Higher Ground

November 22, 2024
6 min read

Higher Ground

  • USD made fresh cyclical highs this morning. The fundamental backdrop still favors USD strength.
  • UK retail sales volume falls more than expected in October on pre-Budget uncertainty.
  • The spotlight today is on relative growth momentum with the release of the November PMI readings for the EU, UK, and US.

USD is mixed after making fresh cyclical highs this morning. 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 (2:45pm London). 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, 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 piece 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 is down under 1.2600 and trading at its lowest level since mid-May on broad USD strength and poor UK retail sales 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.

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.

The UK November preliminary PMI is up next (9:30am London). The composite PMI is forecast to dip 0.1pts to 51.7. Manufacturing is expected to rise 0.1pts to 50 and services is expected to be unchanged at 52.0.

EUR/USD dropped to a low near 1.0462 before recouping some of its losses. The next technical support for EUR/USD is offered at 1.0448, the October 2023 low. The Eurozone’s soggy growth outlook should continue to undermine EUR. The Eurozone November preliminary PMI is due today (9:00am London). The composite PMI is expected to be unchanged at 50.0. Manufacturing and services are also expected to show no change at 46.0 and 50.0, respectively. France and Germany’s PMIs are released earlier (8:15am and 8:30am London, respectively).

USD/JPY is range-bound between 154.00 and 156.00. Japan’s October CPI report was mixed. Headline CPI inflation matched consensus, slowing 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 (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 under 1.4000. CAD will take its cue today from Canada’s September retail sales print (1:30pm London). 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 dropped-back briefly under 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.

NZD is underperforming across the board and NZD/USD plunged to more than a one-year low near 0.5830. The RBNZ has plenty of room to crank-up easing at next week’s meeting. Monetary policy is too tight, raising the risk of a deeper economic downturn. At 4.75%, the RBNZ policy rate is still well above the RBNZ estimate for the nominal neutral rate range of 2% to 4%. The market has fully priced-in a 50bps policy rate cut at the November 27 meeting and implies a 22% probability of a 75bps move.

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