Super Thursday

• The Fed, Bank of England, Riksbank, Norges Bank, Czech National Bank, and Peru central bank all hold policy-setting decisions today.

• Japan official warns against excessive JPY weakness. Japan wage growth remained soft in September.

• Germany’s coalition government collapsed potentially triggering snap elections in March. EUR unmoved and German 10-year bond yields ticked down.

USD and Treasury yields retraced some of their post-US election result rally. The focus now shifts to the FOMC meeting (7:00pm London). The FOMC is widely expected to dial down the pace of easing after slashing the Fed funds rate 50bps in September. Markets have fully priced-in a 25bps cut to a target range of 4.50-4.75%. In our view, the vote split and Fed Chair Jay Powell post meeting press conference will likely signal that the bar for the FOMC to crank-up the easing cycle is high. A hawkish Fed funds rate cut can turbocharge USD.

In September, Fed Governor Michelle Bowman cast the sole dissenting vote in support of a 25bps rate cut. Risk is she votes to keep rates steady this week because the U.S. economy is strong, and inflation remains a concern. Meanwhile, we expect Powell to stick to the message he delivered in October that the “Fed doesn’t feel like it’s in a hurry to cut rates quickly” given “growing confidence” of a soft landing for economy.

Another reason behind our longer-term bullish USD view is the favorable U.S. productivity landscape. Non-farm productivity (GDP/hours worked) is expected at 2.5% q/q vs. 2.5% in Q2, while ULC is expected at 1.0% q/q vs. 0.4% in Q2 (1:30pm London). Importantly, annual productivity growth is running above its post-war average of 2.1%. Rising productivity leads to low inflationary economic growth which translates to higher real interest rate and an appreciation in the currency over the longer term.

The Riksbank is expected to slash rates 50bps to 2.75% (8:30am London). The market implies an 76% probability of a 50bps cut. At the September 25 meeting the Riksbank cut rates 25bps to 3.25% and noted that “the forecast for the policy rate reflects that a cut of 0.5 percentage points at one of the coming meetings is possible.”

In our view, the market is underpricing the risk that the Riksbank keeps moving in 25bps increments because underlying inflation is stabilizing around the 2% inflation target. Indeed, CPIF Ex-energy rose 0.1pts more than expected to 2.1% y/y vs. 2.0% in September while headline CPIF increased 0.2pts more than expected to 1.5% y/y vs. 1.1% in September.

The market is pricing the Riksbank policy rate to bottom around 2.00% in the next 12 months, which is lower than the Riksbank’s 2.25% forecast. Bottom line: there is room for interest rate futures to converge towards the Riksbank’s policy rate forecast as core inflation is sticky around the 2% target. This can offer SEK support on the crosses.

The Norges Bank is widely expected to leave the policy rate steady at 4.50% (9:00am London). At the September 19 meeting, the Norges bank highlighted that “the policy rate will remain at 4.5 percent to the end of 2024 before being gradually reduced from 2025 Q1.” The market is pricing-in 75bps of cuts over the next twelve months which is roughly in line with the Norges Bank’s projection.

The Bank of England (BOE) is widely expected to cut the policy rate 25bps to 4.75% (12:00pm London). We also expect the BOE to reiterate that “monetary policy will need to continue to remain restrictive for sufficiently long.” The focus will be on the MPC vote split and monetary policy implications from the fiscal loosening measures in the U.K. government Autumn Budget 2024.

U.K. interest rate futures have already pared back bets of BOE rate cuts and project the Bank Rate to drop between 4.00% and 4.25% over the next twelve months vs. 3.75% before the Budget. The updated macroeconomic projections will offer additional guidance on the scope of the BOE’s easing cycle. The October DMP survey of inflation expectations is the other domestic highlight today (2:00pm London).

EUR/USD is consolidating around 1.0750. Germany’s three-way coalition government collapsed potentially triggering early elections in March 2025. Yesterday, Chancellor Olaf Scholz sacked his finance minister because he refused to loosen the cap on new borrowing. Scholtz will now seek a vote of no confidence on January 15 which he’s expected to lose as the German economy is flatlining. The election would then have to be held within 60 days. The conservative CDU/CSU alliance under Friedrich Merz is currently in prime position to win the next election. Regardless, relative economic performance between the Eurozone and U.S. points to a lower EUR/USD.

USD/JPY pared back some of yesterday’s solid gains as jawboning on the yen picked-up. Japan’s chief currency official Atsushi Mimura stuck to the government’s well-honed script warning that we’re “seeing one-sided, sudden moves in the currency market…Will monitor markets with a high sense of urgency, including watching speculative moves.” USD/JPY intervention zone is around 160.00.

Japan’s soft wage data supports a loose for longer Bank of Japan policy stance and is a drag for JPY. Nominal cash earnings came in 0.2pts lower than expected at 2.8% y/y vs. 2.8% in August while real cash earnings unexpectedly fell -0.1% y/y (consensus: +0.1%) vs. -0.8% y/y in August. The less volatile scheduled pay growth for full-time workers matched consensus at 2.9% y/y vs. 2.8% y/y in August (consensus: 3%) and is down from a series high of 3% y/y in July.

USD/CNH gave back some of yesterday’s solid gains and Chinse stocks are rallying. China’s trade surplus widened more than expected in October as exports surged and imports declined. The trade surplus rose by $95.72bn (consensus: $75bn) vs. $81.71bn in September to total a record $929bn in the 12 months to October. Exports increased 12.7% y/y (consensus: 5%, prior: 2.4%) while imports fell -2.3% y/y (consensus: -2%) vs. 0.3% in September. The fall in imports is a sign of weak domestic demand activity. China needs to stimulate consumer spending to meaningfully shore-up economic activity. Chinese policymakers are expected to unveil the details of their fiscal stimulus pledge tomorrow. Stay tuned…

Czech National Bank (CNB) is expected to cut rates 25bps to 4.00% (1:30pm London). At the last meeting September 25, the central bank cut rates 25bps to 4.25% by a 6-1 vote, with the dissent (Tomas Holub) in favor of a larger 50bps cut. Governor Michl said that going forward, “The vast majority of the bank board agreed that there was need for caution.” Indeed, Vice Governor Eva Zamrazilova signaled last week that she could favor pausing the easing cycle noting “the inflationary risks to fulfilling the target next year are prevailing at the moment, and I see that as a reason for caution.” The swaps market is pricing in less than 25bps of total easing over the next 12 months. CNB will publish its updated Monetary Policy Report.

Peru central bank rate decision will go the down the wire (11:00pm London). Half the analysts polled by Bloomberg expect the policy rate to remain unchanged at 5.25%, the other half have a 25bps rate cut penciled-in to 5.00%. At the last meeting October 10, the central bank delivered a hawkish surprise and kept rates steady at 5.25% vs. an expected 25bps cut to 5.0%. It warned that inflation would rise in Q4 due to base effects but would remain in the target range. Recently, the bank’s chief economist Armas said the bank will continue cutting rates gradually and that decisions would be based on core inflation, inflation expectations, and economic growth. Inflation data for October support the case for the central bank to resume cutting the policy rate this week. Annual headline CPI inflation rose to 2.01% vs. 1.78% in September while core CPI inflation eased to 2.50% vs. 2.64% in September.