Looser Policy Settings on the IKEA Menu

September 25, 2024

Looser Policy Settings on the IKEA Menu

  • Riksbank is widely expected to cut rates 25 bp to 3.25%. Fade the risk of a jumbo cut.
  • The PBOC slashed the medium-term lending facility by 30 bp to 2.00%.
  • RBA will overlook Australia’s cooling inflation in August.

 

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USD rebounded this morning after testing cyclical lows overnight and US 2-year Treasury yields slipped to a two-year low. Yesterday’s gloomy US September Conference Board consumer confidence report validated the Fed’s labor market concerns.

The headline consumer confidence index unexpectedly dropped in September to a three-month low at 98.7 near the bottom of the narrow range that’s held throughout the past two years. Worrisomely, consumers were more pessimistic about future labor market conditions as the labor index (jobs plentiful minus jobs hard to get) fell to 12.6, the lowest since March 2021.

Nonetheless, we continue to believe the market is overestimating the Fed’s capacity to ease. It will likely take strong US jobs data to trigger a material upward reassessment in Fed funds rate expectations. The next non-farm payrolls report is due October 4. Until then, the combination of a dovish Fed and a strong US economy offer financial market risk sentiment support and can further undermine USD mostly against growth-sensitive currencies.

There are no policy-relevant US economic data releases today. Fed Governor Adriana Kugler speaks on the economic outlook (9:00pm London).

SEK is trading in choppy range against most major currencies ahead of the Riksbank policy announcement (8:30am London). The Riksbank is widely expected to cut rates 25 bp to 3.25%. The swaps market implies a 24% probability of a 50 bp cut. The Riksbank can afford to keep moving in 25 bp increments because CPIF ex-energy inflation is running just above 2% y/y and there’s two remaining policy meetings scheduled the rest of the year November 7 and December 19.

In August, the Riksbank noted that “if the inflation outlook remains the same, the policy rate can be cut two or three more times this year.” Riksbank Governor Erik Thedeen’s recently stated he’s looking for “three additional cuts” by December. New sets of macro forecasts will be published in the upcoming September Monetary Policy Report.

EUR/USD is edging higher and trading near psychological resistance at 1.1200. ECB Governing Council member Klaas Knot said he expects interest rates to settle “somewhere in the 2% range”. This is roughly in line with the 1, 2 and 3-year swaps market pricing.

GBP/USD pared back some of its overnight gains after hitting its highest level since March 2022. Widening UK-US bond yield spreads is supporting the uptrend in GBP/USD. There are no policy-relevant UK economic data releases today. BOE policy maker Megan Greene gives a speech on consumption (9:00am London) and will likely signal that the threshold for an aggressive BOE easing cycle is high. Greene was one of 4 who voted to hold rates in August. The BOE ultimately cut rates by 25 bp to 5.00% in a 5-4 split decision.

AUD/USD rallied briefly above 0.6900 overnight supported by the recovery in Chinese equities and iron ore prices. In Australia, inflation cooled in line with consensus in August. The monthly headline CPI indicator fell to a three-year low at 2.7% y/y from 3.5% in July reflecting the government’s cost-of-living subsidy measures (electricity rebates and increases to rent assistance) and lower gas prices. The policy-relevant CPI trimmed mean indicator declined to a 2.5 year low at 3.4% y/y vs. 3.8% in July.

The softer Australia monthly inflation data is unlikely to convince the RBA to join the global easing cycle in the near-term. Yesterday, RBA Governor Michele Bullock downplayed the importance of the monthly CPI indicator noting it was “quite volatile” and doesn’t capture all items like the quarterly CPI data. Moreover, the RBA reiterated is does not see inflation returning “sustainably” to the 2-3% target range until 2026. We expect the RBA to cut the cash rate target by year-year because Australia underlying economic activity is weak and points to lower inflation pressures. RBA cash rate futures price-in over 70% odds of a 25 bp cut by December.

USD/CNH had a kneejerk downside move under key support at 7.0000 overnight and Chinese stocks continued to edge higher after yesterday’s PBOC pump-priming. Today, the PBOC slashed the medium-term lending facility by 30 bp to 2.00%, the biggest cut since the start of the series in 2016. The move is not a surprise and comes on the heels of yesterday’s unexpected 20 bp cut to the seven-day reverse repo rate to 1.50%. The seven-day repo rate is expected to be the PBOC’s new policy benchmark as it is closer to market rates.

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