New Boss in Charge

September 27, 2024

New Boss in Charge

  • JPY surge as Shigeru Ishiba is set to become Japan’s new prime minister. Investors were betting on BOJ vocal critic Sanae Takaichi to win.
  • France and Spain inflation slows sharply. EUR drops on expectations ECB dials up easing.
  • The US August PCE report is the data highlight. Inflation is expected to ease, and consumer spending should remain solid.

USD started the European trading session on a firm tone but dropped abruptly to the lower end of its recent range on JPY outperformance. Beyond this price action, the risk-on market theme is intact underpinned by greater stimulus measures out of China and market pricing an aggressive Fed easing cycle while the US economy is strong. This encouraging risk backdrop is a drag on USD mostly against growth-sensitive currencies.

Fed Governor Lisa Cook echoed the dovish view made the previous day by Fed Governor Adriana Kugler. Cook pointed out “upside risks to inflation have diminished, and the downside risks to employment have increased. In response to these changing conditions, I whole heartedly supported the decision at last week's Federal Open Market Committee (FOMC) meeting to lower our policy interest rate by 1/2 percentage point.”

The US August Personal Income and Outlays report is the focus today (1:30pm London). Headline PCE is expected to rise 0.1% m/m and print at 2.3% y/y vs. 2.5% in July. Core PCE is projected to rise 0.2% m/m and print at 2.7% y/y vs. 2.6% in July. This is roughly in line with the already released August CPI data and the Cleveland Fed’s inflation Nowcast model. Overall, the progress on inflation since April is encouraging and the FOMC still projects PCE inflation to return sustainably to 2% in 2026.

Meanwhile, personal income and spending are expected to remain indicative of solid domestic demand activity. Personal income is projected to rise 0.4% m/m vs. 0.3% in July, personal spending is expected to increase 0.3% m/m vs. 0.5% in July, and real personal spending is forecast to pick-up 0.1% m/m vs. 0.4% in July. Risks are skewed to the upside as the control group retail sales grew 0.3% m/m in August after rising 0.4% the previous month.

USD/JPY plunged by over 2% after Japan’s ruling Liberal Democratic Party (LDP) voted for Shigeru Ishiba to be its new leader and effectively the new prime minister. JPY surged on the news as investors unwound bets that Sanae Takaichi would win the leadership race. Takaichi argued earlier this week that “it’s stupid to raise rates now” dragging JPY lower against most major currencies on expectations she would encourage the BOJ to keep policy looser for longer.

General elections aren’t due until 2025, but it’s possible Prime Minister Ishiba calls early elections to solidify support. Regardless, the BOJ’s more cautious policy tightening guidance curtails JPY upside traction and supports the recovery in Japanese equities. The swaps market is pricing in 25 bp of total tightening over the next 12 months.

The Tokyo September CPI print matched consensus and does not move the dial on BOJ policy rate expectations. Both headline and core ex-fresh food CPI fell four ticks to 2.2% y/y and 2.0% y/y, respectively, while core ex-fresh food and energy remained at 1.6% y/y for a second consecutive month.

EUR/USD sank after France and Spain report softer preliminary September CPI prints. France’s EU harmonized CPI fell -1.2% m/m (consensus: -0.8%, prior: 0.6%) and eased to 1.5% y/y (consensus: 1.9%) vs. 2.2% in August. Spain’s EU harmonized CPI fell -0.1% m/m (consensus: 0%, prior: 0%) and eased to 1.7% y/y (consensus: 1.9%) vs. 2.7% in August. The swaps market is now more than fully pricing-in 50 bp of ECB rate cuts by December. The risk is the ECB dials-up easing which will weigh on EUR. Yesterday, ECB Executive Board member Isabel Schnabel warned that the “Euro area economy is stagnating while disinflation remains on track.” Schnabel noted bank lending remains muted and surveys signal a slowing economy.

ECB publishes its August consumer inflation expectations survey today (9:00am London). Both 1- and 3-year expectations are anticipated to fall one tick to 2.7% and 2.3%, respectively. Easing inflation expectations leaves plenty of room for the ECB to keep cutting interest rates.

French-German 10-year government bond yield spreads widened to the highest level since end-June. Investors doubt the fragile minority government in France can deal with the country’s poor fiscal situation. French Finance Minister Antoine Armand plans to present a budget that includes tax hikes and spending cuts the week of October 9.

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.

Chinese stocks and iron ore prices continue to edge higher as the government’s recent stimulus pledge boosts market sentiment. The People’s Bank of China (PBOC) went ahead today with the interest rate cuts announced earlier this week. The policy-relevant 7-day reverse repurchase rate was cut 20 bp to 1.50% and banks’ reserve requirement ratios were lowered 50 bp. The PBOC also slashed the 14-day reverse repurchase rate 20 bp to 1.65%, moving it closer to the 7-day repo rate.

CAD will partly be driven today by Canada’s July GDP report (1:30pm London). Statistics Canada estimates real GDP to be essentially unchanged for a second consecutive month in July. Consensus is looking for 0.1% growth. Overall, soggy economic activity, slower inflation, and growing slack in the labor market argue for a 50 bp Bank of Canada (BOC) policy rate cut at the next October 23 meeting. The swaps market pricing 55% odds of such a cut.

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