US
USD and short-term Treasury yields extended yesterday’s slide as the tech rout deepened. Nasdaq futures are down -2.4%, following yesterday’s -1.4% decline. Earning results from Alphabet, Amazon, and Intel fueled doubts about returns on the AI boom. In parallel, concerns of an AI investment slowdown is calling into question the US growth advantage and dampening Fed rate hike expectations.
The tech sell-off can keep USD on defensive in the near term, with the USD index (DXY) likely to test support at 101.00. Still, strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD.
US Q3 real GDP growth was rock solid. Real GDP growth quickened more than expected to 3.4% SAAR (consensus: 3.2%) vs. 2.2% in Q2 driven by strong domestic demand. Private investment added 3.27ppt to growth, powered by AI-related spending, while consumer and government spending contributed +2.52ppt and +0.9ppt, respectively. Surging imports drove -3.32ppt drag from net trade.
US September PCE confirms that progress on inflation has stalled. In line with consensus, headline PCE rose 0.5% m/m vs. +0.3% in August to be up 3.6% y/y vs. 3.4% in August. Core PCE was up 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.0% in August. The less noisy Dallas Fed trimmed mean PCE and the Cleveland median PCE inflation ticked up +0.1ppt to 2.3% y/y and 2.7% y/y, respectively.
The US Q3 Employment Cost Index (ECI) is today’s data highlight (12:30pm London, 8:30am New York). ECI wages & salaries - the Fed’s favorite wage data – was 3.2% y/y in Q2 consistent with the Fed’s 2% target given average annual labor productivity growth of 2.1%. That backs Fed Chair Kevin Warsh’s confidence that inflation compensation is going the right way.
JAPAN
USD/JPY is heavy around 157.30. Bank of Japan (BOJ) delivered a hawkish hold. As was widely expected, the BOJ paused tightening and kept rates at 1.25%. The vote was 8-1 with staunch hawk Takata Hajime supporting a 25bps hike. The BOJ stuck to its hawkish bias stressing it “will continue to raise the policy interest rate” while Governor Kazuo Ueda added that every meeting is live for a hike.
Importantly, for the first time since adopting the 2% target in 2013, the BOJ declared underlying CPI inflation “generally consistent” with its goal. That strengthens the case for additional rate hikes to ensure inflation remains anchored there.
Finally, the BOJ made minor growth revisions but raised its inflation forecasts for 2027. The BOJ also continues to see inflation risks “skewed to the upside” and the risk to the economic outlook as “generally balanced.”
There was no material shift to BOJ rate expectations. The swaps curve still price in 80% odds of a 25bps BOJ rate hike to 1.50% at the December 18 meeting and nearly 75bps of tightening in the next twelve months.
As such, USD/JPY will likely continue to trade within a 155.00-160.00 range in the near term. But a deeper rout in the AI trade, can fuel more safe haven demand for JPY and drive the cross below 155.00.
EUROZONE
EUR/USD recovered above 1.1200 after hitting a 17-month low at 1.1105 following yesterday’s ECB policy decision. The ECB paused and tempered tightening expectations. The ECB kept rates on hold at 2.50% as was widely expected but pushed back against the nearly 75bps of tightening implied by markets over the next twelve months.
The ECB statement highlighted that “underlying inflation has remained broadly stable so far and wages do not show a material response at this stage…Financing conditions have tightened since the Governing Council’s last meeting, which is likely to weigh on inflation and growth.”
Nevertheless, resilient Eurozone economic activity and inflation projected to remain above target for an extended period keep a December rate hike to 2.75% firmly in play (86% priced in). Indeed, real GDP rose 0.4% q/q in Q3 vs. 0.6% in Q2, double the consensus forecast, as growth in Spain and Germany offset France’s contraction. The result leaves 2026 growth tracking above the ECB’s 0.9% projection.
Bottom line: limited policy divergence between the ECB and Fed offers EUR/USD support. However, France’s ongoing fiscal troubles can drive EUR/USD down to 1.1000.
On a side note, ECB President Christine Lagarde announced yesterday she will step down on February 7, nearly nine months before her term expires. The announcement is not surprising and follows months of speculation about an early exit.
EU leaders will meet on November 26-27 to discuss who will take over the ECB’s top job. Spain’s Pablo Hernandez de Cos and the Netherlands’ Klaas Knot are the reported frontrunners to succeed her. Knot is the more hawkish candidate, while Hernandez de Cos is a pragmatic centrist with a dovish tilt.
Lagarde’s seat is one of three top ECB jobs to fill. Executive Board member Isabel Schnabel leaves January 3, and chief economist Philipe Lane’s term ends May 31. EU leaders are likely to seek a package deal covering all three appointments by the December 17-18 summit.
The ECB leadership change is unlikely to alter the near-term policy outlook and has no material implication on EUR. The ECB Governing Council is not a one-person show; 21 members have voting rights, including six Executive Board members and 15 governors of the national central banks.
