It's All Politics
- The French government faces a vote of no confidence today. France’s political crisis is not morphing into a financial market crisis.
- The fallout from South Korea’s brief imposition of martial law continues to unfold. Bank of Korea boosts liquidity to stabilize markets.
- The US labor market is in good shape. The focus today is on the November ISM services index and Fed Chair Jay Powell’s speech.
Please note there will be no London edition of the BBH CurrencyView daily report tomorrow and Friday. Publication will resume Monday December 9.
USD is holding ground. Fed funds futures continue to imply over 70% probability of a 25bps rate cut at the December 18 meeting. In our view, the more favorable US economic outlook relative to other major economies continue to support the fundamental USD uptrend.
The US JOLTS October data remained consistent with a healthy labor market and argues for the Fed to pause the easing cycle in December. Job openings in October increased more than expected to 7744k (consensus: 7519k) vs. 7372k in September. The details were good. The Job opening rate rose 0.2pts to 4.6% which should keep the unemployment rate quite low in historical terms. The layoff rate dipped 0.1pts to 1.0% suggesting there is no layoff spiral underway. The quit rate increased 0.2pts to 2.1%, indicative of improving workers confidence in finding a new job. The hiring rate dropped 0.2pts to 3.3% but that’s in line with labor demand coming into better balance with supply.
There was no new policy guidance from Fed officials overnight. Fed Governor Adriana Kugler views the US economy “as being in a good position” and pointed out that the easing cycle “is not on a preset course”. San Francisco Fed President Mary Daly (voter) was equally cautious about the pace of Fed funds rate cuts noting “I think we can take our time and adjust as the economy gives us more information.” Meanwhile, Chicago Fed President Austan Goolsbee (2025 voter) reiterated he expected interest rates to “come down a fair amount from where they are now” over the next 12 month.
Fed Chair Jay Powell takes the spotlight today (6:40pm London). In his last November 14 speech, Powell hinted the FOMC may hit the snooze button at the December meeting. Powell highlighted “the economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
Today’s US November ISM services index will help shape the near-term Fed rate outlook (3:00pm London). Headline is projected at 57.7 vs. 56.0 in October. The regional Fed ISM services print point to upside risk. Of note, the US S&P Global services PMI increased to a 31-month high at 57.0 vs. 55.0 in October. The December Fed Beige Book is due later today (7:00pm London).
KRW plunged yesterday after South Korean President Yoon Suk Yeol declared martial law to “eliminate anti-state forces as quickly as possible and normalise the country”. Yeol ultimately had to abandon the martial law order following heavy pressure from the National Assembly. Yeol now faces calls to step down or face impeachment.
The sell-off in KRW and the KOSPI index steadied after the Bank of Korea took active market stabilization measures by offering for a limited time an unlimited supply of liquidity. The fallout from South Korea’s brief imposition of martial law will continue to weigh on Korean financial markets and KRW.
However, South Korea’s large current account surplus (4% of GDP) cushions the decline in KRW as the country does not depend on foreign savings to finance domestic investments. Additionally, South Korea has massive foreign exchange reserves to support KRW. FX reserves totals over $410bn (about 20% of GDP) and dwarfs the daily turnover in KRW of about $142bn.
EUR/USD is range-bound around 1.0510. The political paralysis in France and Germany means the ECB will have to do the heavy lifting to support the Eurozone economy. As such, EUR can drift lower against most major currencies.
The French government is on the verge of collapse. Left-wing and right-wing groups plan to vote for a no-confidence motion today (shortly after 3:00pm London time).
What happens if the French government falls? According to POLITICO, “the French constitution provides for at least two stopgap solutions. The first allows the government to put forward a so-called “special law” allowing the state to effectively carry over the previous year's budget for a few months. The second option is more complicated, but would see the parliamentary debate continue until Dec. 21 and then allow the government to adopt the budget via a government order. Barnier would still expose himself to a no-confidence vote, which he'd most likely lose, but the budget would be adopted.”
Overall, France’s political drama faces additional twists and turns. New parliamentary elections cannot be held before June 2025 and President Emmanuel Macron pledged to stay in place “until May 2027” when his term end.
Encouragingly, France’s political crisis is not morphing into a financial market crisis. While French-German 10-year government bond yield spreads widened to near a 12-year high recently, French bond yields are drifting lower in absolute terms. Moreover, the 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.
In Germany, fiscal support to the weak economy will likely take time to materialize. Parliamentary election will be held February 23, but the formation of a new coalition government could take weeks or months. In the meantime, calls are growing for lawmakers to relax the so-called debt brake, which restricts annual structural deficits to 0.35% of GDP in any fiscal year. Bundesbank president Joachim Nagel urged more fiscal space warning that the economy faced a complicated and weak outlook.
AUD is underperforming on sluggish Australian economic activity. Real GDP growth undershot expectations rising 0.3% q/q in Q3 (consensus: 0.5%) vs. 0.2% in Q2. Government spending and public investment contributed the most to growth (+0.3pts each) while inventory destocking was the biggest drag (-0.4pts). Net trade added 0.1pts to GDP growth and household spending was flat. RBA cash rate futures brought forward the timing of a first 25bps rate cut to April from May and imply greater odds for 75bps of total easing in 2025.
National Bank of Poland is widely expected to keep rates steady at 5.75% today (around 1:30pm London). Governor Glapinski will hold his post-meeting press conference Thursday. Minutes from the November 6 meeting will be published Friday. At that meeting, the bank kept rates on hold and Governor Glapinski stressed that rate cut discussions are unlikely before March 2025. The market is pricing-in almost 125bps of easing over next twelve months.