A Fistful of Dollars

November 22, 2024
  • USD surged to a two-year high on a worsening Eurozone and UK economic outlook.
  • The Eurozone and UK composite PMI fell below the 50 boom/bust level in November. UK retail sales also dropped more than expected in October.
  • The spotlight turns to the US November PMI today.

USD rallied to fresh cyclical highs during the European trading session. Investors should continue to lean into USD strength. First, the U.S. economy is in a sweet spot and outperforming other advanced economies. Second, the prospect for looser fiscal policy under a Trump administration will force the Fed to keep policy restrictive for longer. Third, expectations for a lower U.S. corporate tax rate and a wave of deregulation should boost foreign portfolio and FDI flows to the U.S. Fourth, the favorable U.S. productivity landscape will lead to low inflationary economic growth which translates to higher real interest rate.

The US labor market is in a good place and argues for a cautious Fed easing cycle. US weekly jobless claims unexpectedly fell by 6k to 213k last week (consensus: 220k), the lowest level since end-April, dragging the 4-week moving average down to a multi-month low at 218k.

The US November preliminary PMI is forecast to be indicative of an encouraging growth outlook (9:45am New York). The composite PMI is expected to rise 0.2pts to 54.3. Manufacturing is anticipated to improve 0.4pts to 48.9 and services is projected to remain unchanged at 55.0.

According to the Wall Street Journal, US President-elect Donald Trump is looking to appoint Kevin Warsh as Treasury Secretary and later as Fed Chair when Jay Powell’s term ends in May 2026. Warsh was a Fed board member between February 2006-March 2011 and is viewed favorably by financial market participants as he would act as a guard-rail for fiscal and monetary discipline.

In an opinion article published in March, Warsh wrote “Outspending the nation’s capacity is dangerous. Absent a fiscal anchor, the list of buyers retreating from America’s debt markets won’t be limited to those who wish us trouble. Monetary policy requires a revamped framework, too. Inflation isn’t caused by workers earning too much and living too well. It’s caused by the government living too well—spending, printing and borrowing too much.”

GBP/USD undershot 1.2500 to trade at its lowest level since May 2024 on poor UK economic data. In October, UK retail sales volumes dropped more than expected by -0.9% m/m (consensus: -0.4% m/m) vs. 0.1% m/m in September (revised down from 0.3%). Retail sales ex. auto fuel declined -0.7% m/m (consensus: -0.3% m/m) vs. 0.1% in September (revised down from 0.3%). Retailers reported that Budget uncertainty affected sales.

Additionally, the UK composite PMI collapsed to a 13-month low at 49.9 (consensus: 51.7) vs. 51.8 in October. The manufacturing PMI dropped to a 9-month low at 48.6 (consensus: 50.0) vs. 49.9 in October while the services PMI eased to a 13-month low at 50.0 (consensus: 52.0) vs. 52.0 in October.

Odds of a 25bps BOE rate cut at the December 19 meeting rose slightly to as much as 16% versus 11% before the UK PMI data. Nonetheless, stubbornly high UK services price inflation supports the case for the BOE to pause easing next month. Bottom line: the likelihood of a more dovish ECB and cautious BOE favors a lower EUR/GBP.

Yesterday, BOE MPC member Catherine Mann unsurprisingly stuck to her hawkish and “activist” policy guidance. Speaking at our office, Mann emphasized the importance of keeping rates on hold for longer until there are clear signs the remaining persistence in inflation dissipates. Mann added that once inflation persistence has been purged, it would then be appropriate to ease fast and forcefully.

EUR/USD had a kneejerk drop to a two-year low near 1.0335 on worsening Eurozone economic activity. The Eurozone composite PMI unexpectedly sank to a 10-month low at 48.1 (consensus: 50.0) vs. 50.0 in October. The manufacturing PMI dropped to a 2-month low at 45.2 (consensus: 46.0) vs. 46.0 in October while the services PMI fell to a 10-month low at 49.2 (consensus: 51.6) vs. 51.6 in October.

The country breakdown was equally soggy. The German composite PMI fell to a 9-month low at 47.3 (consensus: 48.7) vs. 48.6 in October as the services sector shrank for first time in nine months. Meanwhile, the French composite PMI declined to a 10-month low at 44.8 (consensus: 48.3) vs. 48.1 in October driven by a faster downturn in services and manufacturing activity. Markets raised odds the ECB slashes the policy rate 50bps at the December 12 meeting to over 50% vs. 15% before the PMI data.

USD/JPY is range-bound between 154.00 and 156.00. Japan’s October CPI report was mixed. Headline CPI inflation matched consensus and slowed to 2.3% y/y vs. 2.5% in September. Core (ex-fresh food) fell less than expected to 2.3% y/y (consensus: 2.2%) vs. 2.4% in September but is tracking below the BOJ 2024 forecast of 2.5%. Core (ex-fresh food & energy) increased one tick more than expected to 2.3% vs. 2.1% in September and tracking slightly above the BOJ 2024 forecast of 2.0%.

Nevertheless, the Bank of Japan’s (BOJ) loose for longer policy stance is intact and remains a drag for JPY. Japan underlying inflation is in a firm downtrend and private sector activity is weak. Japan’s composite PMI rose 0.2pts to 49.8 in November but is still below the 50 boom/bust level on a deeper contraction in the manufacturing sector. The manufacturing PMI fell to a 9-month low at 49.0 vs. 49.2 in October while the services PMI rose to a 2-month high at 50.2 vs. 49.7 in October.#

USD/CAD is consolidating around 1.4000 and Canadian bonds underperformed. Yesterday, Canadian Prime Minister Trudeau unveiled a tax breaks and rebates package worth C$6.3bn, or 0.2% of GDP. The fiscal stimulus measure is too small to derail the Bank of Canada’s easing cycle.

CAD will take its cue today from Canada’s September retail sales print (8:30am New York). Statistics Canada’s advanced retail indicator suggests sales increased 0.4% m/m after rising 0.4% in August. Going forward, businesses think sales growth will strengthen over the coming year but remain soft.

AUD/USD is trading heavy around 0.6500. Australia private sector activity worsened in November. The composite PMI sank to a 10-month low at 49.4 vs. 50.2 in October as services activity joined manufacturing output in contraction. The services PMI plunged to a 10-month low at 49.6 vs. 51.0 in October. The manufacturing PMI improved to a 6-month high at 49.4 vs. 47.3 in October. The risk is the RBA’s resolve in keeping rates restrictive for longer chokes off growth further and weighs on AUD. RBA cash rate futures imply a first 25bps cut in May.

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