dollar along with it. mean, frankly, I would sort of almost put everything we saw last night in terms of market moves down as much more in the way of noise than they

were in terms of providing any sort of signal.

Michael Hewson (07:28)
Yet we are 12 basis points off the highs on the five-year US Treasury. So that’s quite a significant move over less than 24 hours.

Michael Brown (07:33)
Hmm.

It

is a significant movement, but I think the other thing that’s coming in when you get to five years and out, you look at the belly and you look at the long end of the curve.

We’ve been selling off for a couple of weeks on what I would argue is a bit of a flimsy narrative of Kevin Hassett’s going to be the Fed chair, let’s sell the long end. I give your head a wobble. But the fact that that narrative is so flimsy, now that we’ve navigated the event risk of the Fed, and if you’re a participant, you can lock in 4.2 % on a 10-year, 4.8 % on a 30-year, and you can lock that in before payrolls on Tuesday, before CPI on Thursday. Why would you not do it?

Michael Hewson (08:15)
We’ve also been trading in a range on the five-year from 3.8 % to 3.5 % for the last three months and we were at 3.8 % last night so you’ve got a range trade going on there which has been pretty much the trade for the last since September.

Michael Brown (08:30)
And actually that’s the same if you look across the Treasury curve and even if you start looking at spreads I mean think the the 2s 10s spread has been in something ridiculous like a 20 basis point range for the last six months. You know in many respects you can reasonably sit there and go nothing has happened.

Michael Hewson (08:47)
and yet you’ve got Trump insulting Powell again. mean, and I think more than anything, I think what this does illustrate is that the difficulty, know, Trump can put a puppet in as Fed chair, but what is clear from last night’s meeting was the fact that even if you do have a Trump-friendly chair, he needs to take the committee with him. Otherwise, he’s going to be in exactly the same situation when Powell leaves in May.

Michael Brown (09:12)
Yep.

100%. And actually, we’ve spoken about this on the podcast before. You’ve already got a puppet as a governor in Governor Stephen Myron, know, voting in favor of a 50 basis point cut yesterday, as he has done at all three of his meetings as an FOMC participant, penciling in his 2026 dot at a frankly farcical 2.1%. You ⁓ know, the reason why the Fed are not doing what Stephen Myron thinks is the appropriate course of policy action is because there’s not a cogent and coherent

their colleagues won’t let them. But let’s leave that as a question for next year because that could get very, very messy indeed, I think.

Michael Hewson (10:19)
that’s always been my base case. You know you can replace the figurehead but at the end of the day you’ve got to convince everybody else. Which brings me on before we segue into next week and well before we segue into obviously what’s happened in the UK this week and then next week. Obviously we get the rope will get a rotation of voting members in January. Now those ones that are coming out and those that are coming on is that likely to change the skew?

Michael Brown (10:22)
Hmm.

Michael Hewson (10:48)
when it comes to voting on the FOMC. Are those new members coming on likely to make it easier to cut rates or harder?

Michael Brown (10:57)
To be honest with you, there’s not actually that much difference. ⁓ If you look at who’s coming on. So, ⁓ Schmid.

Michael Hewson (11:03)
So for the

purposes of this podcast, every year there are regional Fed presidents who basically act as voting members on a rotational basis. Now I think it’s six come off and then another six come on or it could be four, it’s four. Okay, it’s four. See that gives you an indication of how long ago I had to think about this. I knew it was a handful, or round about a handful anyway, I haven’t got six fingers.

Michael Brown (11:06)
Hmm.

It’s full.

Move on.

I’m not going there.

Michael Hewson (11:33)
I’ve got

down the Ryan Paisy route now, aren’t I? ⁓

Michael Brown (11:37)
For listeners who don’t know who that is, that’s not a route you ever want to go down.

Michael Hewson (11:41)
No,

it’s not. ⁓ So it’s four. basically four, four basically take a back seat and then four come on. So essentially it’s not going to make that much of a difference that we’ve got these two, these four new members coming on the, on the slate and four going off.

Michael Brown (11:46)
Hmm.

No, it won’t. The only thing that, you know, I think the balance is, you know, three hawks leave, one dove leaves, three hawks come in, one dove comes in basically. So the difference is very minimal. The only thing it is worth bearing in mind is, you know, that you can’t and you certainly shouldn’t over extrapolate from the dissents we saw last night, because the two hawkish dissents were Schmid and were Gulsby. This is the last meeting they vote at for three years or so, you know, but then again, know, 2026 January, we’re going to have

Michael Hewson (12:04)
Right, okay, so it’s no change.

Michael Brown (12:26)
four new members on the FOMC. We’ll get plenty of public remarks from them in the run up to that meeting and we’ll see what they have to say.

Michael Hewson (12:33)
which is really why I raised the point because obviously Galsby and Schmidt going off.

Michael Brown (12:38)
Yeah, but also this is, know, this might be the nice segue into what we’re going to discuss next, but this is where the Fed are almost turning into the Bank of England, which is not someone you want to turn into, ⁓ but it’s where individual policymakers have much more sway than just the chair or the governor sort of steering the committee and everyone automatically follows. You know, these policymakers are a lot more independently minded now.

Michael Hewson (13:02)
I would argue that’s a good thing.

Michael Brown (13:04)
Well, I think it is as well. I’m more just saying you never want to be likened to the BOE, but maybe even a broken clock is right twice a day. Maybe it’s one thing they’ve got right recently.

Michael Hewson (13:11)
Well, you know, I also think that we need a diversity of views. mean, how how many times have I said over the last 15, 20 years that the Bank of England indulges in groupthink? Now they’re not doing that. And we’re now getting proper discussions about the pros and cons of easing too quickly or not easing enough. And I’d much rather have those discussions where people who understand the topics that they’re talking about have a general discussion about what is potentially best for the economy.

Michael Brown (13:22)
⁓ yeah.

Michael Hewson (13:41)
without the risk of political interference.

Michael Brown (13:44)
I mean, on that, completely agree with you. think the better the diverse, the more the diversity of views, the better because you’re ultimately likely to come to a much better policy outcome.

Michael Hewson (13:53)
Okay, so that’s really winding up the Fed. So essentially markets pricing in the potential for one rate cut next year. Though potentially the reaction last night suggests that we might have more than that. I’m doubtful at the moment. It’s very difficult to say given the lack of clarity that we’ve got on the economic front when it comes to data. UK markets, all quiet really, not really too much to talk about. We had three employment surveys.

Michael Brown (14:07)
.

Yes.

Michael Hewson (14:23)
round about the same time as the Chancellor of the Exchequer Rachel Reeves was talking to the Treasury Select Committee and came out with some ripe purlers. Yeah, no link between the rise in unemployment and national insurance.

⁓ Less said about that the better, but let’s talk about those employment surveys because to be fair, I didn’t pay into particularly pretty picture despite how Torsten Bell would like to have you believe.

Michael Brown (14:40)
Yeah.

Yeah, can we just never mention that man on the podcast again, unless he becomes chancellor, because we’re almost going to get in as much trouble talking about him as we are talking about about Rachel Reeves. as you

Michael Hewson (14:58)
God help us.

Well they’re both incompetent,

I’ll just put it out there right now.

Michael Brown (15:07)
you’re absolutely spot on. But yeah, as you say, you know, we had the employment survey from BDO that was at its lowest level since April of 2011. KPMG, I mean, this was pre budget but

The number of full-time vacancies was a 16-month low. Again, this is all in advance of the official jobs data that we get next week, which we’ll discuss in a bit. Why is anyone surprised? This is the same point we’ve made over and over again. The government have increased the cost of hiring by raising employer and national insurance contributions. They’ve increased the cost of hiring by raising the minimum wage or the national living wage by more than the rate of inflation. And they’ve increased the risk associated with higher

by bringing in this workers rights bill and yes some of it’s been watered down recently but there’s still a huge risk associated with that. Are you then surprised that businesses react accordingly? If anyone is surprised by that I would be very very concerned indeed because you know to say that this was obvious is probably an understatement.

Michael Hewson (16:07)
I think it was very obvious, I think we were seeing it at the time a year ago.

Michael Brown (16:10)
Yeah, and you know, it’s not only these surveys that we’ve had this week that are painting that picture. You you look at the HMRC payrolls numbers, they’ve for 11 of the last 12 months. You know, this is, it’s not something that you can explain as a statistical anomaly. This is a genuine direct result of government policy. And the fact that the government are trying to distance themselves from it, well, frankly, speaks volumes about their integrity or lack of it.

Michael Hewson (16:39)
You know, I could basically draw an analogy, but it wouldn’t be a particularly present, ⁓ pleasant one. And it’s probably not for this podcast. I can indeed. What was also notable in the one of the surveys was that wage growth was still rising despite the slowdown in hiring. Now, let’s segue that onto next week’s Bank of England meeting, because I think it’s universally accepted that we’ll probably get a rate cut next week. ⁓

Michael Brown (16:47)
Well, we’re going for a bit tomorrow, you can tell me then.

Hmm.

Mm-hmm.

Michael Hewson (17:10)
It’ll probably not be a unanimous decision. It’ll be a split decision. Maybe 5-4 or 6-3. I think we’re pretty confident that Andrew Bailey will vote for a cut this time. The bigger question is, what does the Bank of England think about 2026? Now, I know obviously we’ve seen the November inflation report and we know that essentially they think that disinflation

Michael Brown (17:23)
Yes.

Michael Hewson (17:39)
is now starting to kick in. I still have my doubts about that. I think the committee is still split between those who think that inflation is going to be a lot stickier than people would like and those who think that unemployment is the bigger risk.

Michael Brown (17:52)
Mm.

Yeah, I think you’re absolutely right. Sorry, excuse my little coughing fit there. ⁓ Let’s take it from the top. think a 25 basis point cut to bank rate is definitely going to happen. I think it would be a huge surprise if that didn’t happen. At the prior meeting in November, the MPC voted 5-4 in favor of holding rates steady. You’d expect Governor Bailey, as you said, to join the Doves this time out. ⁓ Maybe.

Michael Hewson (18:00)
Looks alright.

Michael Brown (18:20)
His deputy Claire Lombardelli, maybe chief economist Hugh Peel, will join him to get it to 6.3 or even 7.2. But I think the fundamental, the nub of the matter is there are going to be enough votes to get a bank rate cut through at the December meeting. And I think the bank can cite three reasons for that. The first is that inflation does look to have peaked, at least at a headline level, at 3.8 % in August and in September. We’ll discuss that in a second.

The second is that a greater margin of slack is continuing to open up in the UK labour market. Of course, we get the next jobs numbers next week, but unemployment is already at 5%, which is a four-year high. And we just spoke about some of the other alternative job surveys. thirdly, that we’ve moved through the budget. And apart from the minimum wage increase, there was nothing particularly inflationary in that budget.

and actually there were some policies to bring down inflation with them taking money off energy bills and all the rest of it. And yes, there’s some creative accounting around that, but it is going to bring headline prices lower. The key question, as you said, is do the bank now guide towards more rate reductions and do they guide towards delivering another cut in February? And I think frankly that is going to depend on how the data evolves between now and that February meeting.

But we are getting close at this point. Bank rate is currently at four. If they cut, or when they cut next Thursday, it’ll be down at three and three quarter percent. There are models that the bank have put out which puts the neutral rate at three and a half percent. So you are sort of getting to the point where you go, how much more room is there for them to actually lower rates, especially not only given that estimate of neutral, but also considering that inflation is still running in the mid to high threes.

Michael Hewson (20:09)
What you just said makes me smile a little bit because a year ago the Bank of England was projecting that base rate would be at 3 % by now.

Michael Brown (20:17)
Well, that’s yet another forecast they got wrong. If we wrote all of those down, we’d need to destroy a rainforest to get enough paper, I think.

Michael Hewson (20:24)
But I mean, where is the base right now? It’s four. And I was thinking at the time, that’s ambitious. Good luck with that. And yeah, here we are. So I think what we do know is that anything that the Bank of England says needs to be taken with a huge bucket of salt. But, you know, unemployment.

Michael Brown (20:41)
Yeah, very.

Michael Hewson (20:47)
The highest level of unemployment was back in May 2021, I think, just post COVID, when it went, yeah, 5.3%. We’re only three basis points off that. In fact, unemployment has gone up by 25%, almost 25 % since July 2024, when it was at 4.1%.

Michael Brown (20:53)
Yeah, it would have been when furlough was rolling off, wouldn’t

Hmm. Yeah, and we may as well talk about it. We get the latest unemployment earnings and inflation numbers next week. So it’s a really, really big week of UK data. think we’ve got retail sales on Friday as well. You know, there’s a lot of UK data points out just in the interest of housekeeping. It is worth noting that the BOE will be getting advanced site of the labour market and the inflation numbers. So they will have those during their entire policy deliberations.

Michael Hewson (21:19)
We do, we do.

Well, they actually vote

on Wednesday night, just for those of you who don’t know, even though the decision is announced on Thursday at midday.

Michael Brown (21:37)
Yes.

That is a very good point, actually. Yeah. And that’s not a conspiracy or anything. That’s just because they think they need extra time to type up the minutes and all the rest of it. But yeah, they vote on policy on the Wednesday night before the lunchtime Thursday announcement. I don’t think the data is going to tell us anything we don’t already know in terms of the broader picture. It’s going to point to the employment backdrop continuing to weaken, labour market slack continuing to emerge, a continuation of this big divergence between the public and the

private sectors where private sector wage growth is really falling off a cliff frankly. Public sector earnings growth is going in completely the opposite direction. ⁓ And in terms of inflation, you would expect further disinflation at a headline level. The BOE expect prices to come down from 3.6 to 3.4. ⁓ But it’s really those core metrics, the core and the services numbers that are going to be in focus in terms of trying to gauge that degree of inflation persistence and also the risk of price pressures.

remaining at a relatively elevated level into next year.

Michael Hewson (22:42)
I think the biggest risk, this is just obviously a personal view here, is food inflation. That was at 2 % at the end of last year. It’s at 2%. It’s 4.9. It’s 4.9 now. No, no. mean, basically, services inflation is at 4.5%. Food inflation went up to 4.9 from 4.5 in September.

Michael Brown (22:54)
now what just over five? Yeah five wasn’t a bad guess was it?

Mm.

Michael Hewson (23:11)
And here’s where I have concerns about inflation persistence. Ultimately, what do consumers feel most keenly when they go to the shops? It’s food inflation. So obviously the recent increases in the living wage, the minimum wage, are likely to feed through into companies’ costs, particularly in the services sector side. Obviously you’ve got those budget measures which affect hospitality as well.

⁓ That’s going to put upward pressure on wages. Which means that profit margins are going to come under pressure. Prices could go up. But the flip side to that is companies may decide we’re not going to bother. We’re just going to get rid of staff.

Michael Brown (23:44)
Yeah, definitely.

Yeah, and of course in the food space, you know, you’ve got things like self-checkouts and all the rest of it. We know how staff and head counts can be reduced. You’re absolutely right in terms of food inflation and the BOE have done a lot of research into it. And that is by far and away the biggest driver of consumer inflation expectations because it is the most notable ⁓ expense. Everyone does, you know, a big food shop once a week or once a month or whatever it may be. Well, you’ve got to eat.

Michael Hewson (24:20)
You can’t get around it. ⁓

Michael Brown (24:24)
You know that every week I spend 50 quid in Sainsbury’s, next week it’s 60 quid. Well, hang on a minute, what’s going on there? Especially if you haven’t bought anything out of the ordinary. So yeah, I think you’re absolutely right. That does bear watching very, very closely into the new year. And we know policymakers will watch that closely as well. the question is, and we’re not going to get an answer to this next week, but we get a cut in December. Do they go again in February or do they wait further into next year?

Michael Hewson (24:51)
That’s the thing, it’s these secondary effects that ultimately will determine whether or not we see core inflation and headline inflation come down ⁓ as quick as say the Bank of England thinks that it will do.

Michael Brown (25:04)
Yes, I mean, it is worth noting in all of this that the MPC don’t actually expect headline inflation to get back to the 2 % target until I think it’s Q2 2027. So we’re still talking about 18 months away. But the question is, does Q2 become Q3, become Q4, become Q1 28? When that starts to slip, that then strengthens the argument to remain slightly more restrictive for a slightly longer period of time.

Michael Hewson (25:30)
This is the thing though with UK inflation. It goes up very, very quickly and then it comes down like a feather very, very slowly.

Michael Brown (25:35)
Mm.

Indeed, somewhere that doesn’t have inflation is the Eurozone. If you want to move on.

Michael Hewson (25:44)
Indeed. ⁓ And Bank of Japan. Well, actually, no, Bank of Japan is starting to get inflation, but…

Michael Brown (25:47)
Well, I was going to

say they’re actually probably the only people in the world that are glad to have inflation because they’ve spent about 15 years trying to engineer it.

Michael Hewson (25:52)
Yeah, indeed.

But yeah, but let’s talk about the ECB because obviously they finished cutting in June. The first central bank to halt its rate cut cycle, the major central bank that is, before someone basically calls me out on it.

Michael Brown (26:00)
Yes.

some ⁓ central bank somewhere that we don’t know about, yeah.

Michael Hewson (26:12)
Yeah, exactly.

There’s been a slightly hawkish repricing there after comments from German ECB member Isabel Schnabel said that she wasn’t averse to the potential for a rate hike in 2026. How likely is that?

Michael Brown (26:30)
Right, I’ve got a bit of an issue with this.

Michael Hewson (26:33)
And I’m

asking that question rhetorically because I don’t think it’s very likely at all, but go on.

Michael Brown (26:40)
I mean, the ECB will not hike in 2026 and whoever’s editing this podcast, you can save that. And in December 2026, you can play it back. And I hope I’m right. These comments from Schnabel have been misconstrued a little bit, an overinterpreted, because what she actually said was, I’m relatively comfortable with the current market interest rate path, which is basically the ECB do nothing with rates until about the middle of 2027 when the market, well,

Michael Hewson (26:49)
be right back.

or over interpreted shall we say.

Michael Brown (27:10)
before she made these comments, priced about a 50-50 chance that they were going to hike rates by the end of 2027, which is probably about right, to be completely honest with you. We all know the easing cycle is done and dusted and, you know, depending on what happens 18 months into the future, yeah, maybe they are going to hike rates at that point. As you say, it’s been overinterpreted, it’s been overanalyzed. The market’s got way too excited that, you know, are the ECB going to hike in 2026? Well, no, they’re not. You know, I think…

They are going to remain on hold, but you’ve got to remember that the staff macroeconomic projections, as of the September forecast round, pointed to inflation undershooting the 2 % target in both next year and in 2027. Why or how you would generate the majority of policymakers to vote for a rate hike when you’re not achieving your inflation target is slightly beyond me, to be honest with you. I think the key focus for the ECB this week will firstly be

Does Lagarde reiterate that policy is in a good place? I think it’s almost certain that she will. That’s the language that they’ve been using for quite some time now to basically describe that they’re sitting on the sidelines. The second thing to watch, as nerdy as it sounds, is what is the staff projection for inflation in 2028? And I know that that’s a hell of a long way out and I know that the ECB don’t have a great track record in terms of forecasting. Yeah, exactly, that finger in the air. But…

You are looking at a big disinflationary base effect from energy prices in the early part of next year. If you get a third straight year of inflation undershooting that projection, that target in your projection, then the doves will potentially look to argue for the need for another rate cut, which would be the argument that then takes place in probably March of next year. But I think frankly, the base case is that the ECB had done.

they’re at 2 % with the deposit rate and they’re probably going to stay at 2 % with that deposit rate for as long as they can get away with.

Michael Hewson (29:09)
Indeed, and before anyone asks the question, well if there’s a deflationary base effect in energy prices, then why won’t we see it here? Well I can give you two words to answer that particular question and his name is Ed Miliband.

Michael Brown (29:21)
Well, yeah, exactly. The less said about that, the better, I think.

Michael Hewson (29:24)
the energy

price cap is going up in January not down and we’ve got crude oil prices down two and a half percent today. So energy prices should be going down but because of green levees and various other renewable jiggery pokery we’re still paying the highest energy prices in Europe so that’s another reason why the ECB is on hold and

Michael Brown (29:28)
Yeah.

Yeah.

Michael Hewson (29:51)
another reason why the Bank of England is going to find it very difficult to cut that much further.

Michael Brown (29:55)
Yeah, exactly. But build another wind turbine, it’ll be fine.

Michael Hewson (30:00)
Yeah, I’m sure it’ll be fine. Blow all your troubles away. ⁓ Right, okay, Bank of Japan.

Michael Brown (30:04)
it that’s that’s shocking

that is absolutely shocking by the way. I was fiddling with my notes I didn’t quite quite twig what you said but hang your head in shame Mr. Hewson.

Michael Hewson (30:15)
Yeah, well you can take it up with me tomorrow. Bank of Japan, they’re gonna be hiking rates next week, or are they?

Michael Brown (30:17)
Yeah, I will.

Yes, they are.

Michael Hewson (30:25)
by 25

basis points. I mean, let’s just do a little bit of a history lesson. At the end of last year, the bank base rate, the BOJ was minus 0.1%. We’re now at 0.5, with the potential to go to 0.75. I mean, that’s a huge rate shock in percentage terms.

Michael Brown (30:43)
Yeah, yeah, yeah. And also, perhaps more importantly than that, it’s not only a huge shock in percentage terms, but also how long were they in negative territory? That must have been a decade or so. And rates were not particularly high before that. You also consider the non-interest rate tools that they’ve been pulling back on in terms of quantitative easing, in terms of yield curve control, in terms of ETF purchases. They have tightened conditions very, very significantly, albeit at a…

what you would consider in the grand scheme of things a glacial pace, but when you’ve had this ultra accommodative stance for so long, you have to do things slowly, otherwise there is a genuine risk that something may break. But in terms of next week, I think a 25 basis point hike is pretty much nailed on. We’ve had a hell of a lot of ⁓ sources reporting.

alluding to the likelihood that they are going to do that, which is basically the BOJ drip feeding stories to the media to try and make sure this isn’t a shock to financial markets. And perhaps more importantly than that, the new prime minister, Takeiichi, who we had thought would advocate for more of a dovish approach from the BOJ, seems to be relatively open to the idea of them delivering another rate hike. So I think another move is guaranteed. The question is, when do they hike next after that?

I wouldn’t hold your breath for it to come any time soon, probably another six months or so.

Michael Hewson (32:07)
Yeah, the bond market is creaking though, isn’t it? If you look at what the 20 year and 30 year JGBs are doing, mean, 30 year JGBs are at or close to record highs. Now, that’s over three and a half percent. I mean, that’s not a particularly high rate, but when you’re in an indebted economy as Japan is, I think what’s the debt to GDP ratio? 230 %? Is it 250 % now? So,

Michael Brown (32:13)
Hmm.

Yeah.

250 % something stupid. Yeah.

Michael Hewson (32:36)
But it also has consequences in terms of Japanese domestic investors and their bond holdings because obviously an awful lot of their bond holdings are in overseas treasury, overseas bonds, UK bonds, US treasuries. And that’s essentially because of the yield. Well, now with the 30 and a 20 year, 10, 20 and 30 year yields, which are net positive, I think, I don’t know whether they’re net positive, they? I think 30 year is.

Michael Brown (32:49)
Mm-hmm.

30 will be in real terms, yeah.

Michael Hewson (33:06)
Yeah, in

real terms. That’s going to make GGBs a lot more attractive and could prompt an outflow from US and European bonds. Now does that present a problem?

Michael Brown (33:16)
Yeah.

Well, if it’s big enough, yes, it definitely will, because you’ll have selling pressure across ⁓ global government debt, which is then repatriated, those funds are then repatriated into Japan. And you’d naturally expect that to send ⁓ long end yields higher. I think that’s a risk for 2026. I don’t know how big a risk it is. I wouldn’t say it’s the biggest risk, but it’s something to keep on the radar.

Michael Hewson (33:37)
Is it a big risk?

Michael Brown (33:45)
⁓ There you go, there’s another clip to come back at me with at some point in the future. ⁓ I think it’s the way I would be sort of framing this now is, absolutely. I think the way I would sort of frame it is for donkey’s ears, effectively, it hasn’t even been a conversation. You want yield, you’re a Japanese investor, you go outside Japan, job done. That is just how you do it because there is zero yield in Japan.

Michael Hewson (33:53)
think we need to flag it.

Michael Brown (34:11)
We’re now at the point where actually that conversation is taking place. There’s now a debate. Japan is now an option. Holding JGBs is now an option if you want a positive real return. If the BOJ continues to tighten policy, that then moves from being a conversation piece to actually this is now probably an investable idea that’s becoming consensus. That’s when you potentially have an issue on a sort of broader global level. We’re not there yet.

Do we get there at some point in 2026? Potentially, it’s certainly something that we need to keep an eye

Michael Hewson (34:44)
It won’t happen overnight, but it will start to happen at some point. So you need to start to monitor those flows.

Michael Brown (34:46)
I’m not.

It’s also the sort of thing that once it gets going it probably won’t stop.

Michael Hewson (34:59)
And I think it’s probably already started, particularly the long end, if you look at the 20 and the 30 year JGBs.

Michael Brown (35:05)
But also, know, as we just sort of alluded to, we’re sat here going, know, 30 year JGBs are at a two decade high or 20 year JGBs are at two decade high. We’re still talking about, record high, we’re still talking about 2%, you know, which gives you an idea of how low and how long yields have been kept so low in Japan.

Michael Hewson (35:15)
Record eyes.

or three and a half.

Indeed, but if you say, for example, look at where the 30-year JGB was at the end of 2024, it was at 2.25%. It’s now at 3.5%. You compare that to where the 10-year US Treasury yield was at the end of 2024, which is at 4.8%. It’s exactly where it is now.

Michael Brown (35:46)
Hmm.

Yeah, that’s very true actually. Yeah. Which, you know, do the BOJ have greater control over the curve than the Fed? Well, given that they own half the curve, yeah, they absolutely do. You know, I’ll answer my own question there. So, well, there we go. Let’s move on from that one before I answer any more of my own questions.

Michael Hewson (35:57)
Well they probably do, yeah. question, there you go.

Okay, so we’ve we’ve got UK retail sales I’m not I I don’t have a great deal of optimism about those numbers simply because they will have all predated the November budget and Obviously in November 4th and I think it was the 4th of November Rachel Reeves basically calls that called that Downing Street press conference or

Michael Brown (36:24)
⁓ god. That

actually slipped my mind until you just brought that up again.

Michael Hewson (36:30)
and basically warned pretty much the whole of the UK that she was going to have to make some difficult decisions about the public finances, yada, yada, yada. Potentially basically killing consumer and business confidence stone dead for the whole of November. So I can’t imagine for one reason why we won’t see another poor retail sales number for November. Now we may get a bounce back in December post budget.

in the lead up to Christmas, unfortunately we won’t know what that is until January.

Michael Brown (37:01)
No, and as you said right at the top of the show, we’ll probably learn more from the retailers trading updates at the start of the year than we will from the retail sales print. Certainly we’ll learn that sooner. But yeah, my hopes for the November retail sales report are very, low. If the chancellor stands up on the television as I will steal this from John Stipek, I’ll buy you a beer next week to hold an emergency fiscal narrative reset press conference and tells everyone they need to pay more tax.

Michael Hewson (37:06)
Yeah.

Michael Brown (37:28)
What are you going to do after that? Well, you’re not going to run out to the shop and spend all your money. You’re going to try and keep tighten your belt a little bit and keep more of that cash in anticipation of the income tax hike. yeah. Sorry. No, I’ve got well, we’re not going down that route because that will be for the rest of the afternoon. But yeah, you’re absolutely right. It did never come. Yeah, she’s made a rod for her own back. It’s going to be grim.

Michael Hewson (37:39)
Which never came. Which never came.

She’s useless. Anyway. ⁓

Michael Brown (37:57)
The

only upside of the retail sales numbers is it’s the last data point I’ve got to cover this year before I can have the Christmas holiday. There you go. There’s the positive. Yeah.

Michael Hewson (38:04)
next Friday.

Actually after next week’s podcast so we won’t even have the luxury of talking about it until the following year.

Michael Brown (38:11)
No true. But we

can talk about non-farm payrolls. There’s a segue for you.

Michael Hewson (38:17)
There you go, because I was just about to say that. Moving on to non-farm payrolls and CPI. Payrolls for November and an October estimate, I think for both, I believe. Well, the Fed’s already cut rates, so I’m going to put this out there. Who cares? Merry Christmas, Happy New Year. See you next year.

Michael Brown (38:37)
Amen to that. I completely

agree with you. You know, as you say, the Fed have cut rates without having sight of the November or October jobs and inflation data, and the Fed will get the December numbers for both of those prints before their January meeting. The data will be messy as hell to coin a technical term. Certainly the employment reports, because obviously they are skewed by the government shutdown. We don’t know how those furloughed workers are going to be classified.

If they’re all classified as unemployed, then the October unemployment rate is going to be 4.8, 4.9. But then the November unemployment rate is going to be back at 4.4, 4.5, because they all went back to work again. Do not overinterpret the data. I think it’s a classic one where those two data points will drop into a market that at the time is going to be very, very thin, very, very illiquid, and very, very choppy. Yes, there’ll be some intraday volatility over the data, but…

By the time we sit down in mid-January, are we going to be talking about the November non-farm payrolls numbers? I guarantee you it.

Michael Hewson (39:43)
No, we won’t. And furthermore, I think we’re going to have to wait a couple of months for the data to settle down in the wake of the government shutdown because obviously the government reopened on the 12th of November. The last CPR report was in September when it was at 3 percent. Who knows where inflation is now in the US? So I think.

Michael Brown (39:50)
Mm.

But I think as

you said, the key point is no one knows. I don’t know, you don’t know, the rest of the market participants don’t know, the policy makers on the FOMC don’t know. The key point is a majority of policy makers on the FOMC have been happy to deliver three 25 basis point rate cuts, even though they don’t know. The data doesn’t change what they’ve done. And I would argue it’s too stale to actually change what they’re gonna do in the future as well.

Michael Hewson (40:32)
We do have retail sales in the US for November. So that should give us a good indication, hopefully, of what happened in the lead up to Thanksgiving. Assuming that, again, that data is accurate.

Michael Brown (40:44)
Hmm, yes, it should.

Well, I was gonna say, yeah. And also, of course, that drops at exactly the same time as the jobs report. So good luck getting anyone to focus on that. But yeah, we all know that November and December retail sales numbers are absolutely key. That holiday period is pivotal for retail and for the consumer sector. So yeah, it’s definitely gonna be worth watching. But again, it’s a little bit stale to worry about, I think.

Michael Hewson (41:11)
which is why they call it the Black Quarter.

Michael Brown (41:14)
Indeed. ⁓

Michael Hewson (41:15)
that’s when retailers

go into the black for the year just in case anyone was wondering.

Michael Brown (41:19)
Yeah. Earnings? FedEx? Will they deliver?

Michael Hewson (41:21)
earnings there’s only a cut

there’s only there’s only a

Michael Brown (41:26)
Nike, just

do it.

Michael Hewson (41:29)
There’s carries as well.

Michael Brown (41:30)
Yeah, I can’t think of a pun for that one.

Michael Hewson (41:32)
The tech guys, I think. I was going to say, as far as retailers are concerned in the UK, it’s been a bit of a mixed bag. Some have done reasonably well, some less so. Curry’s is one of those that’s done very well. The electrical retailer, it shares earlier this year, hit their highest levels pretty much since 2021. So long may that continue. Optimism, the electrical retailer will be able to build on a solid end to 2025. They did.

Michael Brown (41:52)
Hmm.

Michael Hewson (42:01)
First half of 2026. At the beginning of this year, the shares were around about, let me just double check that before I start spouting numbers at you. Because I was about to say 100p, but I just wanted to check on that. Yep, they were about 100p, they were now about 130. So they’re up about 25, 30 % on the year, which is fairly decent. Trading in line with expectations. Again, I think it’s gonna be tricky.

Michael Brown (42:14)
Ha

So we can’t complain yet.

Michael Hewson (42:31)
because of obviously the bleak outlook, you’re not going to go shopping for fridges, TVs or any other electrical items when there’s a huge amount of uncertainty over the budget. So I think for me, there’s a risk of a profits warning here.

Michael Brown (42:44)
Yeah, I think you’re probably right. And as you say, it is those big ticket items that people are most likely to pull back on first if they are indeed reining in their consumer spending. you know, it wouldn’t be at all surprising if they did warn. And frankly, I think my purchase of a dishwasher is not going to prop up their earnings particularly much. So, you know, I tried my best, but to no avail.

Michael Hewson (43:06)
Probably not mate.

Yeah, I mean, let’s look at Nike and FedEx differing fortunes on both since their last earnings numbers. Nike’s have swooshed not done particularly well.

Michael Brown (43:16)
⁓ for god’s

sake! ⁓

I was waiting for that.

Michael Hewson (43:23)
bit of a lacklustre swoosh.

I mean, the numbers in October are actually fairly decent, jokes aside, but the shares are actually lower. Shares are actually lower. So I think there is a low bar here for a potential beat if their Chinese and Asian markets have continued to improve. And there was evidence of that in their Q1 numbers, but that didn’t provide a lift at the time. Maybe it will provide a lift on this occasion.

Michael Brown (43:53)
Yeah, maybe it’ll be a little bit of a delayed reaction. I mean, I think there’s probably also still a bit of a tariff risk priced in the stock as well. I know that we’ve massive trade risks have massively subsided from where they were in sort of Q2, Q3 this year. But the market is still going to have a degree of risk in that price as well. But yeah, it does feel like a bit of a low bar for them to get over. But again, they’re reporting earnings on the penultimate proper trading day of the year, which

you know, is anyone going to have any conviction to do a lot after that report? I would question that. It feels like a January story, to be honest.

Michael Hewson (44:25)
Yeah, now that’s a good point actually.

they expect the tariff hit, well they revised the tariff hit expectation up to one and a half billion dollars. So I’ll be paying close attention to that to see whether or not they revised that up or down, I’ll keep it the same. ⁓

Michael Brown (44:43)
I’d be surprised if they revised it up given that actually

tariffs or the overall tariff level has come down since the Q126 report.

Michael Hewson (44:53)
Yeah, well gross margins 1.2 % in the current fiscal year is what they expect. So that was a downgrade. So be interesting to see whether they adjust that back up again. As for FedEx, they’ve seen a fairly decent run higher since their last set of numbers. Shows no signs either of running out of steam. Heading back to the levels that we saw at the end of last year, beginning of this year. So they’ve had a pretty poor year all told.

Michael Brown (45:15)
Mmm.

Michael Hewson (45:23)
but they pretty much reversed all of the losses that we saw in the dump into April. So it felt, yeah, they have. So I was gonna say, can they deliver? But I know what your response to that will be. I know you have, I know, so I can’t reuse it. All I’ll say about FedEx is they expect profits to come in above the $4.05 that we saw at the same time last year. So they do expect profits to be higher or in line.

Michael Brown (45:28)
Yeah, they’ve already started to rebound.

Well, I’ve also already used that one today, so…

Michael Hewson (45:52)
with what they were a year ago.

Michael Brown (45:54)
⁓ The other thing with FedEx is, as always with these delivery companies, they are a really good bellwether of the economy more broadly. And again, given that we’ve had the government shut down, we’ve had a lack of official economic figures, FedEx’s commentary on how their business has been performing, how other businesses that use them to ship have been performing, that could be quite useful from a broader perspective as well.

Michael Hewson (46:18)
Yeah, mean, tariffs have added an extra $1 billion in costs this year, but they’ve seen a stronger domestic market as a concept, which has helped to offset that. So as you rightly say, those numbers are out on the 18th, two days after US retail sales. I think I’d much, I’d place much greater store on FedEx’s numbers than the retail sales numbers.

Michael Brown (46:23)
Hmm.

Yeah, I would agree with you on that one. I would fully agree. That’s it, isn’t it?

Michael Hewson (46:48)
Okay,

that’s it. That’s it. We’re done. ⁓ So that’s I think that’s it for pretty much today and this year. We’ll talk again next week where we’ll look at back. We’ll look back at 2025. Look at what’s done well. Yeah, yeah, look at what’s done well. Look at what hasn’t done well. ⁓ And maybe just do a brief nod to what’s coming in the first week of 2026. ⁓

Michael Brown (46:57)
Mm-hmm.

Yes, we’ll do some Christmas specials.

Mm-hmm.

Michael Hewson (47:17)
and before signing off 2025. All right, so we’ll speak to you all again next week. In meantime, have a great weekend.

Michael Brown (47:22)
Absolutely, look forward to it.

Bye for now.