US
USD recovered strongly against all major currencies after hitting a ten-week low yesterday. Gold and crude oil prices got a modest boost after the US ratchet-up pressure on Venezuela. President Donald Trump ordered a total blockade of all sanctioned oil tankers going into and leaving Venezuela. Global equity and bond markets are stable.
USD bounce looks more like a technical relief rally. Fundamentals still favor a lower USD. The FOMC has room to deliver the 50bps of easing priced-in by Fed funds futures over the next twelve months because US labor demand is weak and upside risks to inflation are not martializing. We anticipate USD to edge down to the lower end of its June-December range as it converges towards the level implied by US-G6 rate differentials.
US November non-farm payrolls (NFP) underscores softening labor demand. NFP increased +64k in November (consensus: +50k) after falling -105k in October due to the government shutdown. Disappointingly, the non-cyclical health care and social assistance sector contributed to most of the job gains in November.
Excluding the aforementioned sector and the government, the economy added just 12.4k jobs on average in September, October, and November. The labor demand backdrop is even worse if Fed Chair Jay Powell is right that NFP gains since April may be overstated by about 60k.
Slower wage growth indicates growing labor market slack. Average hourly earnings rose just 0.1% m/m in November (consensus: 0.3%) or 3.5% y/y, the lowest annual rate since May 2021. In parallel, the unemployment rate unexpectedly ticked-up 0.1pts to 4.6% (consensus: 4.5%), the highest since September 2021 and above the FOMC 2025 projection of 4.5%. However, more people entered the labor force as the participation rate increased 0.1pts to 62.5%.
US retail sales growth overshot expectations in October. The retail sales control group used for GDP calculation jumped 0.8% m/m, twice the expected 0.4%, after falling -0.1% in September. However, the slowdown in labor demand points to looming pressure on household incomes and future consumption.
US PMI slipped in December but remains indicative of resilient economic activity. The composite PMI fell more than expected to a six-month low at 53.0 (consensus: 53.9) vs. 54.2 in November due to weaker momentum in the services and manufacturing sectors. More importantly, the December PMIs show the US growth edge over peers is narrowing, offering little support for USD.
No policy relevant US data today. A speech by Fed Governor Christopher Waller on the economic outlook takes the spotlight (1:15pm London, 8:15am New York). Waller’s shot for the Fed chair job improved this week, alongside that of Kevin Warsh, as doubts emerged over frontrunner Kevin Hassett. President Donald Trump is scheduled to interview Waller today.
EUROZONE
EUR/USD plunged to near 1.1700 after testing a multi-month high at 1.1800 yesterday. Germany’s IFO business expectations index dips in December (actual: 89.7, consensus: 90.5, prior: 90.5) but remains indicative of an ongoing recovery in Eurozone economic activity. Bottom line: ECB is in a good place to keep rates on hold for some time while the Fed has more easing in the pipeline. As such, relative ECB/Fed policy stance underpins the uptrend in EUR/USD.
UK
GBP is underperforming across the board. UK inflation cooled more than anticipated in November, leaving room for the Bank of England (BOE) to dial up easing. Headline CPI fell to an eight-month low at 3.2% y/y (consensus: 3.6%, BOE projection: 3.4%) vs. 3.5% in October, core CPI dipped 0.2pts to near a one year low at 3.2% y/y (consensus: 3.4%), and the policy-relevant services CPI dropped 0.1pts to near a one year low at 4.4% y/y (consensus & BOE projection: 4.5%).
The swaps market raised odds for a cumulative 75bps of BOE rate cuts in the next twelve months to 90% from 80%. The BOE is widely expected to trim the policy 25bps to 3.75% tomorrow. We expect GBP to continue underperforming on the crosses.
THAILAND
Bank of Thailand delivered on expectations and cut the policy rate 25bps to 1.25% due to ongoing growth and deflation concerns. THB is the second-best performing currency in Asia year-to-date; MYR is at the top. Thailand’s relatively high positive real rates and favorable balance of payments backdrop continue to underpin the uptrend in THB.
INDONESIA
As was widely expected, Bank Indonesia (BI) kept the policy rate unchanged at 4.75% for a third consecutive meeting. BI reiterated it still sees room for further interest rate reductions but is currently more focused on strengthening the effectiveness of monetary policy transmission that has been pursued so far (150bps of easing since September 2024) and maintaining the stability of the rupiah.
