US
US stocks sold off yesterday after a strong Nvidia-fueled open. That’s a sign of a frothy market where investors sell into strength, not chasing it. Treasury yields slipped across the curve as a December Fed funds rate cut remains in play despite September’s jobs gain overshoot. USD is consolidating above its 200-day moving average.
The US S&P Global November PMI is today’s data highlight (2:45pm London, 9:45am New York). The composite PMI is expected at 54.5 vs. 54.6 in October, underscoring US private sector growth edge over other major economies. That can offer USD additional near-term support.
The US nonfarm payrolls (NFP) report for September was good but remains consistent with a soft labor market backdrop. On the positive side labor demand recovered sharply ahead of the government shutdown. NFP surged 119k (consensus: 51k) vs. -4k in August (revised down from +22k). Private sector payrolls, a better indication of the underlying momentum in the labor market, printed at 97k (consensus: 65k) vs. 18k in August (revised down from +38k).
On the downside, excluding the non-cyclical health care and social assistance sector, the economy added just 6k jobs on average in July, August, and September. Indeed, Philadelphia Fed President Anna Paulson cautioned yesterday that “historically, when job gains are concentrated in acyclical sectors like healthcare, that is a precursor to a slowdown.”
On the “not as bad as it looks” side, the unemployment rate unexpectedly increased 0.1pts to 4.4% (consensus: 4.3%) - highest since October 2021- but that’s because more people entered the labor force. The participation rate also increased 0.1pts to 62.4%.
Meanwhile, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation goal given annual non-farm productivity growth of around 2%. Average hourly earnings growth was 3.8% y/y for a second straight month in September.
Bottom line: We are sticking to our view that the Fed will deliver a follow-up 25bps cut to 3.50%-3.75% in December (34% priced-in) but acknowledge the case has weakened. The October JOLTS report - due on December 9 - is the only other major jobs check ahead of the FOMC policy decision on December 10. Further declines in the hiring rate, quit rate and vacancy-to-unemployed ratio could convince a majority on the FOMC to vote in favor of a December rate cut. Stay tuned...
JAPAN
USD/JPY edged down to 156.60 after reaching a multi-month high around 157.90 yesterday. Japan’s sticky inflation backdrop, increased fiscal support, and firm economic activity argue for the Bank of Japan (BOJ) to raise rates in December. However, the BOJ is in a hurry to resume normalizing rates which remains a drag on JPY.
BOJ Governor Kazuo Ueda still wants to see the “initial momentum” of annual wage negotiations (which typically takes place between February and March) before adjusting policy. The swaps market implies less than 20% odds of a rate hike at the next December 19 meeting, with a full 25bps rate increase priced for March.
Japan October inflation matched consensus across the board. Headline, core ex. fresh food, and core ex. fresh food & energy CPI all ticked up 0.1pts to annual rates of 3.0%, 3.0%, and 3.1%, respectively. Japan core inflation remains well above the BOJ’s 2% target and tracking above its October projection. The BOJ projects core ex. fresh food and core ex. fresh food & energy CPI to average 2.7% and 2.8% in 2025, respectively.
Japan’s Prime Minister Sanae Takaichi unveiled a fresh package of economic measures aimed at price relief worth ¥17.7 trillion (2.8% of GDP). That is more than last year's ¥13.9 trillion (2.2% of GDP) supplementary budget and implies additional JGB issuance are in the pipeline.
Japan private sector growth momentum gained traction in November. The composite PMI rose to a three-month high at 52.0 vs. 51.5 in October driven by a slower contraction in manufacturing activity. The service sector recorded a solid rate of growth (53.1) that was unchanged from October.
UK
GBP/USD is trading heavy above key support at 1.3000. Disappointing UK economic activity and the expected fiscal drag from the upcoming UK budget leave room for the BOE to deliver more easing than is currently priced-in (63bps in the next 12 months). As such, we expect GBP to keep underperforming on the crosses.
UK retail sales growth falls more than expected in October with retailers reporting that consumers held back in preparation for Black Friday discounts. Total retail sales volumes dropped -1.1% m/m (consensus: -0.2%) vs. 0.7% in September (revised up from 0.5%). Excluding auto fuel, retail sales volumes declined -1.0% m/m (consensus: -0.5%) vs. 0.7% in September (revised up from 0.6%).
UK private sector growth almost stalls in November. The composite PMI dropped to a 2-month low at 50.5 (consensus: 51.8) vs. 52.2 in October, reflecting a sharp loss of momentum in the service sector. The services PMI plunged to a 7-month low at 50.5 (consensus: 52.0) vs. 52.3 in October while the manufacturing PMI increased to a 14-month high at 50.2 (consensus: 49.2) vs. 49.7 in October.
The UK fiscal backdrop worsened in October. Borrowing in the financial year to October was £116.8 billion; this was £9.0 billion more than in the same seven-month period of 2024, and £9.9 billion more than the Office for Budget Responsibility projected in March. To shore up the deteriorating fiscal position, the UK government will likely prioritize tax hikes over spending cuts in the budget due on November 26.
EUROZONE
EUR/USD is holding above support at 1.1500. Eurozone business activity remains solid in November and supports the case for an extended ECB pause. The composite PMI printed at 52.4 in November (consensus: 52.5) down slightly from a 29-month high at 52.5 in October. The services PMI unexpectedly increased to an 18-month high at 53.1 (consensus: 52.8) vs. 53.0 in November while the manufacturing PMI dipped to a 5-month low at 49.7 (consensus: 50.1) vs. 50.0 in October.
The regional breakdown showed the German composite PMI eased to 52.1 (consensus: 53.5) from a 29-month high of 53.9 in October. In contrast, France’s composite PMI recovered more than expected to a 15-month high at 49.9 (consensus: 48.1) vs. 47.7 in October driven entirely by the service sector.
The swaps market continues to price-in about 40% odds that the ECB delivers one more 25bps cut in the next 12 months to 1.75%. We think the ECB is done easing as policy is close to neutral while the Fed has more cuts in the pipeline (84bps price in the next 12 months) given that policy is still restrictive. Bottom line: relative ECB/Fed policy stance suggests EUR/USD should hold above its 200-day moving average, currently at 1.1405.
