JOLTS to Shape Fed Rate Outlook

• USD trading on the defensive ahead of today’s US October JOLTS data.

• Political paralysis in France and Germany means the ECB will have to do the heavy lifting in supporting the Eurozone economy. EUR can edge lower.

• Switzerland November CPI prints in line with consensus. SNB has plenty of room to dial-up easing.

USD retraced some of yesterday gains. Comments by Fed Governor Christopher Waller raised odds of a Fed funds rate cut at the December 18 meeting to 75% from 65%. In a speech titled “Cut or Skip?” Waller noted that “at present I lean toward supporting a cut to the policy rate at our December meeting. But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”

Waller added that “there is a ways to go” in bringing down the policy rate, pointing out that the September FOMC 2025 median fed funds rate projection is 3.4% “which is about 100 basis points lower than it is today.” New York Fed President John Williams echoed the remarks emphasizing “I expect it will be appropriate to continue to move to a more neutral policy setting over time.”

In our view, the more favorable US economic outlook relative to other major economies continue to support the fundamental USD uptrend. For instance, the manufacturing sector contraction deepened in the Eurozone while it’s easing in the US. The ISM manufacturing index improved more than anticipated in November to a five-month high at 48.4 (consensus: 47.5) vs. 46.5 in October. The sub-indexes showed price pressures moderating, demand growing, and the downturn in employment lessening.

The US October JOLTS data is today’s data highlight (3:00pm London). Job openings in October are expected at 7,519 mln vs. 7,443 mln in September consistent with a labor market soft-landing. The ratio of vacancies to unemployed is at 1.1 which is historically pretty strong. That ratio has been above 1 only three times since 1960.

Still, the Job opening rate fell to 4.5% in September matching the December 2020 low. Fed research showed that the unemployment rate tends to rise faster when the job opening rate falls under 4.5%. Moreover, the layoff rate ticked up to an 18-month high at 1.2% and the quit rate fell to 1.9%, lowest rate since June 2020, indicative of worsening workers confidence in finding a new job.

On a positive note, the hiring rate rose to a four-month high at 3.5% in September. Also, the Conference Board 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.

Fed speakers today include: San Francisco Fed President Mary Daly (2024 voter), Fed Governor Adriana Kugler, and Chicago Fed President Austan Goolsbee (2025 voter).

EUR/USD is holding on to most of yesterday’s loss triggered by French political uncertainty. The French government is on the verge of collapse. French Prime Minister Michel Barnier invoked article 49.3 of the constitution to adopt the budget bill without a parliamentary vote. In response, nationalist leader Marine Le Pen said her party plans to vote for a no-confidence motion which could be held as early as tomorrow.

The political paralysis in France will make it hard to get the fiscal house in order. The European Commission has already launched excessive deficit procedures against France for running budget deficits larger than the 3% of GDP threshold. Similarly, political paralysis in Germany is preventing any fiscal response to soggy German economic growth. The implication is the ECB will have to do the heavy lifting in supporting the Eurozone economy which can further undermine EUR.

Encouragingly, the higher risk premium on French bonds yields is not spreading to the rest of the Eurozone. The 10-year yield premium for Italy, Spain, and Portugal over safer German peers are contained near recent lows.

CHF is underperforming most major currencies. Switzerland’s November CPI printed in line with consensus. Headline CPI inflation rose to 0.7% y/y vs. 0.6% in October, and core CPI inflation quickened to 0.9% y/y vs. 0.8% in October. Swiss inflation is tracking below the bank’s Q4 forecast of 1.0%, leaving plenty of room for the Swiss National Bank’s (SNB) to keep slashing the policy rate. Indeed, SNB President Schlegel recently warned that negative interest rates cannot be ruled out. The market is currently pricing-in 53% probability of a 50bps cut to 0.50% at the December 12 meeting.

EUR/GBP is trading heavy under 0.8300. The UK BRC same store retail sales data was poor in November but that’s probably because shoppers may have delayed purchases to benefit from Black Friday deals. The value of same store sales unexpectedly plunged -3.4%y/y in November (consensus: 0.6%), after rising 0.3% in October. Black Friday deals which will be reflected in the December figures. The bigger picture shows UK consumption supported by continued growth in household real incomes, and a waning drag from higher interest rates. Bottom line: relative monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.

USD/CNH rallied briefly above 7.3000 to the highest level since November 2023. The People’s Bank of China governor reaffirmed plans to “adhere to an accommodative monetary policy stance and orientation” in 2025. Looser monetary policy is not the long-term solution China needs to address its huge debt overhang and rising deflation risks. To escape the debt-deflation loop, Chinese policymakers need to ramp-up fiscal measures to boost consumption growth. In the meantime, it’s hard to get excited about what is likely to be a short-term pickup in the economy following the unimpressive stimulus measures announced so far. The Chinese government’s closed-door annual Central Economic Work Conference, where GDP growth target and stimulus plans for 2025 are set, will be held December 11-12.

AUD/USD recovered on USD weakness. Australia’s already released GDP input data point to decent underlying Australian economic growth in Q3 (tomorrow, 00:30am London). Real GDP is expected to rise 0.5% q/q vs. 0.2% in Q2 driven by household consumption, public sector demand and business investment. The contribution to GDP growth from net exports is projected to be small at 0.1pts. Inventory is expected to be the biggest drag to growth as it fell -0.9% q/q in Q3 vs. an upwardly revised 0.5% in Q2 (previous: 0.1%). Bottom line: the RBA is in no rush to start easing which offers AUD support on the crosses.

NZD/USD firmed up slightly to 0.5890. New Zealand’s terms of trade index overshot expectations rising 2.4% q/q in Q3 (consensus: 1.3%, prior: 2.1%) to the highest level since Q4 2022. Firmer whole milk powder prices point to a further improvement in the terms of trade. A higher terms of trade has a positive net wealth effect on the economy and raises the fundamental value of NZD. Nonetheless, the RBNZ dovish stance means NZD needs to keep trading at a deep discount to fundamental equilibrium (BBH-PPP estimates NZD/USD equilibrium at around 0.6600) to attract foreign investments and recycle the country’s large current account deficit (-6.7% of GDP in Q2).