When Doves Cry

October 17, 2024

When Doves Cry

  • Risk is the ECB delivers a dovish 25 bp cut today.
  • Australia reported a solid September labor force report. RBA rate cut bets fade and AUD outperforms.
  • China takes additional measures to support the struggling property market. Financial markets are unimpressed.

USD is consolidating near its highest level since August 2. USD faces additional upside potential underpinned by U.S. economic outperformance. There are plenty of U.S. economic data releases today, but the September retail sales report takes the spotlight (1:30pm London). The other data include October Philadelphia Fed business outlook index, weekly jobless claims, September industrial production and business inventories, October NAHB housing market index, and August TIC flows. An update of the Atlanta Fed GDPNow model for Q3 will also be published later today.

U.S. retail sales is forecast to rise 0.3% m/m after rising 0.1% in August driven by modest increase in auto sales. More importantly, the retail sales control group used for GDP calculations, and which excludes volatile items like car sales, is projected to rise 0.3% m/m vs. 0.3% in August. Overall, U.S. consumer spending is forecast to remain the main growth driver supported by positive real wage growth, healthy labor market and strong household balance sheet.

EUR/USD is trading heavy below the 200-day moving average (1.0873). The risk is the ECB delivers a dovish 25 bp cut today which can further weigh on EUR.

The ECB is widely expected to cut the key interest rate 25 bp to 3.25% (1:15pm London) and reiterate that it “is not pre-committing to a particular rate path.” However, ECB president Christine Lagarde will likely sound dovish during her post-meeting press conference (1:45pm London) because the Eurozone economy is stagnating, and inflation is undershooting the ECB’s 2% target. Market is pricing-in almost 175 bp of easing over the next twelve months that would see the policy rate bottom near 1.75%.

Financial markets are unimpressed with China’s latest measures to support the ailing property market. The Hang Seng Mainland Properties index is down over 2% while the broader index is flat.

China will boost the credit available to “white-list” real estate projects from 2.23 to 4 trillion yuan by year-end in an effort to complete unfinished projects. The "white list", launched January 26, is a mechanism whereby local authorities recommend to banks real estate projects eligible for financial support. Moreover, local government will be allowed to issue special bonds to finance the renovation of 1 million more homes in run-down downtown districts.

Investors are waiting for the details of China’s fiscal stimulus pledge which are anticipated to be unveiled later this month. In the meantime, Caixin reported that China may raise 6 trillion yuan (5% of GDP) from ultra-long special government bonds over three years to support economic activity. For reference, China’s 2008 fiscal bazooka which prevented a recession totaled 4 trillion yuan (12.5% of GDP in 2008).

Australia reported a solid September labor force report, crushing expectations of an RBA policy rate cut by year-end. AUD is outperforming and Australian government bonds underperforming. Employment growth overshot expectations by a wide margin (actual: 64.1k, consensus: 25k, prior: 42.6k) driven by a 51.6k rise in full-time jobs. Part-time jobs increased by 12.5k. The unemployment rate printed at 4.1% for a second consecutive month while the participation rate rose one tick to 67.2%. The unemployment remains at the lower end of the RBA’s estimated full employment range of 4.0-5.75%.

Nevertheless, we expect the RBA to join the global easing cycle later this year because Australia underlying economic activity is weak and points to lower inflation pressures. Australia’s Q3 CPI report October 30 will either support our view or ensure the RBA continues to lag its international peer.

Turkey central bank meets today and is expected to keep rates steady at 50.0% (12:00pm London). At the last meeting September 19, the bank kept rates steady at 50.0% but began setting the table for a rate cut by leaving out a previous pledge to hike rates further if needed. This meeting seems too soon for a cut as core inflation remains uncomfortably high around 49% y/y. Instead, we look for the first cut at the November 21 meeting. The swaps market is pricing in about 350 bp of total easing over the next three months, which seems about right.

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