- November PPI ran hot; a Fed cut next week is still fully priced in; Chicago Fed's measure of financial conditions loosened for the eighth straight week; household net worth rose in Q3
- French President Macron named centrist Francois Bayrou as the new Prime Minister; ECB cut rates 25 bp, as expected; President Lagarde tilted dovish at her press conference; U.K. reported soft October real sector data; BOE inflation expectations survey was also reported
- BOJ Q4 Tankan survey was firm
The dollar is trading mixed ahead of the weekend. DXY is trading flat near 106.943 after five straight up days. The yen is the worst performing major today despite a firm Tankan survey (see below), with USD/JPY trading at a new high for this move near 153.60 on falling odds of a BOJ hike next week. Sterling is also underperforming after soft U.K. data (see below) and is trading lower near $1.2645. Elsewhere, the euro is trading modestly higher near $1.0490 despite rising ECB easing expectations in the wake of its decision yesterday (see below). We look for the dollar rally to continue after this period of consolidation. While the U.S. 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. With this week’s dovish monetary policy decisions from the BOC, SNB, and ECB, it’s clear that monetary policy divergences continue to favor the dollar.
AMERICAS
November PPI ran hot. Headline came in at 3.0% y/y vs. 2.6% expected and a revised 2.6% (was 2.4%) in October while core PPI came in at 3.4% y/y vs. 3.2% expected and a revised 3.4% (was 3.1%) in October. PPI services ex-trade, transportation, and warehousing, which feeds into the PCE calculations), remained elevated at 4.6% y/y and is consistent with sticky underlying inflation. Many analysts are downplaying the PPI data by pointing to a 56% jump in egg prices. However, core PPI (which strips out food and energy) still accelerated to the highest since February 2023. Along with yesterday’s CPI data, it seems pretty clear that broad-based price pressures are picking up.
Yet a Fed cut next week is still fully priced in. It’s clear from Fed comments last week that officials (ex-Goolsbee) are worried about sticky inflation, and this week’s CPI and PPI data did nothing to allay those fears. As such, we believe the Fed has been preparing the markets for a pause. If the Fed does indeed cut, we are very confident that it will be a hawkish cut that sets up a pause in January and perhaps beyond.
The Chicago Fed's measure of financial conditions loosened for the eighth straight week. Through last Friday, conditions are the loosest since July 2021. Yes, July 2021. This begs the question of whether the Fed really needs to cut right now. The short answer is no, but the market has other ideas. The PPI data add to mounting evidence that inflation is not only stalling, but actually picking up.
Growth remains solid. The New York Fed's Nowcast model is tracking Q4 growth at 1.9% SAAR while its initial estimate for Q1 growth came in at 2.4% SAAR. Both will be updated today. Elsewhere, the Atlanta Fed GDPNow model has Q4 growth at 3.3% SAAR and the next update will come Tuesday after the data.
Household net worth rose in Q3. Total net worth rose $4.766 trln in Q3, up 2.9% from Q2. This was the fourth straight quarterly rise. Financial assets rose over $5 trln but was largely offset by a $237 bln drop in the value of household real estate. Strong household balance sheets are a key factor underpinning solid consumption growth.
EUROPE/MIDDLE EAST/AFRICA
French President Macron named centrist Francois Bayrou as the new Prime Minister. Regardless, the deeply divided parliament will make it hard for any new government to implement major fiscal changes. Importantly, the political drama faces additional twists and turns because new parliamentary elections cannot be held before June 2025 and Macron pledged to stay in place until his term end in May 2027.
European Central Bank cut rates 25 bp, as expected. However, the statement removed the phrase about keeping policy “sufficiently restrictive for as long as necessary.” The ECB’s updated macro forecasts saw modest downward tweaks to its inflation and growth outlook, while 2027 was added to the forecast horizon. All in all, the ECB paved the way for further easing ahead. The market is currently pricing in over 50% odds of a 50 bp cut at the next meeting January 30. Looking further ahead, the market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.5% vs. 1.75% ahead of the decision.
President Lagarde tilted a bit dovish at her press conference. Lagarde suggested the eurozone economy “is losing momentum” and added that “risks to economic growth remain tilted to the downside.” She also acknowledged “There were some discussions, with some proposals to consider possibly 50 bp, but the overall agreement to which everybody rallied was that 25 bp was actually the right decision.” Lagarde leaned against an aggressive easing cycle. Lagarde emphasized “We are getting closer to the inflation target, but we are not done. When you still have 4.2% domestic inflation and wages of which growth is slowing down, you have to be very cautious.” Nonetheless, the overall message from the ECB is that more cuts are in the pipeline.
The ECB hawks and doves continue their debate. According to a post-decision report, some ECB officials acknowledged that a larger 50 bp cut remains an option in case of an emergency but stressed that such a move risks conveying an “unintended sense of urgency." This sounds like the work of hawks who weren't happy with the discussion for a 50 bp cut yesterday. Today, the doves pushed back. Villeroy said “There will be more rate cuts next year, more rate cuts plural,” adding that while the ECB doesn’t pre-commit, it’s “rather comfortable with financial markets’ forecasts.” Elsewhere, Kazaks said “If necessary, the step can also be larger than 25 bp. The current approach - data-based and analysis/decision-making from meeting to meeting - is well suited for this.”
U.K. reported soft October real sector data. GDP contracted -0.1% m/m vs. 0.1% expected and -0.1% in September, IP fell -0.6% m/m vs. 0.3% expected and -0.5% in September, services index was flat m/m vs. 0.1% expected and flat in September, and construction fell -0.4% m/m vs. 0.3% expected and 0.1% in September. The data was likely affected by the uncertainty surrounding the Autumn Budget but confirms the PMI readings indicating that growth momentum in all three sectors of the economy (services, manufacturing, and construction) slowed sharply in October.
BOE inflation expectations survey was also reported. 1-year expectations picked up three ticks to 3.0%, 2-year expectations picked up two ticks to 2.8%, and 5-year expectations picked up two ticks to 3.4%. This should keep the BOE on its cautious easing path.
ASIA
The Bank of Japan’s Q4 Tankan survey was firm. The large manufacturing index rose a point to 14 vs. 13 expected while the large manufacturing outlook fell a point to 13 vs. 12 expected. Elsewhere, the large non-manufacturing index fell a point as expected to 33 while the large non-manufacturing outlook remained steady as expected at 28. Lastly, large all industry capex came in at 11.3% vs. 10.0% expected and 10.6% in Q2. Overall, conditions for large companies have improved in recent quarters but are clearly leveling out. Looking ahead, conditions are expected to remain steady or fall modestly in 2025. This would still be indicative of a continued modest recovery in real GDP growth. Lastly, large manufacturing and non-manufacturing firms expect inflation to be at 2% or below over the next one, three, and five years. Bottom line: the data do not shift the dial on Bank of Japan policy as markets continue to place low odds of around 15% on a hike next week.
