- November PPI will be the highlight; CPI is worth discussing; a cut next week is now fully priced in; BOC cut rates 50 bp to 3.25%, as expected; Peru is expected to keep rates steady at 5.0%; Brazil unexpectedly hiked rates 100 bp to 12.25% and promised more jumbo cuts
- ECB is expected to cut rates 25 bp; SNB cut rates 50 bp to 0.50%.
- Australia reported strong November jobs data; China pushed back against notions that it wants a weaker currency; Prime Minister Li Qiang vowed to cut interest rates and reserve requirements
The dollar is soft ahead of the ECB decision. DXY is trading lower for the first time since last Thursday 106.572 as markets fully price in a Fed cut next week (see below). CHF is the worst performing major after the SNB surprised with a 50 bp cut (see below), while AUD is the best performing one after strong jobs data (see below). Elsewhere, the euro is trading flat near $1.05 ahead of the ECB decision (see below) and sterling is trading slightly lower near $1.2745. USD/JPY is trading lower near 152.25 despite falling odds of a December BOJ hike. 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 yesterday’s BOC dovish surprise and today’s SNB dovish surprise, it’s clear that monetary policy divergences continue to favor the dollar.
AMERICAS
November PPI will be the highlight. Headline PPI is expected at 2.6% y/y vs. 2.4% in October while core PPI is expected at 3.2% y/y vs. 3.1% in October. Keep an eye on PPI services ex-trade, transportation, and warehousing, as it feeds into the core PCE calculations. In October, this measure of core services PPI rose to a five-month high of 4.6% y/y and remains consistent with sticky underlying inflation.
CPI is worth discussing. Headline picked up a tick to 2.7% y/y and core remained steady at 3.3% y/y, both as expected and in line with the Cleveland Fed’s Nowcast model. Super core decelerated to 4.25% y/y vs. 4.38% in October but remains quite elevated. Also, core has risen 0.3% m/m for four straight months, a pace that is simply inconsistent with the 2% inflation target. Looking ahead to December, the Cleveland Fed’s Nowcast model has headline at 2.9% and core at 3.3%, respectively, which would confirm our fears that progress on inflation has stalled well above 2%.
A cut next week is now fully priced in. Yet it’s clear from Fed comments last week that officials (ex-Goolsbee) are worried about sticky inflation, and yesterday’s CPI 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 (depending on the data).
Q3 change in household net worth will also be reported. In Q2, it rose $2.76 trln and was the third straight quarterly rise. Strong household balance sheets are a key factor underpinning solid consumption growth.
Bank of Canada cut rates 50 bp to 3.25%, as expected. However, the bank toned down its easing guidance by noting that it has “reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.” Previously, the BOC warned that “we expect to reduce the policy rate further.” Still, we believe the BOC has room to ease further, which should limit USD/CAD pullbacks. Inflation is close to 2%, inflationary pressures are no longer broad-based, and the growth outlook is soggy. This means the BOC can afford to move the policy rate within its neutral range estimate between 2.25-3.25%. Of note, the swaps market now sees the policy rate bottoming at 2.0%. The next Monetary Policy Report with updated macro forecasts will be released at the next meeting January 29.
Peru central bank is expected to keep rates steady at 5.0%. However, three of the twelve analysts polled by Bloomberg look for a 25 bp cut to 4.75%. At the November 7 meeting, the bank cut the policy rate 25 bp to 5.0%. The analyst community was split 50-50 between no cut and a 25 bp cut. However, the bank signaled that the scope to ease policy further was limited as “the real interest rate is approaching the level estimated as neutral.” The bank added that the rate decision “does not necessarily imply successive reductions in the interest rate.” Since then, November headline and core inflation have picked up modestly and so a pause today may be in order.
Brazil central bank unexpectedly hiked rates 100 bp to 12.25% and promised more jumbo cuts ahead. Most were looking for a 75 bp move. The bank stated that “In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” The bank warned that “the perception of agents about the recent fiscal announcement has significantly impacted asset prices and expectations, especially the risk premium, inflation expectations and the exchange rate.” It also announced a credit line auction of up to $4 bln today in an effort to help support the real. The swaps market is now pricing in a terminal policy rate of 16.5% vs. 15.75% before the decision.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank is expected to cut rates 25 bp. We also expect the ECB to stick to its data-dependent guidance by reiterating that it “is not pre-committing to a particular rate path.” President Lagarde’s press conference should provide more color on the decision. Attention will also be on the update macroeconomic projections. Of note, 2027 will be added to the forecast horizon. Judging from the recent soft batch of eurozone economic data, the ECB will likely tweak lower its inflation and real GDP growth forecasts. This can lead to a downward adjustment to ECB easing expectations that would likely weigh on the euro. The market is currently pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%, but we think it could go even lower.
Swiss National Bank unexpectedly cut rates 50 bp to 0.50%. Only 5 of the 23 analysts polled by Bloomberg looked for a larger 50 bp cut, while the swaps market priced in only 30% odds of a 50 bp move. However, the SNB toned down its dovish guidance by noting it “will adjust its monetary policy if necessary.” In September, the SNB warned that “Further cuts in the SNB policy rate may become necessary in the coming quarters”. Nevertheless, the bar for additional easing remains low and be remain an ongoing drag for CHF. Despite the less dovish guidance from the SNB, the swaps market is still pricing in 50 bp of further easing that would take the policy rate down to 0% over the next 12 months. Of note, the SNB forecasts headline CPI inflation to ease from 0.7% y/y in Q4 to a low of 0.2% y/y in Q2 2025 and stay below 1% throughout the forecast horizon.
ASIA
Australia reported strong November jobs data. A total of 35.6k jobs were created vs. 25.0k expected and a revised 12.1k (was 15.9k) in October. The details were strong, as the net gain was driven by a 52.6k rise in full-time jobs. Part-time jobs fell -17k. The unemployment rate came in at 3.9% vs. 4.2% expected and 4.1% in October, the lowest since March and still tracking below the RBA’s 4.3% year-end forecast. The market trimmed odds of a February rate cut to around 50% vs. 70% before the jobs data. However, the RBA’s reduced concern about inflation paves the way for the bank to start easing in February. The RBA noted earlier this week “the Board is gaining some confidence that inflation is moving sustainably towards target,” adding that “some of the upside risks to inflation appear to have eased.”
China pushed back against notions that it wants a weaker currency. The PBOC-backed Financial News wrote that the yuan has a “solid foundation to remain basically stable” but added the currency is also likely to be volatile in both directions going forward. It noted that the economy has shown signs of stabilizing, adding that an improvement in the fundamentals due to government stimulus is providing the conditions for the yuan to remain stable at a “reasonable and balanced” level. Lastly, the paper noted that the yuan is likely to strengthen at year-end due to an increased number of corporate FX settlements. This comes after reports earlier in the week suggesting officials would tolerate a weaker yuan next year. That said, we continue to believe that monetary policy divergences point to further weakness ahead.
Prime Minister Li Qiang vowed to cut interest rates and reserve requirements at an “appropriate time.” He stressed that liquidity would be kept “ample.” Li also pledged to increase the fiscal deficit next year to fund additional fiscal stimulus as policymakers strive to meet the growth target. Crucial details are still missing and so we cannot get very excited about these continued pledges. As the saying goes, “show me the money!”
