US
The risk rally is gaining traction fueled largely by plunging crude oil prices. Brent crude oil prices dropped under $90 a barrel, the lowest since end August, on a fading geopolitical risk premium. USD unwounded all its gains following Friday’s strong October non-farm payrolls report before hawkish comments by Fed Governor Christopher Waller sparked a modest rebound.
Fed Waller raised the stakes for today’s US October CPI report (1:30pm London, 8:30am New York). Waller said he leans towards supporting a 25bps hike in December even if the monthly rate of inflation improves in October, adding that a 50bps hike should be considered if core CPI inflation is “around 0.3% or even higher.”
Fed funds futures now fully price in a 25bps hike on December 9, up from 83% odds before Waller’s remarks. Of note, the October CPI print is the last one before the December 8-9 FOMC meeting. Annual rates will not be published because last year’s government shutdown left October 2025 data unavailable.
The focus instead will be on inflation momentum and real average hourly earnings. Headline CPI is expected at 0.3% m/m vs. 0.6% in September as gasoline prices eased in October while the rise in core CPI is seen more muted at 0.2% m/m vs. 0.3% in September.
A softer monthly CPI increase may not be enough to materially temper Fed funds rate hike bets if three-and six-month annualized inflation continue to exceed 2%. Moreover, with average hourly earnings up 0.4% m/m in October, the expected 0.3% m/m rise in headline CPI would imply a modest gain in real earnings, supporting consumer spending activity.
NORWAY
NOK is underperforming on falling crude oil prices. Norway’s soft October CPI backs the Norges Bank decision to pause tightening. Headline CPI rose to 3.6% y/y vs. 3.4% in September, below consensus of 3.7% and the bank’s 3.8% forecast. Underlying CPI fell to 2.7% y/y vs. 3.0% in September, in line with both forecasts.
At its November 4 meeting, the Norges Bank kept the policy rate at 4.50% as was widely expected and left the door open to more hikes “if warranted by the inflation outlook.” Norway’s soft October inflation data should keep rate hike expectations in check.
The swaps curve is pricing in small odds (36%) of a 25bps cut in the next twelve months. That looks premature as inflation has been above target for several years. Regardless, Norway’s attractive carry remains supportive of NOK.
EUROZONE
EUR/USD rallied briefly to an intra-day high around 1.1250 on ECB Chief Economist Philip Lane’s hawkish comments. Lane said “if the information set we have in December is exactly the same as the information set today, then I think it would be prudent indeed to hike.” Fed Waller’s tougher stance ultimately curbed the EUR/USD bounce.
The swaps curve implies 90% odds of a 25bps ECB rate hike to 2.75% on December 17. Limited policy divergence between the ECB and Fed offers EUR/USD support. However, France’s ongoing fiscal troubles can still drive EUR/USD down to 1.1000.
