Markets
Speeches from the Fed, ECB and BoE chairs made up for the gap in the economic calendar yesterday. The one from Fed’s Powell rubberstamped another 25 bps rate cut on October 29. He said the economic outlook was largely unchanged since the September meeting. Powell highlighted growing labour market risks: “available evidence suggests that both layoffs and hiring remain low, and that both households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue their downward trajectories.” The “available evidence” for the time being is a range of non-government data Powell said, adding that the lack of official data due to the shutdown could start to make things more challenging for the October month. The chair also clearly hinted quantitative tightening could end somewhere in the coming months. The Fed is approaching the point when reserves “are somewhat above the level we judge consistent with ample reserve conditions”. The amount recently dropped below $3tn. Fed’s Waller in early 2023 said 10-11% of GDP would be optimal, a level that back then corresponded to around $2.7tn reserves. ECB president Lagarde stuck to the message delivered last month: risks to the inflation and economic outlook are balanced and the ECB is well-positioned to respond to potential shocks. She would, however, never say the ECB is done cutting rates. While it’s a typical central bank strategy to keep all options open in an uncertain environment, markets could consider it a cue for further easing. They currently give it about a 50% chance for it to happen by 2026Q1. Bailey from the Bank of England, finally, warned of the competing risks from above-target inflation and a weakening labor market. The IMF in its outlook update cautioned the UK may suffer the fastest price growth over the next two years. Bailey did note that below-potential growth could drag down inflation over time and said he saw signs of a softening labour market appearing in yesterday’s report. None of the speeches had a material impact on bond markets though. Gilts outperformed after the labour market report, showing yield declines of -4.9 to -6.9 bps in a bull flattener. German rates dropped up to 3.2 bps at the long end while those in the US changed between -2.1 bps (2-yr) to +1.3 bps (30-yr). French OATs outperformed peers, narrowing the swapspread after the key Socialist Party said they won’t vote to oust premier Lecornu in a vote of no confidence. Two motions will be debated tomorrow. Comments from the other kingmaker party, Les Républicains, suggest they won’t vote against Lecornu either. With the French sting removed for the time being, the euro is enjoying a sigh of relief. EUR/USD bounced back north of 1.16, with some help of a weaker dollar this morning too. Stock futures suggest a strong opening in the green. The trade theme serves as the important wild card here with the topic back at the center of attention and proven capable of disrupting sentiment in a heartbeat.
News & Views
Chinese prices didn’t fall for a third consecutive month in September. They rose by 0.1% M/M following a 0.4% increase in July and stabilization in August. On an annual level, they are nevertheless 0.3% lower. A steeper drop in food prices (-4.4% Y/Y) was the main drag on the headline CPI. Details showed a slower pace of goods deflation (-0.8% Y/Y from -1% Y/Y) while services inflation remained steady at 0.6% Y/Y. Core CPI (excluding food and energy) accelerated from 0.5% Y/Y to 1% Y/Y (19-month high). Produces prices were unchanged for a second consecutive month with the annual PPI index 2.3% lower compared with last year (from -2.9% Y/Y). Statistical effects and measures to curb price competition rather than a surge in demand was behind the September price dynamics.
RBA assistant governor Hunter sounded hawkish in an interview this morning. She warns that underlying inflation in the three months through September is likely to be stronger than the Reserve Bank of Australia anticipated. She specifically mentioned housing construction and market services. Crucial Q3 CPI numbers are due October 29 with the RBA meeting one week later. Together with stubborn core inflation, Hunter notes that the labor market and broader economic conditions remain tight. Her comments suggest that the bar to cut the policy rate from the current 3.6% in November might be higher than currently discounted by money markets (40% probability). Since the central bank starting lowering its policy rate in February this year, they stuck with quarterly cuts (May & August) suggesting this pattern could break. AUD/USD is slightly stronger this morning at 0.6515 after being pulled lower in recent days over the intensifying US-Chinese trade dispute.
