Macy’s Santa Claus appears on the trading floor to celebrate the 97th Macy’s Thanksgiving Day Parade at the New York Stock Exchange (NYSE) in New York City, U.S., November 22, 2023. REUTERS/Brendan McDermid Acquire Licensing Rights

LONDON, Dec 1 (Reuters) – Festive cheer has come early to world markets (bar those dollar bulls) on growing certainty that central banks will start slashing interest rates next year.

For sure, key U.S. jobs data will test the exuberance, while Australia’s central bank could reinforce a view that rates have peaked.

Here’s your week ahead in financial markets from Ira Iosebashvili in New York, Kevin Buckland in Tokyo, Naomi Rovnick and Marc Jones in London and Yoruk Bahceli in Amsterdam.

1/ SANTA’S BEEN

Christmas has come early with global stocks posting their best monthly performance in three years in November and global investment-grade bonds returning almost 4% – the best month on record going back to 1997 (.MERGBMI).

Now, the early Santa rally risks running into a central bank Grinch.

Markets price rate cuts as early as the first half of 2024. The U.S. Federal Reserve and the European Central Bank, wary of market euphoria loosening financial conditions, may start to push back.

Whether equities and bonds can rise in tandem next year also feels doubtful. Stocks price in a benign economic scenario of lower borrowing costs and steady growth. Government bonds, which shine in recessions, have been boosted by signs that the impact of previous rate rises is starting to cause pain.

Both cannot be right.

2/ GOLDILOCKS, WELCOME

Will Goldilocks stick around? That’s the question investors are pondering as they await the Dec. 8 U.S. jobs report after a rebound that has taken the S&P 500 within spitting distance of a fresh year high.

The data will have to walk a fine line to satisfy the so-called Goldilocks narrative of cooling inflation and resilient growth that has boosted asset prices.

Too strong a number would undercut bets that the Fed will begin easing monetary policy sooner than expected, presenting an obstacle to the searing fourth quarter rally in stocks and bonds.

A weak number, on the other hand, could spark fears that the economy is beginning to roll over following 525 basis points of rate increases, potentially dulling risk appetite.

Economists polled by Reuters expect the U.S. economy to have added 175,000 jobs in November, versus 150,000 in October.

3/ A HAWKISH HOLD?

Cooler than expected consumer inflation has sounded the death knell for any expectations the Reserve Bank of Australia will hike rates on Tuesday.

But investors are wary of a hawkish hold, with prices still elevated and new Governor Michele Bullock increasingly seen as more of a hawk than her predecessor. Traders currently put odds for a hike at the following meeting in February at about 1-in-3.

Some hint of how soon the Bank of Japan can begin its own, much-delayed tightening campaign may come from the Tokyo CPI data, also on Tuesday.

Whether business and the economy could even weather a return of higher interest rates will also be clearer from the Tankan corporate sentiment surveys and GDP data on Wednesday and Friday.

4/ TROUBLE AND STRIFE

First political turmoil in Spain and Portugal and now upheaval in Germany and the Netherlands heralds fresh uncertainty ahead of a jam-packed 2024 election year.

After November’s constitutional court blow, Germany faces a 17 billion-euro ($18.54 billion) hole in next year’s budget. No date has been set for the budget, so news from Berlin remains in focus and a fiscal correction means the economy is at risk of shrinking for a second straight year.

And coalition talks are stumbling in the Netherlands after far-right, anti-EU Geert Wilders’s shock election win.

Turmoil in two EU heavyweights is unwelcome just as the bloc seeks more cash from members and finance ministers meet to iron out new fiscal rules on Friday.

Bond vigilantes are watching for a deal giving leeway for public investments while taking debt sustainability seriously.

All this as the first EU-China summit in four years on Dec. 7-8 looms.

5/ RIDING TIGERS

Emerging market investing sometimes gets likened to riding a tiger – a lot of fun while you are on it but the dismount can be deadly.

November has certainly been the enjoyable part. EM stocks (.MSCIEF) are up 7.5% for their best month since January. Bonds in both local currencies and dollars have made 6%, while a 10% rebound by Israel’s shekel and 5-6% rises from central European currencies have hoisted MSCI’s EM FX index (.MIEM00000CUS) to its highest since April 2022.

Decembers have been generally kind too. That FX index has risen every December since a dip in 2015 and stocks have made decent gains in three out of the last four.

It will depend on where bond yields and risk premia, or ‘spreads’, go from here of course, but many of the big investment houses are again sounding hopeful.

($1 = 0.9168 euros)

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