- The dollar’s dominance as an international currency means it performs well during periods of risk aversion.
- BOE Governor Bailey warns of the possibility of more aggressive rate cuts. GBP underperforms, gilts outperform.
- Swiss CPI undershoots expectations, raising odds SNB dials-up easing. CHF downside is limited as the fog of war boosts demand for safe haven assets.
USD is powering forward across the board as markets brace for Israel’s counter-action to Tuesday’s ballistic missile attack by Iran. Israel’s response is expected to be less restrained than in April, potentially targeting Iran’s oil infrastructure and/or nuclear facilities. Meanwhile, crude oil prices are up near this week’s high and U.S. equity futures are down.
The real prospect of a full-blown war between Iran and Israel will continue to dominate financial market action in the near-term. Absent this major geopolitical uncertainty, the global macro backdrop would be favorable for risk assets underpinned by China’s pump priming measures and the combination of a dovish Fed/strong U.S. economy.
U.S. data releases today will likely show the economy remains in a good place. The ISM services index is projected to print at 51.7 vs. 51.5 in August (10:00am New York). The ISM services employment sub-component, Challenger job cut announcement (7:30am New York) and weekly jobless claims (8:30am New York) will offer more timely insights about the slowdown in the labor market.
GBP is underperforming and gilts outperforming following dovish comments by Bank of England (BOE) Governor Andrew Bailey. In an interview with the Guardian newspaper, Bailey held out the prospect of the Bank becoming a “bit more aggressive” in cutting interest rates provided the news on inflation continued to be good. The BOE is widely expected to cut the policy rate 25 bp at the next November 7 meeting and odds of a follow-up cut in December increased.
U.K. inflation expectations are still contained and support a cautious BOE easing approach. In line with consensus, the BOE Decision Maker Panel survey (DMP) 1-year inflation expectations rose one tick to 2.7% in September but remains near the lows since this series began in 2022. 3-year inflation expectations stood at 2.7% for a second consecutive month in September and still within the same narrow range that’s held throughout the year
EUR/USD is edging lower on broad USD strength and nearing key technical support at 1.1000. ECB policymakers continue to set the stage for an easier policy stance. Executive Board member Isabel Schnabel said that officials “cannot ignore the headwinds to growth.” Vice President Luis de Guindos warned that "Europe is in a low growth situation, and risks are to the downside.” Finally, Governing Council member Mario Centeno noted “the current state of the euro-area economy…necessitates a response from the ECB: a reduction in interest rates.”
The Eurozone Final September composite PMI printed at 49.6 vs. a preliminary estimate of 48.9, suggesting the downturn in business activity is less severe than initially reported. Also, Eurozone August PPI matched consensus at -2.3% y/y vs. -2.2% in July. Persistent PPI deflation is a downside risk to CPI if businesses manage to pass on declining input cost to consumers. Bottom line: the ECB has room to dial-up easing which is an ongoing drag for EUR. The Eurozone economy is stagnating, and inflation is undershooting the ECB’s 2% target.
CHF sold-off briefly after Swiss September inflation undershot expectations. Headline CPI fell -0.3% m/m (consensus: -0.1%), the biggest monthly decline since April 2020, to be down 0.8% y/y (consensus and SNB Q3 forecast: 1.1%) vs. 1.1% in August. Core CPI dropped -0.2% m/m and eased one tick to 1% y/y (consensus: 1.1%). The sharp decrease in inflation raises odds of a 50 bp cut at the next December Swiss National Bank meeting. Regardless, CHF downside is limited as the fog of war boosts demand for safe haven assets.
USD/JPY is building on yesterday’s gains and Japanese stocks ended the session up as the Bank of Japan (BOJ) is seen keeping policy loose for longer. Japan Prime Minister Shigeru Ishiba emphasized yesterday “I don’t think the environment is ready for an additional rate hike”. And overnight, BOJ member Asahi Noguchi cautioned “I believe it is most important to continue to patiently maintain accommodative financial conditions.” Noguchi’s dovish comments are not surprising as he was one of two BOJ members that voted against raising the policy rate in July.
NZD is down against most major currencies. The RBNZ is expected to follow-up on the 25 bp Official Cash Rate (OCR) cut delivered in August with a 50 bp OCR reduction to 4.75% next week. The swaps market implies 75% odds of a 50 bp cut while the vast majority of analysts surveyed by Bloomberg have a 50 bp cut penciled-in. The RBNZ policy stance is too tight, heightening the risk a deeper economic downturn. In fact, the OCR is well above the RBNZ’s estimate for the nominal neutral rate range of 2 and 4%.
The focus in Poland today is on central bank Governor Adam Glapinski press conference (9:00am New York). Yesterday, National Bank of Poland delivered on expectations and left the key policy rate steady at 5.75%. The risk is Glapinski further softens his policy stance. Several MPC members (Kotecki, Duda, Dabrowski, and Litwiniuk) turned more dovish throughout September arguing for the possibility of a March 2025 rate cut at the earliest. Kotecki and Wnorowski even suggested 100 bp of cuts over 2025 is likely. The swaps market has more than fully priced-in 75 bp of easing over the next 12 months.
Turkey inflation cools less than expected in September. Headline CPI inflation eased to a 13-month low at 49.38% (consensus: 48.30%) vs. 51.97% in August, while core slowed to a 14-month low at 49.10% y/y (consensus: 47.95%) vs. 51.56% in August. At the last meeting September 19, the central bank left rates steady at 50.0% but began setting the table for a rate cut by leaving out a previous pledge to hike rates further if needed. Next meeting is October 17 and that seems too soon for a cut. Instead, we look for the first cut at the November 21 meeting. The swaps market implies 5% of total rate cuts over the next three months.