Careless Whisper
- Financial market action is largely muted. Fed officials remain upbeat about the US economic outlook.
- Today, BOE MPC member Catherine Mann participates in a fireside chat at our office.
- South Africa’s central bank is expected to cut rates 25bps to 7.75%. Turkey’s central bank should stand pat at 50.0%.
Financial markets action is largely muted. USD corrected slightly lower but still trading near last week’s cyclical high. 10-year Treasury yields are steady near 4.40% after testing multi-month high of 4.50% last week. Stocks in Asia are down slightly while US and European equity futures are mixed.
Fed officials remain upbeat about the US economic outlook, suggesting the bar for a December rate cut is high. This morning New York Fed President Williams said he expects “still solid” US growth of 2.5% next year and cautioned that PCE inflation is “not quite there [at the 2% goal] yet.”
Yesterday, Fed Governor Cook noted “I see employment risks as weighted to the downside, but those risks appear to have diminished somewhat in recent months.” And Fed Governor Bowman warned that “with the U.S. economy remaining strong, moving the policy rate down too quickly, in my view, would carry the risk of stoking demand unnecessarily and potentially reigniting inflationary pressures.”
Fed funds futures continue to imply over 50% probability of a 25bps rate cut at the upcoming December 18 meeting and a total of 75bps of easing over the next 12 months. In our view, above-trend US real GDP growth and sticky underlying inflation indicate US interest rate expectations can adjust higher in favor of a firmer USD.
Fed speakers today include: Cleveland Fed President Hammack (voter) (1:45pm & 5:30pm London), Chicago Fed President Goolsbee (2025 voter) (5:25pm London), Kansas City Fed President Schmid (2025 voter) (5:40pm London), Fed Vice Chair for Supervision Barr (9:40pm London).
Second-tier US economic data are released today: November Philadelphia Fed business outlook (1:30pm London), October existing home sales (3:00pm London), and November Kansas City Fed manufacturing index (4:00pm London)
US weekly jobless claims will be closely watched (1:30pm London). That’s because the initial claims reading will be for the BLS survey week containing the 12th of the month and are expected at 220k vs. 217k previously. The last reading was the lowest since mid-May and dragged the 4-week moving average down to 221k, also the lowest since mid-May. Continuing claims are reported with a 1-week lag and are expected at 1.880 mln vs. 1.873 mln previously.
JPY is outperforming all major currencies. Bank of Japan (BOJ) Governor Ueda refused to comment on short-term FX moves instead noting that “we do seriously take into account exchange rate movements in forming our economic and inflation outlook, including the question of what's causing the exchange rate change.”
Ueda also refrained from offering policy guidance ahead of the December 19 BOJ meeting. Ueda pointed out that it was not possible to predict the outcome of the December monetary policy meeting and a lot more data and information will be available by then. Japan’s October CPI data is up next (11:30pm London). In the meantime, markets continue to price-in about 50% probability of a 25bps BOJ rate hike in December.
As flagged in October, Japanese Prime Minister Ishiba unveiled a stimulus package totaling ¥39tn (6.4% of GDP). The package includes ¥21.9tn in fiscal spending and ¥17.1tn in private sector spending. The total package is slightly larger than last year’s (¥37.4tn). A such the fiscal stance is roughly neutral and should not complicate the BOJ’s normalization cycle. Ishiba’s will need the support of another smaller party to get the package passed in parliament after his party and coalition partner lost their majority in last month’s general election.
GBP/USD is range-bound near recent lows. BOE MPC member Catherine Mann participates in a fireside chat at our office (2:00pm London). Mann is a staunch hawk on the MPC. At the November 7 meeting, the MPC voted by a majority of 8–1 to reduce the Bank Rate 25bps to 4.75%. Mann preferred to maintain the Bank Rate at 5.00%.
EUR/USD is trading heavy around 1.0530. Several ECB speakers are lined up today, likely sticking to the familiar dovish script.
NOK ignored Norway’s Q3 GDP print. Mainland real GDP grew 0.5% q/q vs. 0.3% in Q2. The outcome was higher than consensus of 0.3% but lower than the 0.7% increase penciled-in by the Norges Bank. Regardless, the Norges Bank has made it clear that the policy rate will remain at 4.50% to the end of 2024 before being gradually reduced from 2025 Q1. A first full 25bps rate cut is priced-in for March.
South African Reserve Bank (SARB) is widely expected to cut rates 25bps to 7.75% (around 2:00pm London). Headline and core inflation have eased further below the SARB’S 4.5% midpoint range in October. The market sees the policy rate bottoming around 7.25% over the next 12 months, which is in line with the SARB’s guidance.
Turkey central bank is expected to keep rates steady at 50.0% (11:00am London). At the last meeting October 17, the central bank kept rates steady as expected at 50.0% and delivered a hawkish message as it expressed concerns about “uncertainty regarding the pace of improvement in inflation.” In fact, the central bank’s year-end inflation forecasts for 2024 and 2025 were revised up to 44% (prior: 38%) and 21% (prior: 14%), respectively. The market is pricing in more than 625 bp of easing over the next three months.
