Markets
Fragile risk sentiment is still name of the game with main European and US equity markets losing up and over 1%. We don’t see the classic risk-off correlations with core bonds losings marginally ground as well, while the dollar fails to make ground beyond tested resistance levels. Lack of eco data give the opportunity to dive somewhat deeper into several comments by Fed governors today and yesterday. Vice chair Jefferson endorsed the risk management motive that prompted 25 bps rate cuts in September and October but thinks that it makes sense to proceed slowly as we approach the neutral rate. He blames the recent lack of progress in the disinflation appears on tariffs, but still sees underlying inflation progressing to 2%. Chicago Fed Goolsbee (voter) is uneasy with the current shortage of economic numbers. Especially as there aren’t as many private-sector data sources for inflation as there are for the labor market. It makes him feel uneasy as it would take a fair amount of time before any potential problems on the inflation side pop up. He therefore leans more to be “a little careful and slow down when it’s foggy”. St. Louis Fed Musalem (voter) believes that monetary policy is now somewhere between modestly restrictive and neutral. In terms of financial conditions, it’s even getting close to neutral. He wants the Fed to be very careful to continue to lean against above-target inflation. While he acknowledges downside risks to the labor market, he’s happy with the insurance against that risks that the Fed already provided with back-to-back rate cuts. Both Goolsbee and Musalem seems to be preparing to line up with Kansas City Fed Schmid in voting for an unchanged policy rate in December. Schmid already did so in October. Cleveland Fed Hammack (non-voter) is on the same (hawkish) line, labelling inflation a bigger concern than the labor market right now. She argues for a mildly restrictive monetary policy stance to ensure that inflation returns to 2% in timely fashion, adding that the current stance is barely restrictive. Finally, NY Fed Williams elaborated on the ending of quantitative tightening. Recent sustained repo market pressures and other growing sings of reserves moving from abundant to ample justify the decision to end QT starting December 1st. He added that the Fed may soon switch from keeping its balance sheet steady (implying a further mechanical shrinking of reserves) to begin reserve management bond buying. That would obviously be a technical measure and not a signal of a monetary shift.
News & Views
Canadia labour market data for October for the second consecutive month surprised sharply to the upside. The economy added 66.6k jobs, after a rise of 60.4 k in September. The market expected a slight monthly decline. The rise in employment was entirely due to part-time employment (+85.1k). Full time employment declined 18.5k, but coming after a sharp 106.1 k rise in the previous month. The participation rate rose 65.3% from 65.2%. The unemployment rate eased from 7.1% tot 6.9%. Average hourly wages increased 3.5%Y/Y from 3.3% in September. End last month, the Bank of Canada (BoC) cut its policy rate by 25 bps (to 2.25%) as it expected the economy to remain weak in H2 due to the fall-out from the trade tensions with the US. Even so, the BoC then already indicated that “if inflation and economic activity evolve broadly in line with the October projection, the Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment”. Today’s data only reinforce that view. The 2-y Canada Bond yield rises 5.5 bps to 2.44%. The Canadian dollar strengthens from USD/CAD 1.411 to 1.4065.
Dovish Polish NBP member Kotecki expects the recent benign inflation path to continue toward the 2.5% inflation target. Inflation might already come close to that level in November. The current 145 bps inflation-adjusted, real, policy rate still provides room some further easing towards a potential endpoint for the cycle in the 3.75%-4% range, maybe closer to 3.75% in H1 of next year. A terminal rate of 3.5% only would be possible if inflation fell permanently below target amid slowing growth. That’s not a scenario emerging from current forecasts. The NBP today released its November inflation report. The central path for inflation stands at 3.7%, 2.9% and 2.5% for the 2025-2027 period. GDP growth at 3.4%, 3.7% and 2.6%. Kotecki also indicated that a rate cut in December is rather unusual, but can’t be complete ruled out. The zloty continues trading in a tight range near EUR/PLN 4.25.
