US
USD is trading on the defensive and holding above its 200-day moving average. We get some second-tier US jobs check today with the ADP weekly employment preliminary estimate (1:15pm London, 8:15am New York) and sub-components of the November Conference Board consumer confidence index (3:00pm London, 10:00am New York).
Last week’s ADP report showed that for the four weeks ending November 1 private employers shed an average of -2,500 jobs a week, indicative of weak labor demand. In October, the Conference Board consumer report offered mixed readings on the labor market. The labor differential index (jobs plentiful minus jobs hard to get) improved slightly but consumers were more worried about the labor market outlook over the next six months.
US September retail sales and PPI data are also due today (both at 1:30:pm London, 8:30am New York). The retail sales control group used for GDP calculation is projected at 0.3% m/m vs. 0.7% in August. Retail sales activity has held up well in the three months to August, growing at an above trend pace. However, the slowdown in labor demand points to looming pressure on household incomes and future consumption.
US PPI will hold clues for consumer price inflation. Watch-out for Trade Services PPI which measures changes in margins received by wholesalers and retailers. In August, Trade Services PPI dropped to a nine-month low at 2.9% y/y vs. 5.9% in July, suggesting business are absorbing costs rather than passing them on to consumers. That reduces upside risk to inflation.
Bottom line: we expect the Fed to deliver a follow-up 25bps cut to 3.50%-3.75% in December (77% priced-in) because restrictive Fed policy can worsen the fragile employment backdrop and upside risks to inflation have lessened. USD will likely consolidate recent gains ahead of the December 10 FOMC rate decision. But narrowing US-G6 rate differentials suggests the path of least resistance for USD is down.
NEW ZEALAND
NZD is trading heavy ahead of the RBNZ policy rate decision (8:00pm New York, tomorrow 1:00am London). The RBNZ is expected to trim the Official Cash Rate (OCR) by 25bps to 2.25%. At its last October 8 meeting, the RBNZ slashed the OCR by 50bps to 2.50% and stressed it “remains open to further reductions in the OCR.” Markets more than fully price-in a 25bps cut this week and about 50% probability of a final 25bps cut in the next six months to 2.00%.
The focus will be on the RBNZ’s updated OCR forecast. In its August Monetary Policy Statement, the RBNZ projected the OCR to bottom at 2.50%. Our base case is the RBNZ signals the OCR will be kept at 2.25% after this week’s cut. That would be a hawkish move and underpin a modest NZD recovery.
New Zealand Q3 employment and inflation are tracking the RBNZ’s August projection, while the October ANZ business outlook survey suggests green shoots are emerging. Moreover, outgoing RBNZ Governor Christian Hawkesby may want to leave policy option flexibility to new Governor Anna Breman ahead of her December 1 start.
Nevertheless, the risk is the RBNZ trims its OCR forecast closer to the lower bound of its estimated neutral range (1.60%-4.20%). New Zealand underlying inflation and 2-year inflation expectations are stable within the RBNZ’s 1 to 3% target range.
INDIA
USD/INR is holding near an all-time high above 89.00, with INR the third worst performing emerging market currency this year. ARS is down the most while TRY is runner-up. Narrowing US-India rate differentials and the ongoing US-India trade dispute have underpinned a firmer USD/INR. India’s central bank (RBI) has stepped up currency intervention since August to curtail INR weakness.
The RBI’s heavy hand in the FX market is set to prompt the IMF to reclassify India’s de facto exchange rate regime from “stabilized arrangement” to “crawling peg” in Wednesday’s Article IV staff report. A shift to a crawling peg would reduce INR volatility as market price in a systemic depreciation glide path.
