• The two-day FOMC meeting ends with an expected 25 bp cut; Q3 unit labor costs and nonfarm productivity will be reported; Mexico reports October CPI data; Peru central bank meets today and the market is split
  
• BOE meeting ends shortly with an expected 25 bp cut to 4.75%; October DMP inflation expectations will be reported; Norges Bank kept rates steady at 4.5%, as expected; Riksbank cut rates 50 bp to 2.75%, as expected; CNB is expected to cut rates 25 bp to 4.0%
  
• Japan reported soft September cash earnings; Australia reported weak September trade data; China reported mixed October trade data

The dollar is trading soft ahead of the FOMC decision. DXY is trading lower near 104.867 after trading at a new cycle high of 105.441 and remains on track to test the June high near 106.130. Sterling is trading higher near $1.29 ahead of the BOE decision (see below) while the euro is trading higher near $1.0760. The yen is trading firmer, with USD/JPY trading lower near 154.10. We look for the dollar rally to continue. While the election results have turbo-charged this 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. Recent data have showed that the labor market remains firm and supportive of continued robust consumption that is fueling above-trend growth. While the Fed is likely to cut rates 25 bp today, we believe it will continue to take a cautious tone going forward, especially in light of what we view as heightened inflation risks in a second Trump term (see below).

AMERICAS

The two-day FOMC meeting ends with an expected 25 bp cut. In our view, the vote split and Chair Powell’s post-meeting press conference will likely signal that the bar is high for the FOMC cut rates more aggressively. At the September meeting, Governor Bowman cast the sole dissenting vote in support of a 25 bp rate cut and we see risks that she again votes to keep rates steady this week. Meanwhile, we expect Powell to stick to the message he delivered in October that the “Fed doesn’t feel like it’s in a hurry to cut rates quickly” given “growing confidence” of a soft landing for economy.

Chair Powell will be asked about his relationship with the White House. He will of course be non-committal and will likely stress the independent nature of the Fed. That said, the Fed is always forward looking and potential inflationary impulses are coming down the pike if tariffs are enacted and fiscal policy turns expansionary again. As such, we believe the Fed will have to remain cautious going forward. Fed Funds futures are pricing in 75% odds of a December cut, while the swaps market is pricing in close to 55% odds.

The jobs report Friday did not make the Fed’s job any easier. Looking through the distorted jobs data, we believe most indicators show the U.S. economy growing rather robustly and the labor market remaining in solid shape. Our thesis will be tested in the coming months. Before the following FOMC meeting December 17-18, we get one more jobs report and two more CPI, PPI, and retail sales reports.

Growth remains solid in Q4. The Atlanta Fed GDPNow model's initial estimate for Q4 GDP stands at 2.4% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.0% SAAR and will be updated tomorrow, while its initial forecast for Q1 2025 will come at the end of November. Bottom line: the US economy continues to grow at or above trend as we move into 2025.

Q3 unit labor costs and nonfarm productivity will be reported. Productivity (GDP/hours worked) is expected at 2.5% q/q vs. 2.5% in Q2, while ULC are expected at 1.0% q/q vs. 0.4% in Q2. Importantly, annual productivity growth is running above its post-war average of 2.1%. Rising productivity leads to low inflationary economic growth which translates to higher real interest rate and an appreciation in the currency over the longer term.

Mexico reports October CPI data. Headline is expected at 4.74% y/y vs. 4.58% in September, while core is expected at 3.85% y/y vs. 3.91% in September. If so, headline would accelerate for the first time since July and move further above the 2-4% target range, while core would be the lowest since January 2021. At the last meeting September 26, Banco de Mexico cut rates 25 bp as expected to 10.50%. The vote was 4-1, with the lone dissent in favor of steady rates. The bank warned that the balance of risks to growth were to the downside and said the inflation environment would permit further cuts ahead. Next meeting is November 14 and another 25 bp cut seems likely. The swaps market is pricing in 125 bp of total easing over the next 12 months followed by another 25 bp cut over the subsequent 12 months that would see the policy rate bottom near 9.0%.

Peru central bank meets today and the market is split. The analyst community is split 50-50 between no cut and a 25 bp cut, though we favor a 25 bp cut. At the last meeting October 10, the central bank delivered a hawkish surprise and kept rates steady at 5.25% vs. an expected 25 bp cut to 5.0%. It warned that inflation would rise in Q4 due to base effects but would remain in the target range. Recently, the bank’s chief economist Armas said the bank will continue cutting rates gradually and that decisions would be based on core inflation, inflation expectations, and economic growth. We believe the inflation data for October support the case for the central bank to resume cutting rates today. Headline picked up slightly to 2.01% y/y vs. 1.78% in September and core eased to 2.50% y/y vs. 2.64% in September, the lowest since August 2021.

EUROPE/MIDDLE EAST/AFRICA

Bank of England meeting ends shortly with an expected 25 bp cut to 4.75%. We expect the BOE to reiterate that “monetary policy will need to continue to remain restrictive for sufficiently long.” The focus will be on the MPC vote split and the monetary policy implications of the fiscal loosening measures contained in the government’s Autumn Budget. The market has already pared back bets on BOE easing and now sees the policy rate bottoming at 4.0% over the next 12 months vs. 3.75% before the budget. Updated macroeconomic projections will offer additional guidance on the scope of the BOE’s easing cycle, with 2027 added to the forecast horizon. Chief Economist Pill then speaks tomorrow.

October DMP inflation expectations will be reported. 1-year inflation expectations are expected to remain steady at 2.7%. In September, 3-year inflation expectations stood at 2.7% for a second consecutive month and still within the same narrow range that’s held throughout the year. Overall, inflation expectations are contained and support a cautious BOE easing approach.

Norges Bank kept rates steady at 4.5%, as expected. In terms of forward guidance, the bank reiterated that “the policy rate will remain at 4.5% to the end of 2024.” It also noted that the economic outlook is tracking the forecasts presented in the September Report, which indicated a gradual reduction in the policy rate from the first quarter of 2025. The swaps market is pricing in 75 bp of easing over the next 12 months, which is roughly in line with the Norges bank’s projection. In contrast, the market is pricing over 125 bp of ECB cuts over the next 12 months and so relative monetary policy divergences support a lower EUR/NOK.

The Riksbank cut rates 50 bp to 2.75%, as expected. The bank noted that “the policy rate may be cut again at the next monetary policy meeting in December and during the first half of 2025, in line with what was communicated in September.” The market is pricing in 75 bp of further easing over the next 12 months, which would see the policy rate bottom near 2.0% vs. the Riksbank’s 2.25% forecast. In our view, there is room for interest rate futures to converge towards the Riksbank’s forecast because underlying inflation is stabilizing around the 2% inflation target. Indeed, CPIF ex-energy rose 0.1 ppt more than expected in October to 2.1% y/y vs. 2.0% in September.

Czech National Bank is expected to cut rates 25 bp to 4.0%. At the last meeting September 25, the bank cut rates 25 bp as expected to 4.25% by a 6-1 vote, with the dissent in favor of a larger 50 bp cut. Governor Michl said, “The vast majority of the bank board agreed that there was need for caution.” Indeed, Vice Governor Zamrazilova signaled last week that she could favor pausing the easing cycle noting “the inflationary risks to fulfilling the target next year are prevailing at the moment, and I see that as a reason for caution.”

ASIA

Japan reported soft September cash earnings. Nominal earnings came in two ticks lower than expected and was steady at 2.8% y/y, while real earnings came in two ticks lower than expected at -0.1% y/y vs. -0.8% in August. The less volatile scheduled pay growth for full-time workers came in a tick higher than expected at 2.9% y/y. We believe that the limited wage growth lowers the likelihood the BOJ resumes normalizing policy at its next meeting December 19, though markets currently see 45% odds of a hike then vs. 30% at the start of this week.

Australia reported weak September trade data. Exports fell -4.3% m/m vs. a revised -0.6% (was -0.2%) in August, while and imports fell -3.1% /m vs. -0.2% in August. In y/y terms, both saw deeper contractions that underscore the risks to both external and domestic demand.

China reported mixed October trade data. Exports came in at 12.7% y/y vs. 5.0% expected and 2.4% in September, while imports came in at -2.3% y/y vs. -2.0% expected and 0.3% in September. Declining imports is a sign of weak domestic demand activity. Meanwhile, China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate consumer spending.