- Fed policy remains data dependent; October JOLTS data will be the highlight; November ISM manufacturing PMI was firm; growth remains solid; Canada also reported firm November manufacturing PMI
- The French government is on the verge of collapse; U.K. BRC same store retail sales plunged in November; markets digesting Turkey and Swiss CPI
- Australia’s already released GDP input data point to decent underlying growth; New Zealand’s terms of trade index improved; the yuan is making new lows; Korea reported November CPI
The dollar is consolidating ahead of JOLTS data. DXY is trading lower near 106.252 ahead of key U.S. labor market data this week. USD/JPY continues to oscillate around 150 but we continue to believe that it’s unlikely to trade below 150 for any significant amount of time given still-wide interest rate differentials that continue to favor the dollar. Elsewhere, the euro is trading higher near $1.0520 despite ongoing French political risks (see below), while sterling is trading flat near $1.2665. We look for the dollar rally to continue after this period of consolidation. While the election results have turbo-charged this dollar move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Key data this week should confirm our thesis. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.
AMERICAS
Fed policy remains data dependent. Waller said, “At present I lean toward supporting a cut to the policy rate at our December meeting.” However, he qualified that statement by adding “But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.” Williams said “The path for policy will depend on the data. If we’ve learned anything over the past five years, it’s that the outlook remains highly uncertain.” Lastly, Bostic said succinctly that “I’m keeping my options open.” Daly, Kugler, and Goolsbee (twice) speak today. Odds of a December cut have risen to nearly 75% but it’s clear that this Friday’s jobs report will ultimately determine policy.
October JOLTS data will be the highlight. Job openings in September are expected at 7.519 mln vs. 7.443 mln in September, which would be consistent with a labor market soft landing. The ratio of vacancies to unemployed is at 1.1, which is historically pretty strong as it has been above 1 only three times since 1960. Still, the job openings rate fell to 4.5% in September, matching the December 2020 low. Fed research has shown that the unemployment rate tends to rise faster when the job openings rate falls under 4.5%. Elsewhere, the layoff rate ticked up in September to an 18-month high of 1.2% while the quits rate fell to 1.9%, the lowest rate since June 2020 and indicative of worsening workers confidence in finding a new job. Encouragingly, the hiring rate rose to a four-month high of 3.5% in September. Also, the Conference Board labor index (jobs plentiful minus jobs hard to get) rose to a five-month high at 18.2 in November, suggesting consumers are more optimistic about future labor market conditions.
November ISM manufacturing PMI was firm. Headline came in at 48.4 vs. 47.5 expected and 46.5 in October and was the highest since June. The details were also strong, with new orders at 50.4 vs. 47.1 in October, employment at 48.1 vs. 44.4 in October, and production at 46.8 vs. 46.2 in October. The fall in prices paid to 50.3 vs. 54.8 in October is noteworthy, as it suggests diminishing price pressures. Of note, the S&P Global manufacturing PMI was revised higher to 49.7 vs. 48.8 preliminary. ISM services will be reported tomorrow. Headline is expected at 55.5 vs. 56.0 in October, and the regional Fed ISM services prints point to upside risk. Of note, the S&P Global services PMI rose to a 31-month high of 57.0 vs. 55.0 in October.
Growth remains solid. The Atlanta Fed GDPNow model is currently tracking Q4 growth at 3.2% SAAR and will be updated Thursday after the data. Elsewhere, the New York Fed Nowcast model is tracking Q4 growth at 1.8% SAAR and will be updated Friday. Its initial estimate for Q1 growth should be published Friday.
Canada also reported firm November manufacturing PMI. S&P Global manufacturing PMI came in at 52.0 vs. 51.1 in October and was the highest since February 2023. It reports its services and composite PMIs tomorrow. Ivey PMI will be reported Thursday.
EUROPE/MIDDLE EAST/AFRICA
The French government is on the verge of collapse. Prime Minister Barnier invoked article 49.3 of the constitution to adopt the budget bill without a parliamentary vote. In response, nationalist leader Marine Le Pen said her party plans to vote for a no-confidence motion, which could be held as early as tomorrow. The political paralysis in France will make it hard to get the fiscal house in order. The European Commission has already launched excessive deficit procedures against France for running budget deficits larger than the 3% of GDP threshold. Similarly, political paralysis in Germany is preventing any fiscal response to soggy German economic growth. The implication is the ECB will have to do the heavy lifting in supporting the eurozone economy, which can further undermine EUR. Encouragingly, the higher risk premium on French bonds yields is not spreading to the rest of the Eurozone. The 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.
U.K. BRC same store retail sales data plunged in November. However, that’s probably because shoppers delayed purchases to benefit from Black Friday deals, which should show up in the December data. The value of same store sales unexpectedly plunged -3.4% y/y in November vs. 0.6% expected and 0.3% in October. While the data suggest downside risk to official retail sales data due out December 20, the bigger picture shows U.K. consumption supported by continued growth in household real incomes, and a waning drag from higher interest rates. Bottom line: relative monetary policy divergences between the ECB and BOE still favor a lower EUR/GBP.
Switzerland reported November CPI data. Headline rose a tick as expected to 0.7% y/y, while core rose a tick as expected to 0.9% y/y. Inflation is tracking below the Swiss National Bank’s Q4 forecast of 1.0%, leaving plenty of room for the bank to keep slashing the policy rate. Indeed, SNB President Schlegel recently warned that negative interest rates cannot be ruled out. The market is currently pricing in over 50% odds of a 50 bp cut to 0.50% at the December 12 meeting. Looking ahead, the market is pricing in a terminal rate of 0% over the next 12 months.
Turkey reported November CPI data. Headline came in at 47.09% y/y vs. 46.60% expected and 48.58% in October, while core came in at 47.13% y/y vs. 47.30% expected and 47.75% in October. Headline was the lowest since July 2023 and core was the lowest since June 2023, but the disinflationary process is slowing. At the last meeting November 21, the central bank kept rates steady at 50.0% but opened the door for rate cuts ahead as it noted that the slowdown in domestic demand indicators is “reaching disinflationary levels” and “signs for an improvement in services inflation have become more apparent.” Next meetings are December 26 and January 23 and a cut seems likely at one of these meetings. The market is pricing in 625 bp of easing over the next three months.
ASIA
Australia’s already released GDP input data point to decent underlying economic growth. Q3 GDP data will be reported tomorrow and growth is expected at 0.5% q/q vs. 0.2% in Q2, driven by household consumption, public sector demand and business investment. The contribution to GDP growth from net exports is projected to be small at 0.1 ppt, while inventories are expected to be a drag on growth after falling -0.9% q/q in Q3 vs. an upwardly revised 0.5% in Q2. (previous: 0.1%). Bottom line: the RBA is in no rush to start easing which offers AUD support on the crosses.
New Zealand’s terms of trade index improved. Indeed, they overshot expectations by rising 2.4% q/q in Q3 vs. 1.3% expected and 2.1% in Q2, and to the highest level since Q4 2022. Firmer whole milk powder prices point to a further improvement in the terms of trade. A higher terms of trade has a positive net wealth effect on the economy and raises the fundamental value of NZD. Nonetheless, the RBNZ dovish stance means NZD needs to keep trading at a deep discount to fundamental equilibrium (BBH-PPP estimates NZD/USD equilibrium at around 0.6600) to attract foreign investment and recycle the country’s large current account deficit (-6.7% of GDP in Q2).
The yuan is making new lows. Both USD/CNY and USD/CNH traded at their highest levels since November 2023. Further weakness is expected due to monetary policy divergences with the Fed, as the People’s Bank of China governor reaffirmed plans to “adhere to an accommodative monetary policy stance and orientation” in 2025. Looser monetary policy is not the long-term solution China needs to address its huge debt overhang and rising deflation risks. To escape the debt-deflation loop, Chinese policymakers need to ramp up fiscal measures to boost consumption growth. In the meantime, it’s hard to get excited about what is likely to be a short-term pickup in the economy following the unimpressive stimulus measures announced so far. The government’s closed-door annual Central Economic Work Conference, where GDP growth target and stimulus plans for 2025 are set, will be held December 11-12.
Korea reported November CPI data. Headline came in two ticks lower than expected at 1.5% y/y vs. 1.3% in October, while core came in as expected at 1.9% y/y vs. 1.8% in October. Headline accelerated for the first time since July but remains below the 2% target. The Bank of Korea delivered a dovish surprise last week and cut rates 25 bp to 3.0%. Governor Rhee said that “Our decision can be interpreted as an acceleration of easing to deal with downward economic risks that are growing larger than we expected. Among the biggest changes since August is the Red Sweep in the US, which was bigger than we forecast.” The swaps market is now pricing in a terminal rate of 2.25% vs. 2.5% before the decision.
