Curb Your Fed Easing Enthusiasm

October 11, 2024

Curb Your Fed Easing Enthusiasm

  • Sticky underlying U.S. inflation supports the case for a cautious Fed easing cycle.
  • UK real GDP grew 0.2% m/m in August after stagnating the previous two months. BOE rate cut expectations largely unchanged.
  • Canada’s September labor force data will help shape the magnitude of the BOC rate cut decision later this month.

USD spiked-up briefly to a two-month high yesterday after Atlanta Fed President Raphael Bostic raised the possibility of holding off easing at the next November meeting. USD has since pared back those gains but continues to trade firmly against most major currencies.

U.S. inflation in September was hotter than anticipated and argues for a cautious Fed easing cycle. Headline CPI dropped 0.1pts to a 43-month low at 2.4% y/y (consensus: 2.3%), core CPI (ex. food and energy) unexpectedly increased 0.1pts to 3.3%% y/y (consensus: 3.2%) and super core CPI (core services less housing) remained uncomfortably high at 4.3% y/y for a second consecutive month.

Following the U.S. CPI print, Atlanta Fed President Raphael Bostic (voter) said “I think we have the ability to be patient and wait and let things play out a little longer.... There are elements of today's report which I think validate that view."

Fed funds futures imply 85% odds of a 25 bp cut at the November 7 meeting while a 25 bp cut at the December 18 meeting is fully priced-in. In our view, there is room for an upward adjustment to U.S. interest rate expectations in favor of USD because resilient U.S. economic activity and easing in financial conditions are upside risks to inflation.

The bigger than expected pick-up in U.S. initial jobless claims for the week ending October 5 is a red flag for the labor market. Initial claims rose 33k from the previous week to 258k (consensus: 230k), the highest since June 2023. However, the data may have been distorted by Hurricane Helene and the Boeing machinist strike. More importantly, broader job market conditions are positive underpinned by solid labor demand and low layoffs.

The U.S. September PPI data (1:30pm London) and the University of Michigan preliminary October consumer sentiment report (3:00pm London) are today’s highlights. Headline PPI is expected to fall 0.1pts to 1.6% y/y while core PPI is projected to rise 0.2pts to 2.6% y/y. Watch-out for PPI ex-trade, transportation, and warehousing because it feeds into the core PCE calculations. Another sticky print above 4% y/y is an upside risk to inflation.

Meanwhile, the headline consumer sentiment index is expected to improve to a six-month high at 71.0 in October consistent with a healthy consumer spending outlook. Overall, positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to U.S. GDP growth.

CAD will take its cue today from Canada’s September labor force survey (1:30pm London). Consensus sees a 27k rise in jobs vs. 22.1k in August and the unemployment rate is expected to rise 0.1pts to a three-year high at 6.7% on an unchanged participation rate of 65.1%. More evidence cooling labor market conditions will cement the case for a 50 bp Bank of Canada (BOC) rate cut at the next October 23 meeting and drag CAD lower. The market is currently pricing-in 58% probability of such a cut. The BOC Q3 business outlook survey released later today (3:30pm London) will also help guide near-term policy rate expectations.

EUR/USD recovered overnight after testing two-month lows around 1.0900. The ECB’s Account of the September meeting highlighted three policy path scenarios: (i) gradual easing, (ii) faster pace of rate cuts, (iii) suspend the cutting cycle.

According to the ECB, a gradual approach to dialing back restrictiveness would be appropriate if the incoming data were in line with the baseline projection. A faster pace of rate cuts would likely be appropriate if the growth outlook worsened or services inflation slows more than the ECB expects. Finally, pausing the easing cycle would be appropriate if core inflation quickens. Risks are skewed in favor of the second scenario which can further weigh on EUR. The Eurozone economy is stagnating, and inflation is undershooting the ECB’s 2% target.

GBP/USD is consolidating near this week’s low around 1.3050. The U.K. August GDP report matched consensus and does not move the dial on Bank of England rate cut expectations. Real GDP grew 0.2% m/m after stagnating the previous two months. All three sectors made positive growth contributions in August. Services added 0.06pts to monthly GDP, while production and construction added 0.07 and 0.03pts, respectively. The Bank of England is expected to resume cutting rates at the November 7 meeting.

KRW is outperforming. Bank of Korea (BOK) delivered a hawkish cut. In line with expectations, BOK cut the policy rate 25 bp to 3.25% in a 5-1 vote split. The dissenter favored keeping rates on hold. Still, the bar for additional easing is high as five members want to keep rates steady over the next three months, while only one prefers to keep the door open to a cut. The market is pricing in 60 bp of total easing over the next 12 months.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction