Markets Look Ahead to Wednesday’s (Probable) 25 Bp Rate Cut

Rates close nearly unchanged ahead of a busy week. Swap rates closed within 1 bp of opening levels across the curve today, with markets largely awaiting Wednesday’s FOMC meeting decision and a packed slate of economic data. Fed Funds futures have a 25 bp rate cut priced in as 95% likely, and tomorrow’s retail sales print is unlikely to sway the odds materially. Retail sales is expected to climb to 0.5% in November from 0.4%, which would be an encouraging rebound after a 0.4% decline from September to October.

US services sector continues to flourish while manufacturing lags. S&P Global Services PMI rose to 58.5 according to preliminary December data, the fastest pace of expansion since October 2021. Service sector growth was driven by new orders, which rose at the fastest pace since March 2022, and slowed cost growth. Meanwhile, the manufacturing sector contracted for the sixth straight month, with the S&P Global Manufacturing PMI now at 48.3.  Chris Williamson, chief business economist at S&P Global, argued that Trump tariffs, aimed at boosting US manufacturing, have caused concerns related to the “potential impact on inflation resulting from the higher cost of imported materials.”

European growth outlook remains negative despite today’s positive data. Per December Eurozone PMI data released today, the services sector expanded at 51.4, a 2-month high, lifting the composite index to 49.5 vs. 48.3 last month. Manufacturing remained the laggard and in contraction, unchanged on the month at 45.2. Despite the somewhat positive results, the outlook for European growth remains grim. Recently, ECB President Lagarde said economic risks remain skewed to the downside, and the ECB lowered its 2025 growth outlook from 1.3% to 1.1%. Additionally, German Chancellor Scholz lost a confidence vote today, creating new political uncertainty within the Eurozone’s largest economy.