Markets
Several Fed policymakers hit the wires yesterday and showcased the broad array of views that led chair Powell to push back strongly against expectations for a December rate cut. To grab a few, Goolsbee (Chicago) said the threshold for cutting then is indeed higher than last month, citing concerns over inflation in the services sector in particular. SF Fed Daly supported the October cut urged officials to keep an open mind for next month. She sees more vulnerability in consumer spending data. Governor Cook saw more risks to the labour market than inflation and said there’s reason to be concerned about an unemployment uptick. The job market can turn quickly, she added. Their comments had little direct market impact, nor did a too-close-to-expectations manufacturing ISM (48.7) for October. The latter is also the lesser important one with the services reading still coming up Wednesday. US Treasury yields added a few bps across the curve, varying between 3.1 and 4 bps in a steepening move. European rates rose similarly while Gilts marginally outperformed. The US dollar had a slight edge in FX, supported by a less ecstatic risk rally. Not all indices on Wall Street for example closed in the green and those that did finished below the opening levels. Equity futures suggest a more difficult day lies ahead. EUR/USD lost support from the October low and remains under pressure this morning. The couple tested the 1.15 big figure for the first time since August. Assuming dollar strength persists (eg. in a more fragile risk environment), there’s room for a revisit of the August low at 1.1392. DXY flirted with the 100 barrier yesterday and again this morning but a push higher is not yet materializing. JPY is holding the trade-weighted dollar back, by appreciating to USD/JPY 153.57 after a short-lived (?) adventure north of 154. Japanese PM Takaichi pledged parliament she’ll put together a new growth strategy by next summer. “We aim to strengthen Japan’s supply structure, increase incomes, improve consumer sentiment, boost corporate profits and increase tax revenues without raising taxation rates.” Long-term Japanese bonds underperform. The empty economic calendar today (no JOLTS because of the shutdown) sets the stage for technical and sentiment (currently clearly negative) driven trade. Both favour the US dollar, which is on the verge of breaking through several resistance areas in a range of currencies. Core bonds strengthen with US yields giving up some of yesterday’s gains. Bund futures suggest a yield drop at the open as well.
News & Views
The Reserve Bank of Australia (RBA) left its policy rate unchanged at 3.60%. The decision was widely expected after the recent higher than expected inflation data. RBA takes notice of Q3 trimmed mean inflation accelerating to 1% Q/Q and 3% Y/Y in the September quarter (was 2.7% in Q2), an outcome materially higher than expected. Headline inflation also increased above the 2-3% inflation target range (3.2% in Q3). Even as the RBA assesses that part of the rise in in underlying inflation is due to temporary factors, a new forecast now sees inflation rising above 3% in the coming quarters before settling at 2.6% in 2027, a scenario based on one more rate cut in 2026. On activity, the RBA indicates that the pick-up in demand continues and that the housing market strengthened further. Labour market conditions are assessed as being tight even as the unemployment rate rose from 4.3% to 4.5%. On the monetary policy stance, the RBA says that there are uncertainties regarding the assessment that monetary policy remains a little restrictive. Given recent evidence of more persistent inflation, the Board judged that it was appropriate to remain cautious, updating its view of the outlook as the data evolve. The reaction to the decision was modest. The 3-y government yield rises 3.4 bps (3.67%). Money markets still see chance of about 75% of one additional rate cut by mid-next year. The Aussie dollar is ceding modest ground this morning (AUD/USD 0.651).
Inflation in South Korea unexpectedly accelerated in October by 0.3% M/M and 2.4% Y/Y up from 2.1% and vs 2.2% expected. Underlying inflation also picked up from 2% to 2.2%. Base effects only explain a part. The acceleration was also driven by monthly price rises for clothing, transport and recreation and culture. Frood price inflation also remains rather elevated at 3.5% Y/Y. Combined with the BoK keeping a close eye at property price rises, today’s data suggest that there is little room for the BoK to ease policy further anytime soon. The BoK left its policy rate unchanged at the three previous meetings (2.5%). The next meeting is scheduled for November 27. The won continued trading in the defensive this morning (USD/KRW 1438.2).
