•  Fed, BOE, Czech National Bank, and Peru’s central bank deliver hawkish cuts.

• Canada’s October jobs report expected to point at a further softening in labor market conditions.

• China’s fiscal stimulus package underwhelmed but policymakers pledged to do more next year.

USD and Treasury yields have retraced most of their post-U.S. election gains. Nonetheless, the fundamental uptrend in USD is intact in part because the U.S. economy is in a sweet spot and outperforming other advanced economies.

As was widely expected, the FOMC trimmed the Fed funds rate 25bps to a target range of 4.50-4.75%. The decision this time was unanimous. In September, the FOMC voted by a majority of 11-1 to slash rates 50bps with Fed Governor Michelle Bowman dissenting in favor of a smaller 25bps rate cut.

Importantly, the bar for an aggressive Fed easing cycle is high which is USD supportive. First, the FOMC press release scrapped previous reference that it had gained greater confidence that inflation is moving sustainably toward 2%. Second, Fed Chair Jay Powell emphasized “the Fed is not in a hurry to get to neutral”, adding “the economic activity data have been stronger than expected” while “inflation data wasn’t terrible but higher than expected.” Fed funds futures hardly budged and still price-in about 70% odds of a 25bps cut in December followed by 43% odds of a 25bps cut in January.

Powell made it clear he does not plan to resign before his term ends in May 2026 if president-elect Donald Trump demands it. Powell also reminded the audience that it was “not permitted under the law” for a sitting president to dismiss or demote a Fed chair or Fed governors. Unsurprisingly, Powell refused to get drawn down on a fiscal outlook discussion. Powell simply said that the path of federal debt is unsustainable, and the election will have no effect on policy in the near-term.

Today, the University of Michigan November preliminary consumer sentiment report is published (10:00am New York) and Fed Governor Michelle Bowman speaks (11:00am London). Consumer sentiment is expected at 71.0 vs. 70.5 in October consistent with healthy consumer spending activity. Positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.

USD/JPY has retraced more than 60% of its post U.S. election gains. Japan’s finance minister Kato echoed comments made yesterday by his chief currency official Mimura warning against excessive JPY weakness. USD/JPY intervention zone is around 160.00. Regardless, widening U.S.-Japan 10-year bond yield spreads support the uptrend in USD/JPY.

USD/CAD is firmer just under 1.3900 ahead of Canada’s October labor force survey (8:30am New York). Consensus sees a 27.2k rise in jobs vs. 46.7k in September, while the unemployment rate is expected to rise one tick to 6.6% on an unchanged participation rate of 64.9%. Overall, the labor market is softening and the BOC’s Q3 Business survey showed firms’ hiring intention remain weak. Bottom line: the Bank of Canada has room to keep cutting the policy rate which is an ongoing drag on CAD. The market is pricing-in 58% odds of a follow-up 50bps cut in December.

GBP is holding on to yesterday’s gains triggered by the BOE’s hawkish cut. As was widely expected, the BOE cut the policy rate 25bps to 4.75% and reiterated “a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long.” The MPC voted by a majority of 8–1 to reduce the Bank Rate. One member - Catherine L. Mann - preferred to maintain the Bank Rate at 5.00%.

The BOE’s updated fiscal outlook suggests the bank could pause easing in December. The BOE warned that the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP and CPI inflation. As such, the BOE raised annual Q4 2025 GDP growth and CPI inflation projections to 1.7% (prior: 0.9%) and 2.7% (prior:2.2%), respectively.

The market responded by slashing in half the probability of a 25bps BOE December rate cut to about 20% while the OIS curve still implies the Bank Rate to bottom at 4.00% in the next 12 months. In contrast, the market anticipates the ECB policy rate to bottom at around 2.00% in the next year. Bottom line: relative monetary policy trend supports a lower EUR/GBP.

BOE Governor Andrew Bailey downplayed concerns about the post-Budget Gilt market sell-off pointing out “if you look at the market today it’s pretty settled.” BOE deputy governor Dave Ramsden added “we’re not seeing anything unusual at all at the moment.” U.K.-German 10-year government bond yield spreads tightened to 205bps from high of 216bps this week. For reference, the spread hit a high of 228bps in September 2022 following the Trussonomic tax cut debacle. BOE Chief Economist Huw Pill speaks today (12:15pm London).

CNH and AUD had a modest kneejerk drop before consolidating after China detailed its long anticipated fiscal stimulus package. The package underwhelmed but policymakers pledged to do more next year. In line with expectations, China will allow local authorities to issue as much as 10 trillion yuan in bonds over the five years (6 trillion in the next three years and another 4 trillion over five years), mainly to refinance off-balance-sheet debt.

China also plans to cut hidden debt outstanding to 2.3 trillion yuan from 14.3 trillion yuan. However, the IMF estimates China has over 60 trillion yuan in hidden debt outstanding as of last year.

China’s finance minister confirmed that policymakers will implement forceful fiscal policy in 2025. China plans to roll out tax measures to support the property market soon, issue ultra-long special sovereign bonds, and expand local govt debt sales. In our view, piling on more debt to support a burst property bubble is not the long-term solution China needs to address its huge debt overhang and rising deflation risks.

Yesterday, Czech National Bank (CNB) delivered on expectations and voted 5-2 to cut the policy rate 25bps to 4.00%. Five members voted in favor of the decision, one member voted for leaving rates unchanged and one member voted for lowering them by 50bps. Importantly, CNB warned it “will approach future monetary policy easing with great caution and may pause the interest rate reduction process.” In fact, CNB Governor Michl reiterated this morning that policymakers are already discussing when to stop the rate cuts. The swaps market is pricing in 25bps of total easing over the next 12 months which seems about right.

Yesterday, Peru’s central bank cut the policy rate 25bps to 5.00%. The analyst community was split 50-50 between no cut and a 25bps cut, though we favored a 25bps cut. Moreover, the bank signaled that scope to ease policy further is limited as “the real interest rate is approaching the level estimated as neutral.” The bank added that yesterday’s rate decision “does not necessarily imply successive reductions in the interest rate.” Indeed, the bank warned again that inflation would rise in Q4 due to base effects but would remain in the 1-3% target range.