European stocks fell overnight, hindered by weak economic data and political instability in France and Germany.
The German parliament accepted Chancellor Olaf Scholz’s request for a confidence withdrawal, leading to an early election on 23 February after his government collapsed. Scholz called the vote after dismissing Finance Minister Christian Lindner, leader of the Free Democrats, which cost him his majority.
France’s credit rating downgrade
Moody’s downgrade of France’s credit rating further dampened sentiment, increasing borrowing costs and raising concerns about the country’s financial recovery.
European PMI data eases tariff concerns
In economic news, the purchasing managers’ index (PMI) data showed European economic activity contracted less than feared, easing tariff gloom ahead of United States (US) President-elect Donald Trump’s inauguration next month.
The Hamburg Commercial Bank (HCOB) Composite PMI rose to 49.5 from 48.3 in November, beating forecasts of 48.2
In the United Kingdom (UK), the S&P UK Composite PMI remained at 50.5 in December, unchanged from November, marking the 14th consecutive month of expansion in the UK private sector.
The focus now shifts to the upcoming UK consumer price index (CPI) data and Thursday’s Bank of England (BoE) meeting, previewed below.
BoE interest rate decision
Date: Thursday, 19 December at 11.00pm AEDT
At its last meeting in November, the Bank of England lowered its official Bank interest rate by 0.25% to 4.75%, marking its second rate cut in this easing cycle.
The BoE signalled that a quarterly pace of rate cuts was likely in the future, as services inflation is still high in the UK and fiscal stimulus from recent government budget announcements will boost growth and bring upside risks to inflation.
On Wednesday night in the lead-up to Thursday’s BoE meeting, an inflation report for November will be released. In October, annual inflation in the UK was unexpectedly firm at 2.3%, the highest in six months, while annual core inflation increased to 3.3% from 3.2% prior.
Core inflation is expected to tick higher again to 3.4% in November. This will ensure the BoE keeps rates on hold at 4.75% before cutting rates by 25 basis points (bp) in February next year. A cumulative 73 bp of rate cuts are priced into the UK rates market between now and December 2025, taking the BoE’s official Bank rate lower to 4%.
BoE official bank rate chart