U.S. Economy: Master of its Domain

October 25, 2024

U.S. Economy: Master of its Domain

  • The U.S. economy continues to deliver stellar performance.
  • Greater risk premium on gilts is a drag on GBP.
  • The Tokyo October CPI was mixed in October. BOJ is unlikely to take a more hawkish tone at next week’s meeting.

USD is steady after yesterday’s technical pullback. 10-year Treasury yields drifted a little lower on easing inflation expectations. Asian equity markets are mixed and equity futures point to flat-to-lower opens in Europe and the U.S. In our view, U.S. economic outperformance remains a major theme favoring higher Treasury yields and a stronger USD.

The U.S. economy continues to deliver stellar performance. In October, the U.S. composite PMI unexpectedly rose 0.3pts to a 2-month high at 54.3 (consensus: 53.8). For comparison, the October composite PMI readings for the Eurozone printed at 49.7, the UK at 51.7, Japan at 49.4, and Australia at 49.8.

Second-tier US economic data are released today: September durable goods orders (1:30pm London), the final reading of the October University of Michigan consumer sentiment index (3:00pm London), and the Kansas City Fed services activity (4:00pm London).

Boston Fed President Susan Collins speaks (2025 voter) (4:00pm London). At midnight, the Fed media blackout goes into effect and there will be no Fed speakers until Chair Powell’s press conference November 7.

U.K.-German 10-year government bond yield spreads widened by over 10 bp this week to 1.97%, the highest since August 2023. Investors fear the U.K. Labour government will fund increased investment spending with higher debt issuance by tweaking budget rules to include government assets in the U.K.’s measure of debt. Greater risk premium on gilts is a drag on GBP. Chancellor of the Exchequer Rachel Reeves will present the budget on October 30.

Yesterday, BOE MPC member Catherine Mann stuck to her hawkish view. Mann cautioned “if you have structural persistence in the relationship between wages and price formation that lasts, that is persistent and embedded, then it’s premature to start cutting until you purge those behaviors”. Mann voted to hold the Bank Rate at 5.25% in August whereas the MPC’s decision was to cut Bank Rate. BOE Governor Andrew Bailey speaks on a panel tomorrow.

EUR/USD retraced some of yesterday’s rebound. Today’s Eurozone data will likely support the case for the ECB to speed up its easing cycle and can further weigh on EUR. The German October IFO business climate index is expected to remain consistent with sluggish economic activity (9:00am London) and the ECB consumer inflation expectations survey is projected to ease further in September (9:00am London).

USD/JPY is consolidating around 151.80. The Tokyo CPI, a leading indicator of the national CPI, was mixed in October and does not move the dial on Bank of Japan (BOJ) policy rate expectations. Headline CPI matched consensus falling 0.3pts to 1.8% y/y. The core CPI prints ran hotter than expected but remain below the BOJ’s 2% inflation target. Core ex-fresh food eased 0.2pts to a six-month low at 1.8% y/y (consensus: 1.7%) while core ex-fresh food and energy rose 0.2pts to 1.8% y/y (consensus: 1.6%).

The BOJ is unlikely to take a more hawkish tone at next week’s meeting. Japan economic activity is unimpressive and underlying inflation is in a firm downtrend. Importantly, BOJ Governor Kazuo Ueda signaled again yesterday that the BOJ is in no rush to remove policy accommodation. According to Ueda, there is “enough time” to examine economic data for making a policy decision and that financial markets remain unstable. The BOJ loose for longer policy stance should continue to undermine JPY.

AUD/USD is trading heavy near its 200-day moving average (0.6629). RBA Governor Michele Bullock reiterated in the foreword to the bank’s annual report that “it will take another year or two” before inflation returns “sustainably” to the 2-3% target range. Specifically, the RBA projects trimmed mean inflation of 2.9% in Dec 2025, 2.7% in Jun 2026, and 2.6% in Dec 2026.

RBA cash rate futures implies just 25% odds of a 25 bp cut by December. We think the market is underpricing the risk the RBA starts easing by year-end. Australia underlying economic activity is weak and points to lower inflation pressures. Next week’s Q3 CPI report will either support our view or ensure the RBA continues to lag its international peer.

NZD/USD made fresh lows under 0.6000. New Zealand ANZ consumer confidence index fell 4 points in October to a three-month low at 91.2 driven by declines in the current and future conditions indexes. Consumer confidence remains well below the 20-year average of 114.0, leaving plenty of room for the RBNZ to deliver additional jumbo rate cuts. The market has fully priced-in a 50 bp policy rate cut in November and implies a 24% probability of a larger 75 bp move.

USD/CAD is trading sideways just under this week’s high around 1.3869. Canada’s August retail sales report is the domestic focus (1:30pm London). Statistics Canada’s advanced retail indicator suggests sales increased 0.5% m/m after rising 0.9% in July. Going forward, businesses think sales growth will strengthen over the coming year but remain soft.

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