Take It Easy

November 15, 2024
6 min read

Take It Easy

  • Fed Chair Powell in no rush to lower rates. Fed funds futures curve adjust higher.
  • U.K. real GDP growth cooled more than expected in Q3, but domestic demand was surprisingly strong. BOE gradual easing cycle intact.
  • Japan’s Q3 real GDP growth matched consensus, and China economic activity data for October was mixed.

USD retreated from a one-year high. While a technical pullback is overdue, the fundamental USD uptrend is intact supported in part by a more cautious Fed easing cycle. Fed Chair Jay Powell hinted yesterday the FOMC may hit the snooze button at the December 18 meeting.

Powell highlighted “the economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” The money market reaction to Powell’s remark was swift as odds of a 25bps December Fed funds rate fell to 56% from around 80%.

Moreover, Powell acknowledged that the October U.S. inflation data “was slightly more than an upward bump than we had expected.” Indeed, underlying CPI inflation remains stubbornly high above the Fed’s 2% target and PPI inflation points to upside risk to prices. PPI services ex-trade, transportation, and warehousing which feeds into the core PCE calculations, increased 0.2pts to 4.6% y/y in October, the highest since June.

The U.S. October retail sales print is up next (1:30pm London). Retail sales is forecast to rise 0.3% m/m vs. 0.4% in September. More importantly, the retail sales control group used for GDP calculations, is projected to increase 0.3% m/m vs. 0.7% in September. Overall, consumer spending is supported by positive real wage growth, healthy labor market and strong household balance sheet. October export/import prices, business inventories and industrial production are also reported today. Fed speakers include: Goolsbee, Collins, Williams, and Barking.

EUR/GBP recovered above 0.8340. U.K. growth momentum cooled more than expected in Q3. Real GDP rose 0.1% q/q vs. 0.5% in Q2. Consensus and the Bank of England (BOE) had penciled-in a 0.2% q/q increase. However, U.K. domestic demand was surprisingly strong and supports the case for a gradual BOE easing cycle.

U.K. household spending rose 0.5% q/q (consensus: 0.2%) and added 0.28pts to Q3 growth. The largest contributions to consumer spending growth were from higher spending on housing, miscellaneous, and clothing and footwear. Gross fixed capital formation surged 1.1% q/q (consensus: 0%) driven by a 1.2% q/q pick-up in business investment. Elsewhere, net trade added 0.46pts to growth largely because of a slump in imports and gross capital formation subtracted -0.74pts to growth due to the acquisitions less disposals of non-monetary gold.

Bottom line: relative monetary policy trend between the ECB and BOE still favors a lower EUR/GBP. In fact, the ECB Account of the October 16-17 meeting suggests the bar is low for the ECB to crank up easing. The Account emphasized that the risks to Eurozone economic growth “remained tilted to the downside” and “the disinflationary process was well on track.”

USD/JPY dropped back under 156.00 on broad USD correction. Japan’s Q3 real GDP growth matched consensus rising 0.2% q/q vs. 0.5% in Q2. Private consumption was the biggest growth tailwind rising 0.9% q/q, the most since Q2 2022, underpinned in part by a one-off cut in income and residential taxes. Typhoons and an earthquake warning may have also boosted demand for emergency food and other supplies. Net exports was the biggest drag shaving off -0.4% to Q3 growth. On an annualized quarterly basis, Japan real GDP was up 0.9% in Q3 and tracking above the Bank of Japan’s (BOJ) 0.6% projection for fiscal 2024.

Nonetheless, we doubt the BOJ will be in a rush to remove policy accommodation which will continue to weigh on JPY. Japan’s disinflationary trend is intact, and the growth outlook is unimpressive. Markets continue to price-in about 55% probability of a 25bps BOJ rate hike at the December 19 meeting.

USD/CNH is trading near its highest level since end-July and China’s benchmark CSI 300 Index is a little lower. China economic activity data for October was mixed. Retail sales growth overshot expectations (actual: 4.8% y/y, consensus: 3.8%, prior: 3.2%) but industrial production growth was softer than anticipated (actual: 5.3% y/y, consensus: 5.6%, prior: 5.4%). Meanwhile, the property slump remains an ongoing drag on consumer spending. New home prices fell -0.51% m/m vs. -0.71% in September and used home prices dropped -0.48% m/m vs. -0.93% in September.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2