PBOC and Riksbank Continue the Global Easing Parade

September 25, 2024

Win Thin

The market continues to overestimate Fed easing; financial conditions continue to loosen; Conference Board September consumer confidence fell sharply; Brazil reports mid-September IPCA inflation
Widening U.K.-U.S. bond yield spreads are supporting sterling as BOE officials remain cautious; Riksbank cut rates 25 bp to 3.25% but its expected policy rath path was revised lower; CNB is expected to cut rates 25 bp to 4.25%
Australia reported soft August CPI data; PBOC cut its key 1-year MLF rate 30 bp to 2.0%, as expected

The dollar is getting some limited traction. DXY is trading flat near 100.487 as support near 100 holds. The risk on impulses from China’s package of stimulus and market support measures continued after another PBOC rate cut today (see below) and so the yen and Swiss franc continue to underperform. USD/JPY is trading higher near 144.15 while EUR/CHF is trading higher near .9500. The euro is trading flat near $1.1185 after meeting resistance at $1.12, while sterling is trading lower near $1.3370 after making a new high for this move near $1.3430 earlier. Despite the Fed’s efforts to push back in the Dot Plots and Powell’s press conference, market easing expectations remain too dovish. Yet the U.S. data remain firm and so we continue to believe that the market is once again overreacting and dead wrong in pricing in 200 bp of further easing over the next 12 months. Yet we cannot stand in the way of this move and so until market pricing changes, the dollar is likely to remain vulnerable. The divergence story favoring the U.S. was supported by today’s dovish 25 bp cut from the Riksbank (see below).

AMERICAS

The market continues to overestimate Fed easing. The Fed has tried its best to rein in dovish expectations but the market is still pricing in 75 bp of easing by year-end and nearly 200 bp total easing over the next 12 months. Some Fed officials have pushed back but to no avail so far. Bowman is one of them, which is no surprise as she was the lone dissent this month in favor of a smaller 25 bp cut. Yesterday, she said “Turning to the risks to achieving our dual mandate, I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment.” She added that “In my view, beginning the rate-cutting cycle with a quarter percentage point move would have better reinforced the strength in economic conditions, while also confidently recognizing progress toward our goals.” We concur. Kugler speaks today.

Financial conditions continue to loosen. The Chicago Fed’s measure for last week will be reported today. For the previous week, conditions were the loosest since November 2021, months before the Fed started hiking rates. With U.S. yields down, equity markets up, and the dollar down, condition are likely to continue loosening. The Fed is probably quite content to have the market doing most of the heavy lifting, as loose financial conditions should help the economy avoid a hard landing.

Conference Board September consumer confidence fell sharply. Headline came in at 98.7 vs. 104.0 expected and a revised 105.6 (was 103.3) in August. This was the lowest since June but remains roughly within the same 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. That said, positive real wage growth, rising house prices, and encouraging labor demand suggest that household spending will remain an important tailwind to GDP growth. University of Michigan reports final September consumer sentiment Friday.

Brazil reports mid-September IPCA inflation. Headline is expected at 4.29% y/y vs. 4.35% in mid-August. If so, it would be the second straight month of deceleration to the lowest since mid-June. The central bank releases its quarterly inflation report tomorrow and will contain updated forecasts that are likely to support its hawkish stance. Next COPOM meeting is November 6 and the market is pricing in a 50 bp hike to 11.25%. Looking ahead, the market is pricing in 200 bp of total tightening over the next 12 months that would see the policy rate peak near 12.75%.

EUROPE/MIDDLE EAST/AFRICA

Widening U.K.-U.S. bond yield spreads are supporting the uptrend in cable as BOE officials remain cautious. MPC member Greene said “I believe the risks to activity are to the upside, which could suggest that the long-run neutral rate is higher and - all else equal - our stance of policy isn’t as restrictive as we had thought. Given this risk, I believe it is appropriate to take a gradual approach to removing restrictiveness.” Greene was one of four on the MPC who voted to hold rates in August. The BOE ultimately cut rates by 25 bp to 5.00% in a 5-4 split decision. Cable has pared back some of its overnight gains and is now trading near $1.3370 after trading as high as $1.3430 earlier, the highest since March 2022.

Riksbank cut rates 25 bp to 3.25%, as expected. The Riksbank warned the policy rate is expected to be cut at a faster pace than was previously communicated. Specifically, the Riksbank noted that “the forecast for the policy rate reflects that a cut of 0.5 percentage points at one of the coming meetings is possible. It also indicates that one or two further cuts may be made during the first half of 2025. Together, these changes imply a relatively large shift of monetary policy in a more expansionary direction.”

The Riksbank’s expected policy rath path was revised lower across the forecast horizon. As a result, the market is now pricing in a 50 bp cut November 7 followed by a 25 bp cut December 19. Looking ahead, the market is pricing in 175 bp of total easing over the next 12 months that would see the policy rate bottom near 1.50%, which is much lower than the Riksbank projects. Updated macro forecasts were also released. The Riksbank slashed its inflation projections for 2024 and 2025. Elsewhere, its GDP growth forecast was trimmed for 2024 but revised a little higher for 2025 and 2026.

Czech National Bank is expected to cut rates 25 bp to 4.25%. At the last meeting August 1, the bank voted unanimously to cut rates 25 bp to 4.50% after several 50 bp cuts. Governor Michl described it as a hawkish cut. While it is premature to expect CNB to pause the easing cycle since economic activity is weak, jumbo rate cuts are unlikely going forward as Michl warned that “the fight against inflation is not over.” Looking ahead, the market is pricing in 125 bp of total easing over the next 12 months.

ASIA

Australia reported soft August CPI data. Headline came in as expected at 2.7% y/y vs. 3.5% in July. This was the lowest since August 2021 and back within the 2-3% target range and reflects the government’s cost-of-living subsidy measures (electricity rebates and increases to rent assistance) and lower gas prices. CPI trimmed mean inflation eased to 3.4% y/y vs. 3.8% in July and has fallen three straight months to the lowest since February 2022. 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 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. However, we expect the RBA to cut the cash rate by year-end as underlying economic activity is weak and points to lower inflation pressures. The market sees over 70% odds of a 25 bp cut by December.

People’s Bank of China cut its key 1-year MLF rate 30 bp to 2.0%, as expected. As we wrote yesterday, this latest batch of stimulus measures may boost market sentiment temporarily but policymakers are still not addressing the root causes of the current slowdown. In order to escape the debt-deflation loop, Chinese policymakers first need to address the huge debt overhang before scaling up fiscal measures to boost consumption growth. China's consumption-to-GDP ratio is very low at round 30%, in large part due to high household savings.

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