Weekly review 11 December 2023: Hopes of interest rate cuts


The central bank super week will be something interesting to keep an eye on. The markets’ focus is already on the lowering of key interest rates. But will the central banks respond to the markets’ hopes?

The strong rise seen in the equity markets in November has moderated in December. Over the past six weeks, all asset classes have developed in a positive direction, however. The background for this is the belief in the markets that the central banks will start lowering their key interest rates in the spring.

Generally speaking, interest rates have recently been on a downward trend, but the end of last week saw them rise slightly. As the interest rate level has fallen, the equity market, in turn, has experienced positive development.

The strong labour market report published last week in the USA can be considered to be one of the factors explaining the rise in the interest rate level at the end of last week. According to the report, up to 199,000 new jobs were created in the USA in November, and the unemployment rate fell to 3.7 per cent from the previous 3.9 per cent. At the same time, however, wage inflation accelerated somewhat, increasing the pressure on the Fed to maintain its policy rate higher for longer to tackle inflation.

Expectations of interest rate cuts increasing

For some time now, rather than interest rate hikes, the markets have been focusing on when the central banks will start lowering their key interest rates. At the moment, the central banks are expected to lower their interest rates next year at a rapid pace.

The markets are pricing that the European Central Bank will start its interest rate cuts in April and that the US Fed will start them in May. In addition to these cuts, the markets are also pricing further cuts in key interest rates for the latter half of next year.

Historically, the Fed has changed its monetary policy before the ECB. However, the way it is seen in market expectations, the situation is now the opposite, which has contributed to weakening the euro in relation to the dollar.

At the same time, both actual inflation figures and inflation expectations have been on a downward trend. In Europe, it has been a while since long-term inflation expectations took a downward turn, and in November, inflation expectations also fell in the USA.

The US and European economies, which have developed in different directions in the course of the current year, have started to come closer to each other towards the end of the year. Earlier in the autumn, Europe provided a surprise with even weaker-than-expected economic data, while the US economy fared better. Now, earnings in Europe are no longer worse than the expected weak level, while economic data in the USA has softened, and highly positive surprises have been in scarce supply.

A week full of interesting news

During the current week – the central bank super week – the central banks of different countries will be busy holding their interest rate meetings. First in line is the US central bank (Fed) on Wednesday, followed by the European Central Bank (ECB) and the central banks of England and Norway on Thursday. The meeting of the central bank of Japan is scheduled for Tuesday next week, for which there has been speculation on the markets on a possible interest rate hike.

Although the central banks are not expected to make any major changes in their monetary policies this time, it will be even more interesting than usual to keep an eye on the final interest rate meetings of the year, given that the markets’ key interest rate expectations have changed considerably in recent weeks.

Particularly interesting about the meetings will be the way the central banks communicate. Previously, the message has been that the key interest rates must be kept higher for longer. Based on their pricing, however, the markets have recently started to believe less in that message.

Central bank meetings are not the only interesting events during the week: the US November inflation figures will be published on Tuesday. Headline inflation is believed to fall to 3.1 per cent from 3.2 per cent in October, and core inflation (less energy and food prices) is believed to remain at 4 per cent. Adding to these is the publication of Purchase Manager Indices from the USA and Europe.


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