Will They or Won’t They? Central Banks Decide, Markets Brace

If 2023 was the year of “what goes up must stay up” in monetary policy, 2024 is turning into “what on Earth is going to happen next?” Central banks around the globe are gathering in the coming weeks to play an intense game of "Guess the Rate." Traders, investors, and anyone with a 401(k) are biting their nails as nine of the Group-of-10 central banks prepare to make their final moves of the year.

This isn’t your typical December calm before the holiday storm. This is more like financial gladiators battling it out in an arena of geopolitical chaos, market volatility, and economic uncertainty. And you? You’re in the stands with popcorn and an options contract that could go either way.

The Fed’s Next Move: To Cut or Not to Cut

Let’s start with the Federal Reserve, the headliner in this monetary drama. The Fed is set to decide on December 18 whether to finally cut rates by a quarter-point. Traders are currently pricing in about a 75% chance of a cut, but nobody’s putting it in ink just yet.

Why the hesitation? Because the Fed has been the monetary equivalent of a moody teenager this year. On the one hand, inflation is finally showing signs of retreat, with the Consumer Price Index (CPI) hovering at 3.3% annually for core inflation. On the other hand, labor markets remain tight, with unemployment steady at 4.1%.

Even Jerome Powell himself has sounded like a man torn between two lovers—one being economic growth and the other inflation control. The last thing he wants is to stoke a late-cycle inflationary fire just as the economy cools.

And let’s not forget about Wednesday’s U.S. inflation data, which will serve as the Fed’s final crystal ball before its decision. Economists expect a 0.3% month-over-month increase in core CPI, marking the fourth consecutive month of this trend. If inflation surprises to the upside, that 75% chance of a rate cut might plummet faster than a meme stock post-hype.

The ECB’s Balancing Act

Across the Atlantic, the European Central Bank (ECB) is navigating its own labyrinth. On Thursday, the ECB is widely expected to deliver a quarter-point rate cut, bringing its benchmark rate down to 3.25%. But this isn’t just about Thursday’s decision. Investors are already speculating that the ECB will have to cut even deeper in 2025.

The Eurozone economy is caught in a bind. While inflation has cooled from its double-digit peaks, growth remains sluggish, with GDP expanding at just 0.2% last quarter. Germany, the Eurozone’s economic engine, narrowly avoided recession in Q3 but remains on shaky ground. Industrial production fell 1.8% in October, marking its third consecutive monthly decline.

Meanwhile, bond markets are whispering sweet nothings about a potential pivot. German 10-year bund yields are holding steady at 2.11%, but any sign of aggressive ECB action could send them tumbling. Traders are also watching spreads between peripheral economies like Italy and core countries like Germany, which could widen if the ECB’s messaging falters.

The Bank of Japan: The Eternal Enigma

The Bank of Japan (BOJ)—the central bank that loves to keep markets guessing. Set to meet on December 19, the BOJ faces a conundrum of its own. Will it finally tighten its ultra-loose monetary policy, or will it stick to its guns and maintain its negative interest rates?

The Japanese economy has been surprisingly resilient this year. GDP growth in Q3 came in at a robust 4.8% annualized rate, buoyed by strong exports and a weaker yen. However, inflation has been creeping up, with core CPI hitting 3.7% in October—the highest in over three decades.

The BOJ has already started to tweak its yield curve control policy, allowing 10-year bond yields to rise above 1%. But a full-blown rate hike would be a seismic shift, and traders aren’t convinced it’s coming just yet. The yen has been volatile in anticipation, trading at around 150.22 per dollar.

Trump’s Dollar Dilemma: A Plaza Accord 2.0?

Then there’s the Trump wildcard. The president-elect has been vocal about his desire for a globally competitive dollar—strong enough to maintain its reserve currency status but weak enough to give U.S. exporters an edge.

Scott Bessent, Trump’s pick for Treasury Secretary, has reportedly been studying the 1985 Plaza Accord, which orchestrated a 40% decline in the dollar. Could we see a modern-day version of this pact? Unlikely, say analysts. Global growth remains tepid, and most central banks aren’t in a position to tighten policy alongside the U.S.

But even the suggestion of such a move could rattle currency markets. The Dollar Spot Index has already dipped 0.3% in recent days, as traders weigh the odds of a coordinated devaluation.

Geopolitical Chaos Adds to Market Jitters

If central bank uncertainty wasn’t enough, geopolitics is adding extra spice to the mix. Donald Trump’s tariff threats are back in the headlines, this time targeting the BRICS bloc. Meanwhile, Europe is dealing with political drama in France and Germany, and tensions in the Middle East are escalating following the collapse of the Assad regime in Syria.

“It’s a geopolitical free-for-all,” said Raphael Gallardo, chief economist at Carmignac. “A reckoning awaits between populist politics and the bond market.”

This macro backdrop has many investors taking risk off the table as the year winds down. “It’s important to be more agile, more tactical,” said Julian Le Beron of AllianzGI. “We have less directionality in the portfolio and are focusing more on relative value plays.”

Markets Brace for Impact

So, what does this all mean for investors? Volatility, plain and simple. The S&P 500 has hit 56 record highs this year but is now struggling to gain traction as traders digest the flurry of central bank decisions. The index is currently flat, while the Nasdaq 100 is down 0.1%, and the Dow Jones Industrial Average has slipped 0.2%.

In the bond market, U.S. 10-year Treasury yields are hovering around 4.20%, stuck between resistance at 4.16% and the 200-day moving average at 4.21%. A breakout in either direction could signal the next big move for rates.

Meanwhile, commodities are sending mixed signals. Oil is up 0.5%, trading at $68.90 per barrel, as OPEC+ announced plans to defer supply increases. Gold, however, is down 0.3%, holding steady at $2,641.88 per ounce.

The Bottom Line

With so many moving pieces, the only certainty is uncertainty. Central banks are walking a tightrope between growth and inflation, geopolitics is a minefield, and markets are bracing for anything and everything. Whether you’re a day trader or a long-term investor, one thing’s clear: 2024 is ending with a bang, not a whimper. Stay nimble, stay informed, and, for heaven’s sake, keep your eye on the data.