Gobble On
- US markets are closed today and will close early tomorrow for the Thanksgiving holiday.
- Today’s speech by RBA Governor Bullock could generate some AUD volatility.
- Bank of Korea unexpectedly cut the policy rate 25bps to 3.00%.
USD recovered some of this week’s loss and 10-year Treasury yields are roughly 20bps down from their November 13 high of 4.45%. We view the recent correction in USD and Treasury yields as a technical pullback. Seasonality may also play against USD in the near-term as December is normally a weak month for the currency. In the past 29 years, USD has averaged a 1% decline in December, weakening in 20 of those years. Still, the favorable US macro backdrop suggests the Fed won’t cut rates as much as is priced-in (75bps over the next 12 months), keeping the USD fundamental uptrend intact.
Yesterday’s US data showed economic activity remained encouraging and underlying inflation stubbornly high above 2%. Real personal spending undershot expectations in October (actual: 0.1% m/m, consensus: 0.2%) but the previous month’s rise was revised one tick higher to 0.5% m/m. In addition, the Atlanta Fed GDPNow model estimate for Q4 real GDP growth notched-up to 2.7% SAAR from 2.6% on November 19.
Meanwhile, US PCE inflation matched consensus. In October, headline PCE rose two ticks to 2.3% y/y, core PCE increased one tick to 2.8% and the Dallas Fed Trimmed Mean PCE inflation printed at 2.7% y/y for a third consecutive month. For November, the Cleveland Fed’s inflation Nowcast model sees headline and core PCE accelerating to 2.5% and 2.9%, respectively. It’s worth noting that core PCE inflation is tracking above the FOMC’s 2024 projection of 2.6%.
EUR/USD pared back some of its recent gains and will take its cue today from Spain and Germany’s CPI data (8:00am and 1:00pm London, respectively). EU harmonized CPI inflation for Spain is expected at 2.3% y/y vs. 1.8% in October and 2.6% y/y vs. 2.4% in October for Germany. The expected pick-up in inflation will largely reflect base effects and should not derail the ECB’s easing cycle. The Eurozone November economic sentiment index is also due today and should remain indicative of a sluggish growth outlook (10:00am London).
In an interview with the Financial Times, ECB President Christine Lagarde was asked what would a trade war mean for the ECB and how would it affect inflation? Lagarde responded “if anything, maybe it’s a little net inflationary in the short term. But you could argue both ways; it depends what the tariffs are, what they are applied on and over what period of time.”
AUD/USD is trading heavy under 0.6500. Australia’s Q3 Capex data does not move the needle on RBA rate expectations. Business investment increased 1.1% q/q (consensus: 1.0%) vs. -2.2% in Q2 driven by a 2.3% q/q rise in non-mining capex. Mining capex fell -1.9% q/q. Finally, investment intentions remain above average with Estimate 4 of planned capex for 2024/25 up 5.1% to A$178.2bn. RBA cash rate futures continue to imply a first full 25bps rate cut to 4.10% in May.
Today’s speech by RBA Governor Bullock will likely generate more volatility (8:50am London). Bullock could take the opportunity to clarify or adjust the message from the RBA November meeting Minutes. According to the Minutes members noted that a faster than currently forecast decline in inflation “could warrant an easing in the cash rate target, but that they would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” Australia’s Q3 CPI tracked the RBA’s forecast. The Q4 and Q1 CPI prints are due end-January and end-April, respectively. This indicates the RBA is likely to wait until after the release of the Q1 CPI data before considering rate cuts, likely at its May 7 policy meeting.
NZD/USD is struggling to sustain a move above 0.5900. The ANZ November business outlook survey validates the RBNZ’s guidance to front-load policy rate reductions. Business confidence eased one point to +65 in November, but expected own activity rose two points to +48 to more than a decade high. Reported past activity, which has the best correlation to GDP, remains very weak but lifted from -10.5 to -9.7 suggesting the downturn in economic activity will be short-lived. In fact, RBNZ Assistant Governor Karen Silk warned of slower pace of easing after February and noted the RBNZ does not forecast to slash the policy rate below neutral (around 3%) throughout 2027.
KRW underperformed all other EMFX. Bank of Korea (BOK) unexpectedly cut the policy rate 25bps to 3.00%. Expectation was for no change while two of the six board members opposed today’s rate cut. Governor Rhee said “Our decision can be interpreted as an acceleration of easing to deal with downward economic risks that are growing larger than we expected…Among the biggest changes since August is the Red Sweep in the US, which was bigger than we forecast.”
The bar for more BOK easing is low as Governor Rhee noted that three of six board members were open to another rate cut in the next three months. In October, five board members saw steady rates over the next three months and only one was open to another cut. The swaps market sees 75bps of total easing over the next twelve months that would see the policy rate bottom at 2.25%.
