A Hawk Among Doves

• Monetary policy trend between the Fed and other major central banks continue to support the USD uptrend.

• Risk of a US government shutdown will likely have a minimal impact on financial markets.

• UK November retail sales was soft and underscores the Bank of England’s more dovish guidance.

Please note this is the last BBH CurrencyView (London Edition) daily report for 2024. Publication will resume January 13. We wish our readers a joyful holiday season and a happy New Year.

The dollar index (DXY) retraced some of its gains after trading at its highest levels since November 2022. 10-year Treasury yields climbed to a seven-month high around 4.59% and the US yield curve (10-2 years) steepened to 26bps, the most since mid-2022.

Monetary policy trend between the Fed and other major central banks continue to support the USD uptrend. The Fed indicated it’s slowing the pace of easing. In contrast, the ECB signaled more cuts are in the pipeline, BOE is on track to resume easing, and the BOJ is in no hurry to raise rates again. Meanwhile, China is expected to boost monetary stimulus as one-year bond yield slid below 1%, the lowest since 2003.

The US TIC data showed underlying demand for the dollar is robust. Net foreign purchases of long-term US securities increased to a 15-month high at $1282bn in the 12-month to October vs. $1102bn the previous month, eclipsing over the same period the cumulative US trade deficit of -US$866bn. The surge in net foreign purchases of long-term US securities was driven by private sector purchases of Treasury bonds and US equities.

US economic growth was stronger than initially reported in Q3. Real GDP growth was revised up to 3.1% SAAR from 2.8%, surpassing Q2’s growth rate of 2.8%. The upward revision reflects stronger personal consumption and exports. Looking ahead, the Atlanta Fed GDPNow model estimates Q4 growth at 3.2% SAAR. The next GDPNow update is due today after the November PCE data (1:30pm London).

US November PCE is expected to validate the Fed’s more cautious easing guidance. Headline PCE is expected at 2.5% y/y vs. 2.3% in October and core PCE is projected at 2.9% y/y vs. 2.8% in October. The Cleveland Fed’s inflation Nowcast model estimates headline and core PCE at 2.59% and 2.97% in November. Overall, progress on inflation is stalling above the Fed’s 2% target.

Meanwhile, personal income and spending are anticipated to remain indicative of solid domestic demand activity. Personal income is projected at 0.4% m/m vs. 0.6% in October, personal spending is expected at 0.5% m/m vs. 0.4% in October, and real personal spending is forecast at 0.3% m/m vs. 0.1% in October.

Fed speakers today include: San Francisco Fed President Mary Daly (12:30pm London) and New York Fed President John Williams (1:30pm London).

Risk of a US government shutdown will likely have a minimal impact on markets. Lawmaker must reach a deal on a stopgap spending bill and pass it through Congress before midnight today. Failure to act could lead the US government to temporarily close. In the past, shutdowns lasted only a few days minimizing the impact on the economy. Moreover, there are ways for the US Treasury to keep paying its bills for several more months before the severe consequences of a debt default becomes an issue.

Japan’s November CPI report largely matched consensus and does not shift the dial on Bank of Japan (BOJ) rate expectations. Headline CPI inflation quickened to 2.9% y/y vs. 2.3% in October as the government rolled-back energy subsidies. Core (ex-fresh food) rose a tick more than expected to 2.7% y/y vs. 2.3% in October. Core (ex-fresh food & energy) increased to 2.4% y/y vs. 2.3% in October and is tracking above the BOJ 2024 forecast of 2.0%.

Regardless, the BOJ is in no rush to resume normalizing rates. Governor Ueda suggested yesterday the BOJ could wait until March to raise rates again as wage trend will be clearer by then. The swap market continues to price-in about 80% odds of a 25bps hike in March.

In the meantime, Japan’s chief currency official Atsushi Mimura voiced his unease with JPY weakness. Minura said “we’re deeply concerned about recent foreign exchange moves. For now I think it’s best not to say more beyond saying we’ll take appropriate responses against any excessive moves.” USD/JPY will likely find heavy resistance as it approaches intervention zone around 160.00.

UK November retail sales was soft and underscores the Bank of England’s (BOE) more dovish guidance. Retail sales volumes rose 0.3% m/m (consensus: 0.5%) following a -0.9% plunge in October. The data data does not capture the full effect of the Black Friday deals which will be reflected in the December figures. The bigger picture shows UK consumption supported by continued growth in household real incomes, and a waning drag from higher interest rates.

Yesterday, the BOE delivered a dovish hold. The BOE kept the policy rate unchanged at 4.75% (widely expected) and reiterated that “monetary policy will need to continue to remain restrictive for sufficiently long.”

However, the BOE signaled the bar for resuming the easing cycle is low. The BOE noted that “most indicators of UK near-term activity have declined” and “there has been progress in disinflation.” Additionally, the MPC voted by a majority of 6–3 to stand pat with three members (Swati Dhingra, Dave Ramsden and Alan Taylor) in favor of cut. The swaps market implies 70% probability of a 25bps cut in February.

USD/CAD is eyeing the January 2016 high at 1.4690. The more dovish Bank of Canada vs. the Fed and Canadian political uncertainty are weighing on CAD. Canada October retail sales is up next (1:30pm London). Statistics Canada’s advanced retail indicator suggests sales increased 0.7% m/m after rising 0.4% in September.

Yesterday, the Czech National Bank delivered on expectations and voted 5-2 to leave the policy rate at 4.00%. Five members voted in favor of the decision while two members voted to lower rates 25bps. The bank decided to pause easing in part because “the disinflation process in the core components of the consumer basket, especially in the services sector, is not yet completed.” Governor Michl added “we are leaving all options open, but for now we regard this as a pause in interest-rate cuts.” The swaps market got the message and expect the policy rate to remain at 4.00% over the next three years.