• FOMC minutes suggest the Fed is in no hurry to cut rates; minutes also discussed the reason the FOMC tweaked its policy statement; October PCE data will be the highlight; personal income and spending will be reported too
  
• France remains under market scrutiny; there are still some ECB hawks; BOE officials remain cautious
  
• Australia reported mixed October CPI data; RBNZ cut rates 50 bp to 4.25%, as expected

The dollar is soft ahead of the holiday weekend. DXY is trading lower near 106.471 as the foreign currencies see broad-based gains. However, MXN, CAD, and CNY continue to underperform today after being singled out by Trump in his tariff threats. The yen continues to outperform, with USD/JPY trading at the lowest since late October near 151.25. We believe 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 $1.0525, while sterling is trading higher near $1.2610. We look for this dollar rally to continue after this current 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. The policies that incoming Treasury Secretary Bessent are prioritizing will support this narrative, not derail it. Market pricing for the Fed has already adjusted, which has given the dollar a huge lift.

AMERICAS

FOMC minutes suggest the Fed is in no hurry to cut rates. Minutes showed that “Participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time.” Moreover, a “couple” of participants cautioned that the process to get inflation moving sustainably toward 2% could take longer than previously expected while “a few” participants remarked that “the strength of economic activity was unlikely to be a source of upward inflation pressures.” Importantly, “some participants judged that downside risks to economic activity or the labor market had diminished.”

The minutes also discussed the reason the FOMC tweaked its policy statement. Recall that it scrapped the previous reference to their greater confidence that inflation was moving sustainably toward 2%. According to the minutes, “this language had been specifically associated with the commencement of policy easing in September and therefore was no longer needed.” Finally, the minutes showed that Fed officials are considering a “technical adjustment” to money market operations at a future meeting. Some participants saw value in lowering the overnight reverse repurchase agreement (ON RRP) facility offering rate by 5 bp to align it with the bottom of the target range for the Fed Funds rate. The ON RRP is designed to temporarily add or drain reserves available to the banking system and provides a floor under overnight interest rates.

Odds of a December cut have crept higher. The odds are around 66% in the Fed Funds futures market and are near 60% in the OIS market. We will have one more each of the jobs, CPI, PPI, and retail sales reports to digest ahead of the December 17-18 meeting. Looking ahead, the swaps market is pricing in a terminal rate near 3.75%, which is about a full percentage point above the Fed’s expected long-term rate of 2.875% in the September Dot Plots. Of note, updated macro forecasts and Dot Plots will be released at the December meeting.

October PCE data will be the highlight. Headline PCE is expected to pick up two ticks to 2.3% y/y, while core PCE is expected to pick up a tick to 2.8% y/y. Consensus is in line with the Cleveland Fed’s inflation Nowcast model. Looking ahead to November, that model sees headline and core accelerating to 2.5% and 2.9%, respectively. Underlying inflation remains stubbornly high and inflation momentum has clearly regained traction. That's why the Fed should remain cautious about easing too much or too quickly.

Personal income and spending will be reported at the same time. Income is expected at 0.3% m/m vs. 0.3% in September, personal spending is expected at 0.4% m/m vs. 0.5% in September, and real personal spending is expected at 0.2% m/m vs. 0.4% in September. Judging from the already released retail sales data, October personal spending may disappoint but the previous month’s increase could get revised higher. Recall that the control group used for GDP calculations fell -0.1% m/m in October while September was revised up to 1.2% m/m from 0.7%.

Growth remains robust. We get another revision to Q3 GDP data today but this is old news as markets look ahead to Q4 and beyond. The Atlanta Fed GDPNow model is tracking Q4 growth at 2.6% SAAR and will be updated today after the data. October advance goods balance, wholesale and retail inventories, durable goods orders, pending home sales, and weekly jobless claims will all be reported. Elsewhere, the New York Fed Nowcast model is tracking Q4 growth at 1.9% SAAR and will be updated Friday. Its initial estimate for Q1 will come at the end of November.

Conference Board consumer confidence for November improved. Headline came in close to consensus to 111.7 vs. a revised 109.6 (was 108.7) in October and remains within the same narrow range that’s held throughout the past two years. Expectations to 92.3 from a revised 91.9 (Was 89.1) to the highest since December 2021, which is consistent with resilient household spending activity. Bottom line: household spending will continue to be an important tailwind to GDP growth supported by positive real wage growth, encouraging labor demand, and strong household balance sheets. This argues for a cautious Fed easing cycle. Interestingly, the Conference Board’s labor index (jobs plentiful minus jobs hard to get) rose to a five-month high of 18.2 in November, suggesting consumers are more optimistic about future labor market conditions. Of note, Bloomberg consensus for November NFP is 190k vs. 12k in October, while its whisper number stands at 172k.

November Chicago PMI will be reported. It is expected at 45.0 vs. 41.6 in October. However, this series has not correlated very well with the national PMIs for quite some time and so offers little insight. ISM PMI readings will be reported next week and are likely to mirror the improvement seen in the S&P Global PMIs.

EUROPE/MIDDLE EAST/AFRICA

France remains under market scrutiny. The French-German 10-year spread widened to 86 bp, the highest level since 2012 and nearing Greece’s spread at 88 bp. French Prime Minister Barnier is expected to invoke article 49.3 of the constitution in December to adopt the budget bill without a vote. However, far-right leader Le Pen vowed to bring down the government in a no-confidence motion “if the budget remains as it is.” Encouragingly, the higher risk premium on French bonds yields is not spreading to the rest of the Eurozone, which limits the drag on EUR. That said, it feels like Europe is even more fractured than it was during the eurozone crisis back in 2011-2012, with no Draghi figure to step up to do "whatever it takes." Moreover, the stresses are emanating from the two largest economies in the eurozone and not from the much smaller periphery. Even during the height of that crisis, EUR never got much below $1.20. Here we are at $1.05 now, which says a lot.

There are still some European Central Bank hawks. Executive Board member Schnabel stated that “I would warn against moving too far, that is into accommodative territory.” She estimated the neutral rate to be between 2-3% and observed that “we may not be so far” from it now. Of note, her estimate of neutral is a bit higher than what most see for the eurozone. Schnabel downplayed the need for jumbo cuts by expressing “a strong preference for a gradual approach.” The market sees only 15% odds of a jumbo 50 bp cut at the December 12 meeting, down from nearly 50% last week. Looking ahead, the swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom at 1.75%.

Bank of England officials remain cautious. Deputy Governor Lombardelli reinforced the case the BOE pauses easing at its December 19 meeting, noting that “I do worry [that] we still have services inflation in this country consistently at levels above their pre-Covid average, well above rates that are consistent with the [2%] inflation target.” Lombardelli added “we will need to see more evidence on this disinflation process continuing before we can continue to ease policy.” While the market is pricing in a hold next month, it now sees the terminal rate at 3.75% vs. 4.0% before the weak November PMI reading last week.

ASIA

Australia reported mixed October CPI data. Headline came in 2.1% y/y vs. 2.3% expected and 2.1% in September, but trimmed mean came in at 3.5% y/y vs. 3.2% in September. Headline remained at the cycle lows while trimmed mean accelerated for the first time since May to the highest since July. It’s worth noting, that the RBA focuses on the quarterly CPI data because they are less volatile and capture more items than the monthly CPI indicator. The market is still pricing in the first 25 bp rate cut in May. RBA Governor Bullock speaks tomorrow. Bullock could take the opportunity to clarify or adjust the message from the minutes of the November 6 policy meeting.

Reserve Bank of New Zealand cut rates 50 bp to 4.25%, as expected. It also noted that it “expects to be able to lower the OCR further early next year.” Indeed, the new OCR forecasts infer a steeper cash rate decline than in August. Governor Orr pointed out that the bank’s updated projections are consistent with another 50 bp cut at its next decision on February 19, 2025. Orr added that there was no consideration at today’s meeting of either a 75 bp or 25 bp cut. As per the RBNZ’s guidance, the market is pricing in another 50 bp cut in February.