Inflation Check Ahead
- U.S. inflation is expected to move closer to 2% in September. But sticky underlying inflation still argues for a cautious Fed easing cycle.
- The ECB Account of the September meeting is unlikely to offer fresh policy guidance.
- Norway inflation printed below expectations in September. Risk is the Norges Bank eases sooner than they project.
USD and Treasury yields are holding on to this week’s solid gains. USD faces additional upside potential because there is greater room for an upward reassessment in U.S. interest rate expectations relative to other major economies. Meanwhile, the combination of a dovish Fed/ strong U.S. economy supports the melt-up in US equities.
The FOMC September meeting minutes suggests the threshold for another 50 bp rate cut is high. According to the minutes “a substantial majority of participants” supported the 50 bp reduction to the fund rate to 4.75-5.00%. However, “some participants observed that they would have preferred a 25 basis point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision” because “inflation was still somewhat elevated while economic growth remained solid and unemployment remained low.” Moreover, “several participants noted that a 25 basis point reduction would be in line with a gradual path of policy normalization… A few participants also added that a 25 basis point move could signal a more predictable path of policy normalization.”
San Francisco Fed President Mary Daly (voter) commented overnight that “two more cuts this year, or one more cut this year, really spans the range of what is likely in my mind.” Fed funds futures are pricing-in 25 bp cut in November followed by a 25 bp cut in December. Our base case is for one 25 bp Fed funds rate reduction by year-end because resilient U.S. economic activity and easing in financial conditions are upside risks to inflation.
The U.S. September CPI data is up next (1:30pm London). In September, headline CPI is expected to rise 0.1% m/m and ease two ticks to a 42-month low at 2.3% y/y. Core is expected to rise 0.2% m/m and remain at a 39-month low at 3.2% y/y for a third consecutive month. The FOMC September meeting minutes noted that “almost all participants indicated they had gained greater confidence that inflation was moving sustainably toward 2 percent.” Nevertheless, uncomfortably high super core inflation (core services less housing) above 4% y/y argues for a cautious easing cycle.
Fed speakers today include: Fed Governor Lisa Cook (2:15pm London), Richmond Fed President Tom Barkin (3:30pm London), and New York Fed President John Williams (4:00pm London).
EUR/USD is under downside pressure near its 100-day moving average at 1.0934. The ECB publishes the Account of the September meeting (12:00pm London). At that meeting, the ECB delivered on expectations so we doubt the Account will offer fresh policy guidance. The ECB unanimously voted to cut the key deposit facility rate (DFR) 25 bp to 3.50% and reiterated that it will “follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.” The ECB also slashed the rates on the main refinancing operations (MRO) and marginal lending facility (MLF) by 60bps to 3.65% and 3.90%, respectively. The aim was to improve liquidity condition and steer short-term money market rates closer to the DFR.
French Prime Minister Michel Barnier is due to present the 2025 budget today. The budget is expected to include €60 billion in spending cuts and tax hikes to rein-in the ballooning fiscal deficit. Barnier also confirmed plans to delay by two years the timing to bring the budget deficit, which is expected to hit 6% of GDP this year, within the 3% of GDP EU Stability and Growth Pact limit.
French-German 10-year government bond yield spreads tightened a bit lately but are just 5 bp lower than the June high of 82 bp. More 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 down near multi-month lows.
GBP/USD is range-bound near recent lows, while EUR/GBP has retraced most of its recent gains. U.K. housing market activity continues to improve and supports the case for a gradual Bank of England (BOE) easing cycle. The September RICS residential market survey headline measure showed the proportion of surveyors reporting a rise in prices minus those reporting a fall rose to a two-year high at 11% vs. a reading of zero in August. Overall, the relative monetary policy trend between the ECB and BOE still favors a lower EUR/GBP. The BOE Q3 Credit Conditions Survey is up next (9:30am London).
NOK ignored lower than expected inflation in Norway. In September, headline CPI rose four ticks to 3% y/y (consensus: 3.2%) while underlying CPI fell one tick to 3.1% y/y (consensus: 3.2%, Norges Bank forecast: 3.3%). The risk is the Norges Bank eases sooner than they project because mainland economic growth is sluggish and underlying inflation is easing rapidly. The Norges Bank has a first full 25 bp cut pencilled-in for Q2 2025 while the market is pricing in 100 bp of total easing over the next 12 months.
USD/JPY is consolidating near recent highs around 149.00. Japan PPI unexpectedly rose two ticks to 2.8% y/y in September (consensus: 2.3%) but the Tankan all industries input prices index points to easing PPI inflation ahead. Bottom line: the Bank of Japan loose for longer policy stance is intact and remains a drag for JPY.
AUD and NZD have recovered some of their recent losses in line with the overnight bounce in Chinese stocks. Market participants anticipate China’s Ministry of Finance to offer more details on their fiscal stimulus pledge at a scheduled briefing Saturday. A fiscal package that falls short of 2 trillion yuan (1.6% of GDP) and/or not directed at boosting consumer spending would disappoint and trigger a correction in the commodity complex.