Eazy-Duz-It

• The FOMC November meeting minutes suggests participants are in no rush to ease policy. The spotlight today is the US October PCE report.

• RBNZ delivers 50bps rate cut and front-loads future rate reductions. But total easing forecast by RBNZ over projection horizon is roughly unchanged.

• The higher risk premium on French bonds yields over safer German peers is not spreading to the rest of the Eurozone.

USD is down against most major currencies, reflecting overbought technical conditions. The fundamental USD uptrend is intact supported in part by a more favorable US economic outlook relative to other major economies.

The FOMC November 6-7 meeting minutes suggests participants are in no rush to ease policy. The minutes emphasized “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 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 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 5bps to align it with the bottom of the target range for the federal funds rate. ON RRP is designed to temporarily add or drain reserves available to the banking system and provides a floor under overnight interest rates.

The spotlight today is the US October PCE report (3:00pm London). 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. For 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.

Meanwhile, US personal income and spending are expected to remain indicative of solid domestic demand activity. Personal income is projected 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 forecast at 0.2% m/m vs. 0.4% in September. Judging from the already released retail sales data, October personal spending risk disappointing but the previous month increase could get revised higher. The control group retail sales used for GDP calculations fell -0.1% m/m in October while the September rise was revised up to 1.2% m/m from 0.7%.

Yesterday, the US Conference Board consumer confidence index improved in line with consensus in November and remains within the same narrow range that’s held throughout the past two years. The expectations index rose 0.4 points to 92.3, the highest level since December 2021, consistent with resilient household spending activity. Interestingly, the labor index (jobs plentiful minus jobs hard to get) rose to a five-month high at 18.2 in November, suggesting consumers are more optimistic about future labor market conditions.

GBP is firmer versus USD and EUR. Comments by Bank of England (BOE) Deputy Governor Clare Lombardelli reinforced the case the BOE pauses easing at its December 19 meeting. Lombardelli said “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”. Lombadelli added “we will need to see more evidence on this disinflation process continuing before we can continue to ease policy.”

EUR/USD is holding above 1.0500. French-German 10-year government bond yield spreads widened to 86bps the highest level since 2012. French Prime Minister Michel Barnier is expected to invoke article 49.3 of the constitution in December to adopt the budget bill without a vote. But far-right leader Marine 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. The 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.

AUD/USD bounced back towards 0.6500. Australia’s monthly headline CPI indicator was unexpectedly steady at 2.1% y/y in October (consensus: 2.3%) and remains the lowest since July 2021. Falls in electricity and automotive fuel prices weighed on inflation. The trimmed mean CPI rose to a three-month high at 3.5% y/y vs. 3.2% in September. It’s worth noting, that the RBA focuses on the quarterly CPI prints because it’s less volatile and captures more items than the monthly CPI indicator. RBA cash rate futures continue to imply a first full 25bps rate cut to 4.10% in May.

NZD rallied across the board and New Zealand bonds sold-off after the outcome of the RBNZ meeting for two reasons: (i) markets unwound the modest pricing for a 75bps RBNZ policy rate cut. (ii) the total easing implied in the updated Official Cash Rate (OCR) forecast to 2027, about 125bps, was similar than in August.

Otherwise, the RBNZ slashed the OCR 50bps to 4.25% as anticipated and noted it “expects to be able to lower the OCR further early next year.” Indeed, the new OCR forecast infers a steeper cash rate decline than in August. RBNZ Governor Adrian Orr pointed out that the bank’s updated projections are consistent with another 50bps reduction at its next decision on February 19, 2025. Governor Orr added there was no consideration at today’s meeting of cutting the OCR by 75bps or 25bps. Bottom line: the RBNZ dovish policy guidance can drag NZD lower in the near-term.