American Exceptionalism
- USD and Treasury yields are firm near multi-week highs underpinned by robust US economic activity. FOMC September meeting minutes takes the spotlight today.
- RBNZ slashed the policy rate 50 bp to 4.75%. NZD is down across the board.
- Chinese policymakers have yet to back their words with action.
USD and Treasury yields are firm near multi-week highs underpinned by robust US economic activity. The Atlanta Fed’s GDPNow model is tracking Q3 annualized growth at 3.2%, up from 2.5% on October 1.
The FOMC September meeting minutes is today’s highlight (7:00pm London). We don’t expect any major surprises in the minutes as a large number FOMC members have already spoken at length about the September policy decision. At that meeting, the Fed funds rate was slashed 50 bp vs. 25 bp expected, the new Dot plots implied more easing in the pipeline, and there was only one dissenting vote (Fed Governor Michelle Bowman) in favor of a 25 bp cut.
Several Fed officials have since pushed back against additional jumbo rate cuts following Friday’s superb U.S. September jobs report. Fed speakers today include: Bostic (voter), Logan (non-voter), Goolsbee (2025 voter), Fed Governor Jefferson, Collins (2025 voter), and Daly (voter).
EUR/USD remains heavy under 1.1000. ECB policymakers continue to set the stage for an easier policy stance. ECB Governing Council member Yannis Stournaras said in an interview with the Financial Times “even if we have one cut of 25 basis points now and another one in December, we will be back to just 3 per cent — still in highly restrictive territory,” adding “there is a likely case for further easing of policy in 2025.” The market is pricing in about 150 bp of total cuts over the next 12 months that would see the policy rate bottom near 2.00%.
NZD is underperforming against all major currencies. The RBNZ delivered on expectations and slashed the Official Cash Rate (OCR) 50 bp to 4.75%. The RBNZ noted that “economic activity in New Zealand is subdued, in part due to restrictive monetary policy.” Indeed, the OCR is above the RBNZ’s estimate for the nominal neutral rate range of 2 and 4%. The implication is another 50 bp cut at the November 27 meeting is in the pipeline which is weighing on NZD.
The RBNZ Summary Record of Meeting showed “the Committee discussed the respective benefits of a 25-basis point versus a 50-basis point cut in the OCR. They agreed that a 50-basis point cut at this time is most consistent with the Committee’s mandate.” The Committee also confirmed that “future changes to the OCR would depend on its evolving assessment of the economy.”
China’s benchmark CSI 300 Index has retraced about 38% of its recent rally. Chinese policymakers have so far failed to back up fiscal spending pledges with real money. Yesterday, China’s economic planning agency announced that just 200 billion yuan (0.16% of GDP) in spending would be advanced from next year without providing a clear breakdown of how that amount would be spent. Market participants expected a much larger fiscal package worth about 2 trillion yuan (1.6% of GDP) with half the funds directed to boosting consumer spending. For reference, China’s 2008 fiscal bazooka which prevented a recession totaled 4 trillion yuan (12.5% of GDP in 2008).
USD/INR is up near key resistance at 84.0000. Reserve Bank of India (RBI) kept the policy rate steady at 6.50%. The vote was 5-1 to keep rates on hold, with the dissent in favor of a 25 bp cut. More importantly, the RBI paved the way for lower rates by changing the policy stance from “withdrawal of accommodation” to “neutral”. The swaps market went from pricing in steady rates over the next three months to a 60% probability of a 25 bp cut.
Bank of Israel is widely expected to keep rates steady at 4.50% (2:00pm London). At the last meeting August 28, the bank kept rates hold and Deputy Governor Abir noted “I would be very surprised if the conditions are in place for an interest rate cut before the end of the year.” The swaps market is pricing in steady rates over the next six months and over 50% probability of a 25 bp cut in the next twelve months.