Slow and Steady
- Fed officials argue for a go-slow approach to rate cuts.
- Another data-light day ahead but there’s plenty of central bank speakers.
- Hungary’s central bank is widely expected to keep the policy rate on hold at 6.50%.
USD is consolidating yesterday’s big gains. Treasury yields are up across the curve and leading the global bond market sell-off. Stocks in Asia and U.S. equity futures are down.
USD and Treasury yields broke higher yesterday as most Fed officials back a go-slow approach to rate cuts. Kansas City Fed President Jeffrey Schmid (2025 voter) said “a cautious and deliberate course of action seems appropriate”. Minneapolis Fed President Neel Kashkari (non-voter) noted “right now I am forecasting some more modest cuts over the next several quarters.” Dallas Fed President Lorie Logan (non-voter) highlighted that “a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals.”
San Francisco Fed President Mary Daly (2024 voter) did not comment on the pace of the easing cycle but pointed out “so far, I haven’t seen any information that would suggest we wouldn’t continue to reduce the interest rate.” Last week, Daly stated that “one or two cuts [this year] was a reasonable thing”. Today, Philadelphia Fed President Patrick Harker (non-voter) will have an opportunity to share his policy view (3:00pm London).
Fed funds futures continue to price-in 25 bp cut in November followed by a 25 bp cut in December. Our base case is for one 25 bp Fed funds rate reduction by year-end because resilient U.S. economic activity and easing in financial conditions are upside risks to inflation. Indeed, the Atlanta Fed’s GDPNow model is tracking Q3 annualized growth of 3.4%, which is above the pre-pandemic average annual growth rate of 2%, and the Chicago Fed national financial conditions index is the loosest since November 2021.
Three regional Fed business surveys are due today: October Philadelphia Fed non-manufacturing activity index (1:30pm London), Richmond Fed manufacturing and services indexes (both at 3:00pm London).
The IMF publishes its October World Economic Outlook (2:00pm London). The IMF’s updated real GDP growth forecasts are expected to show the U.S. economy still outpacing other major economies. U.S. economic outperformance remains a major theme underpinning higher Treasury yields and USD strength. Interestingly, the latest edition of The Economist magazine is titled “The envy of the world” in reference to America’s “bigger and better than ever” economy.
GBP/USD recovered slightly to 1.3000 after testing two-month lows around 1.2980 overnight. EUR/GBP remains under downside pressure near 0.8320 as the ECB has greater scope to loosen policy than the BOE.
BOE speakers today include Governor Andrew Bailey (2:45pm London), Megan Greene (2:45pm London), and Deputy Governor Sarah Breeden (9:15pm London). In a newspaper interview earlier this month, Bailey held out the prospect of the Bank becoming a “bit more aggressive” in cutting interest rates provided the news on inflation continued to be good. U.K. inflation cooled sharply in September. This raises the risk that Bailey may double down on the dovish rhetoric, leading to a kneejerk drop in GBP.
ECB President Christine Lagarde takes the spotlight in a busy line-up of ECB speakers. Lagarde is schedule to speak twice (3:00pm and 8:15pm London). In our view, the bar for additional ECB easing is low and an ongoing drag for EUR. The Eurozone economy is stagnating, and inflation is undershooting the ECB’s 2% target.
NZD/USD is firmer after falling to two-month lows overnight around 0.6020. New Zealand’s September annual merchandise trade deficit narrowed to the lowest in 30 months at -NZ$-9.1bn vs. NZ$-9.4bn in August. However, the smaller trade deficit is the result of an 8.4% y/y fall in imports and is indicative of weak domestic demand activity. Bottom line: the RBNZ has ample room to continue its easing cycle which is an ongoing drag for NZD.
National Bank of Hungary meets today and is widely expected to keep the policy rate steady at 6.50% (1:00pm London). At the last meeting September 24, the bank cut rates 25 bp to 6.50% and Deputy Governor Virag said “The Monetary Council will continue to make cautious, patient and stability-oriented decisions.” Since then, the forint has weakened and EUR/HUF made new highs above 400.00. Last week, Virag warned the bank “may not only pause interest rate cuts in October… [But] the base rate may stay unchanged for a sustained period.” The swaps market is pricing in 25-50 bp of total easing over the next six months.
