Fed Easing Outlook Weakens

October 15, 2024

Fed Easing Outlook Weakens

  • Fed Governor Waller warns the U.S. economy may not be slowing as much as desired.
  • The gradual normalization in the U.K. labor market argues for a cautious BOE easing cycle.
  • The possibility of a full-blown war between Iran and Israel abated somewhat. Crude oil prices are down.

USD is firmer against most major currencies and U.S. equity markets are breaking higher. The bias is for a stronger USD because there is greater room for an upward reassessment in U.S. interest rate expectations relative to other major economies. Meanwhile, easier Fed policy and a strong U.S. economy support the melt-up in U.S. stocks.

Fed Governor Christopher Waller argued yesterday against additional jumbo rate cuts. Waller noted that “monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting.” According to Waller the “upward revisions to gross domestic income (GDI), an increase in job vacancies, high GDP growth forecasts, a strong jobs report and a hotter than expected CPI report” are signs the economy may not be slowing as much as desired.

Crude oil future prices dropped by about 3.5% overnight as the likelihood of a full-blown war between Iran and Israel abated. The Washington Post reported that Israeli Prime Minister Benjamin Netanyahu has told the Biden administration he is willing to strike military rather than oil or nuclear facilities in Iran.

Second-tier U.S. economic data are released today. The October Empire manufacturing index is expected to dip to 3.6 from a 28-month high of 11.5 in September (1:30pm London). Later, the New York Fed releases its September survey of consumer inflation expectations (4:00pm London). Fed speakers include San Francisco Fed President Mary Daly (4:30pm London) and Fed Governor Adriana Kugler (6:00pm London).

EUR/GBP is grinding lower on relative ECB/BOE policy trend. The U.K. August labor data largely matched consensus and argues for a cautious BOE easing cycle. Total weekly regular earnings fell 0.2pts to 4.9% y/y while private sector regular earnings are tracking the BOE’s Q3 projection of 4.8% y/y. The unemployment rate unexpectedly dipped 0.1pts to 4% (consensus: 4.1%) which is below the BOE’s Q3 forecast of 4.4%.

EUR/USD dropped under 1.0900, eyeing key support at 1.0874, the 200-day moving average. The risk is the ECB delivers a dovish 25 bp cut Thursday because the Eurozone economy is stagnating and inflation is undershooting the ECB’s 2% target.

Today, the focus is on the ECB Q3 Bank Lending Survey (9:00am London). The monthly money supply data showed credit dynamics are improving but remain weak by historical standards amidst weak loan demand. Germany also reports the October ZEW investor economic sentiment survey (10:00am London). The expectations index is projected to improve to 10.0 from an 11-month low of 3.6 in September. Regardless, Germany remains the weak link in the Eurozone as it slides into recession.

USD/JPY retraced some of yesterday’s gains after testing key resistance near 150.00. Nevertheless, the looser for longer BOJ policy stance remains a drag for JPY.

USD/CNH surged to near a one month high around 7.1343 on widening U.S.-China interest rate differentials. Chinese banks are expected to trim rates on time deposits by at least 25 bp this week.

The recovery in Chinese stocks fizzled. Investors are waiting for the details of China’s fiscal stimulus pledge which are anticipated to be unveiled later this month. In the meantime, Caixin reported that China may raise 6 trillion yuan (5% of GDP) from ultra-long special government bonds over three years to support economic activity. For reference, China’s 2008 fiscal bazooka which prevented a recession totaled 4 trillion yuan (12.5% of GDP in 2008).

USD/CAD rallied above 1.3800 and faces additional upside pressure. Canada’s September CPI report is due today (1:30pm London). Headline inflation is expected to fall below the mid-point of the Bank of Canada’s (BOC) 1%-3% control range to 1.9% y/y vs. 2.0% in August. Core-median CPI is expected to print at 2.3% y/y same as in August while core-trim is forecast to rise 0.1pts to 2.5% y/y. The BOC projects core CPI (average of trim and median) at 2.5% y/y in Q3. Slower inflation can boost the case for a jumbo 50 bp cut at the next October 23 BOC meeting. Market is pricing-in 50% odds of such a cut.

NZD/USD is trading heavy under 0.6100. RBNZ Deputy Governor Christian Hawkesby warned more easing was in the pipeline. Hawkesby said the Official Cash Rate, currently at 4.75%, “is headed more toward neutral.” The RBNZ estimates the nominal neutral policy rate range between 2% and 4%.

New Zealand’s Q3 CPI report is due later today (10:45pm London). Headline is expected at 2.2% y/y vs. 3.3% in Q2. The RBNZ has 2.3% y/y penciled in. Inflation is converging towards the middle of the RBNZ 1%-3% target band, leaving ample room for the RBNZ to crank-up easing and further weigh on NZD.

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