Eye of the Tiger
- USD and Treasury yields are punching through key resistance levels.
- The U.S. October CPI report will either support a December Fed funds rate cut or signal a pause.
- Australia wage growth cooled more than expected in Q3 but still tracking above the RBA’s forecast. RBA cash rate futures adjusted a bit higher.
The dollar index (DXY) is on steroids punching through key resistance levels and eyeing the April high at 106.52. Similarly, 10-year Treasury yields made fresh multi-month highs around 4.47% driven by rising real yields that reflect an encouraging U.S. economic outlook. Indeed, 10-year inflation breakeven rates remain contained within the Fed’s comfort zone and the term premium for holding 10-year Treasuries eased to 0.1% after reaching a one-year high of 0.3% last week.
The fundamental USD uptrend is intact. 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.
Today, the U.S. October CPI print (1:30pm London) will guide near-term Fed funds rate expectations. Minneapolis Fed President Kashkari (non-voter) warned overnight that only an inflation surprise could derail a December 25bps rate cut, which is currently 62% priced-in.
U.S. headline CPI is expected to rise 0.2% m/m and increase 0.2pts to 2.6% y/y. Core is anticipated to rise 0.3% m/m and remain at 3.3% y/y for a second consecutive month. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.6% y/y and 3.3% y/y, respectively. While inflation has eased significantly over the past two years, the FOMC is more cautious about the inflation outlook. The FOMC November press release scrapped previous reference that it had gained greater confidence that inflation is moving sustainably toward 2%.
Fed speakers today include: Minneapolis Fed President Kashkari (1:30pm London), New York Fed President Williams (2:30pm London), Dallas Fed President Lorie Logan (non-voter) (2:45pm London), St. Louis Fed President Musalem (2025 voter) (6:00pm London), and Kansas City Fed President Schmid (2025 voter) (6:30pm London).
US credit condition remains broadly healthy. The October Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices showed the net percentage of large and middle-market firms reporting tighter credit conditions fell to 0% (lowest since April 2022) vs. 7.9% in Q2. For small businesses, the net share of banks that saw tighter credit standards rose to 13.3% from 8.2% in Q2. That’s still well below the Q2 2023 high of 49.2%.
AUD/USD is consolidating around 0.6530 after sliding to lows near 0.6515 yesterday. Australia wage growth cooled more than expected in Q3. The wage price index rose for a third consecutive quarter by 0.8% q/q (consensus: 0.9%) and fell 0.6pts to 3.5% y/y (consensus: 3.6%). The breakdown shows private sector wages down 0.6pts to a two-year low at 3.5% y/y while wages in the public sector dropped 0.2pts to a one-year low at 3.7% y/y. Moreover, the proportion of jobs with annualized wage changes over 4% fell to two-year low of 31% in Q3.
RBA cash rate futures trimmed odds of a 25bps cut in May 2025 to 68% from 100% last week because wage growth is still tracking above the RBA’s projection of 3.4% y/y by December. Also, wage growth remains high relative to productivity growth (0.8% y/y in Q2) and puts upward pressure on inflation. RBA Governor Michele Bullock takes part in a panel discussion later this evening (11:00pm London).
USD/JPY is trading at its highest level since July 30 on USD strength. Japan PPI unexpectedly increased 0.3pts in October to a 13-month high at 3.4% y/y (consensus: 2.9%). This is an upside risk to inflation if firms manage to pass on the higher input cost to consumers. However, soft consumer spending activity in Japan suggests firms will most likely have to absorb higher input cost in profit margins. Bottom line: the Bank of Japan loose for longer policy stance is intact and remains a drag for JPY. Nevertheless, expect Japanese officials to ramp-up currency jawboning as we approach USD/JPY intervention zone around 160.00.
USD/SEK remains under upside pressure on widening US-Sweden interest rate differentials. The Riksbank minutes from the November 7 meeting is published today (8:30am London). At that meeting, the Riksbank cut rates 50bps to 2.75%, as expected. The bank noted that “the policy rate may be cut again at the next monetary policy meeting in December and during the first half of 2025, in line with what was communicated in September.” The market is pricing in about 100bps of further easing over the next 12 months, which would see the policy rate bottom near 1.75% vs. the Riksbank’s 2.25% forecast. In our view, there is room for interest rate futures to converge towards the Riksbank’s forecast because underlying inflation is stabilizing around the 2% inflation target. An upward adjustment to Sweden interest rate expectations should cushion the decline in SEK, particularly on the crosses.
GBP/USD is holding on to yesterday’s losses and trading near its lowest level since early August. BOE MPC member Catherine Mann takes part in a panel discussion (9:45am 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%.
