End of Year Market Outlook

LONDON (Reuters) – The end of the year is almost in sight for traders, yet the last mile will be anything but slow.

Central banks in the United States, Japan, and Britain meet, while Germany holds a vote of no confidence in the government.

Here's all you need to know about the coming week in world markets from Lewis Krauskopf in New York, Kevin Buckland in Tokyo, and Naomi Rovnick, Amanda Cooper, and Dhara Ranasinghe in London.

1. CUT, THEN WHAT?

The U.S. Federal Reserve is expected to continue monetary easing with a 25 basis point (bps) rate cut on Wednesday, marking its third consecutive reduction, as the latest consumer price index aligns with economists' estimates.

Investors have lowered expectations for future Fed rate cuts, anticipating a decline to about 3.7% by the end of 2025 from the current 4.5%-4.75% range, roughly 90 basis points higher than projections in September.

This shift places emphasis on the Fed's own rate forecasts and insights from Chair Jerome Powell regarding his outlook for rate cuts. Powell indicated that the economy is stronger than previously anticipated and suggested a slower pace of future cuts.

2. HIKE ON HOLD?

Expectations for Bank of Japan (BOJ) policy have fluctuated significantly in recent weeks. As the Dec. 19 decision approaches, signals are becoming clearer, though the outcome remains uncertain.

Recent reports suggest that policymakers may opt for a pause, delaying a potential third rate hike until more data on wages and clarity on Donald Trump's policies are available. Analysts note that volatility may be high leading up to the BOJ decision, especially if the Fed does not deliver expected cuts on Dec. 18.

3. VORSPRUNG DURCH TECHNICALITY

Germany's DAX index has been the best-performing European index this year, rising 22% and consistently hitting record highs. Strong performance in defense, tech, and construction sectors has countered weaknesses in the automotive sector.

Despite signs of sluggish growth and political instability, a no-confidence vote in the government on Dec. 16 could pave the way for a snap election in February. However, Goldman Sachs highlights that a significant portion of DAX sales come from outside Germany.

4. TIME FOR BOE SURPRISE?

In contrast, the Bank of England (BoE) has been slow in its approach to rate cuts, with expectations to maintain rates at 4.75% on Thursday. Significant tax hikes have raised inflation concerns, allowing the pound to strengthen against the euro.

However, bond markets are skeptical, as two-year gilt yields have dropped, indicating uncertainty about future rates while UK employment growth slows, impacting overall consumer confidence.

5. SHAKIER GROUND

Across major economies, what was once a robust services sector is now faltering, leading to a convergence with lagging manufacturing activities. November PMIs indicated a downturn, and upcoming December data will clarify if this trend deepens.

The November eurozone composite PMI fell to 48.3, while the UK's all-sector PMI dropped to a yearly low of 50.9, just above the contraction mark. Service sector activity in the U.S. also experienced a slowdown, with potential impacts from U.S. tariff tensions and political issues in France and Germany.

Some analysts believe that PMI data might reflect overly pessimistic views on activity, optimism stemming from falling interest rates may still support economic sentiment.