European and Global Markets Start the Week on a Cautious Note

China began the week with disappointing economic data. Retail sales in November rose just 3.0% year-over-year, falling short of the median forecast of 4.6%. Additionally, house prices continued their decline, though industrial output showed some resilience.

Officials reiterated promises of stimulus measures, including potential cuts to bank reserve requirements. However, credit data revealed that lower borrowing costs are ineffective when investment appetite remains weak.

Chinese bond yields dropped to record lows in response, prompting the central bank to consult with commercial banks about their positions. In a challenging turn for the yuan, Chinese 10-year yields posted their steepest weekly drop since 2018, coinciding with the largest weekly surge in longer-dated US Treasury yields this year.

Reports of Beijing considering allowing the yuan to depreciate to support its economy were met with criticism from President-elect Donald Trump’s trade adviser, Peter Navarro.

Stability in South Korea Amid Political Transition

In South Korea, political tensions eased slightly as Han Duck-soo assumed interim leadership following the impeachment of President Yoon Suk Yeol. The Constitutional Court has begun reviewing Yoon’s impeachment, with a decision expected within six months.

Authorities have pledged to stabilize financial markets, which helped the KOSPI index hold steady on Monday.

Markets Eye Federal Reserve Meeting

Attention is focused on the Federal Reserve’s upcoming meeting on Wednesday, where a 25-basis-point rate cut is almost universally expected. Market consensus assumes the Fed will revise its 2025 outlook to project three rate cuts instead of four. The terminal rate could rise to 3.0% or higher, compared to 2.875% in September.

Markets are more hawkish than the Fed, pricing in a floor for rates around 3.80%. This divergence contributed to last week’s selloff in bonds.

Central Bank Activity Across the Globe

In other central bank meetings this week:

• Bank of Japan, Bank of England, and Norges Bank are expected to maintain current rates.
• Riksbank is anticipated to cut rates, potentially by 50 basis points.

Key Market Influences on Monday

Several developments could shape markets on Monday:

• Appearances by ECB President Christine Lagarde, Vice President Luis de Guindos, and board member Isabel Schnabel.
• Release of PMIs for Europe and the US.
• Remarks by Bank of Canada Governor Tiff Macklem.
• The Empire State Manufacturing Survey for December.