Steady As She Goes

November 08, 2024
6 min read

Steady As She Goes

  • Fed and BOE deliver hawkish cuts. USD, Treasury yields and Gilt market stabilizing.
  • Canada’s October jobs report expected to point at a further softening in labor market conditions.
  • Chinese policymakers are set to unveil the details of their fiscal stimulus pledge at a press briefing today (4:00pm Beijing, 8:00am London).

USD and Treasury yields stabilized after retracing yesterday some of their post-U.S. election gains. As was widely expected, the FOMC trimmed the Fed funds rate 25bps to a target range of 4.50-4.75%. The decision this time was unanimous. In September, the FOMC voted by a majority of 11-1 to slash rates 50bps with Fed Governor Michelle Bowman dissenting in favor of a smaller 25bps rate cut.

Importantly, the bar for an aggressive Fed easing cycle is high which is USD supportive. First, the FOMC press release scrapped previous reference that it had gained greater confidence that inflation is moving sustainably toward 2%. Second, Fed Chair Jay Powell emphasized “the Fed is not in a hurry to get to neutral”, adding “the economic activity data have been stronger than expected” while “inflation data wasn’t terrible but higher than expected.” Fed funds futures hardly budged and still price-in about 70% odds of a 25bps cut in December followed by 43% odds of a 25bps cut in January.

Powell made it clear he does not plan to resign before his term ends in May 2026 if president-elect Donald Trump demands it. Powell also reminded the audience that it was “not permitted under the law” for a sitting president to dismiss or demote a Fed chair or Fed governors.

Unsurprisingly, Powell refused to get drawn down on a fiscal outlook discussion. Powell simply said that the path of federal debt is unsustainable, and the election will have no effect on policy in the near-term.

Today, the University of Michigan November preliminary consumer sentiment report is published (3:00pm London) and Fed Governor Michelle Bowman speaks (4:00pm London). Consumer sentiment is expected at 71.0 vs. 70.5 in October consistent with healthy consumer spending activity. Positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.

USD/JPY has retraced more than 60% of its post U.S. election gains. Japan’s finance minister Kato echoed comments made yesterday by his chief currency official Mimura warning against excessive JPY weakness. USD/JPY intervention zone is around 160.00. Regardless, widening U.S.-Japan 10-year bond yield spreads support the uptrend in USD/JPY.

USD/CAD is firmer just under 1.3900 ahead of Canada’s October labor force survey (1:30pm London). Consensus sees a 27.2k rise in jobs vs. 46.7k in September, while the unemployment rate is expected to rise one tick to 6.6% on an unchanged participation rate of 64.9%. Overall, the labor market is softening and the BOC’s Q3 Business survey showed firms’ hiring intention remain weak. Bottom line: the Bank of Canada has room to keep cutting the policy rate which is an ongoing drag on CAD. The market is pricing-in 58% odds of a follow-up 50 bp cut in December.

GBP is holding on to yesterday’s gains triggered by the BOE’s hawkish cut. As was widely expected, the BOE cut the policy rate 25bps to 4.75% and reiterated “a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long.” The MPC voted by a majority of 8–1 to reduce the Bank Rate. One member - Catherine L. Mann - preferred to maintain the Bank Rate at 5.00%.

The BOE’s updated fiscal outlook suggests the bank could pause easing in December. The BOE warned that the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP and CPI inflation. As such, the BOE raised annual Q4 2025 GDP growth and CPI inflation projections to 1.7% (prior: 0.9%) and 2.7% (prior:2.2%), respectively.

The market responded by slashing in half the probability of a 25bps BOE December rate cut to about 20%. However, the long-end of the U.K. OIS curve adjusted lower to imply a Bank Rate at around 3.75% over the next 12 and 24 months vs. 4.00%-4.25% before the BOE decision. In contrast, the market anticipates the ECB policy rate to bottom around 2.00% in the next year. Bottom line: relative monetary policy trend supports a lower EUR/GBP.

BOE Governor Andre Bailey downplayed concerns about the post-Budget Gilt market sell-off pointing out “if you look at the market today it’s pretty settled.” BOE deputy governor Dave Ramsden added “we’re not seeing anything unusual at all at the moment.” U.K.-German 10-year government bond yield spreads tightened to 205bps from high of 216bps this week. For reference, the spread hit a high of 228bps in September 2022 following the Trussonomic tax cut debacle. BOE Chief Economist Huw Pill speaks today (12:15pm London).

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