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Confidence among Japan’s major manufacturers showed a modest recovery in Q4, breaking a two-quarter decline. The Tankan large manufacturing index rose to 14 from 13, slightly exceeding market expectations. However, the outlook dipped marginally from 14 to 13, though still better than the anticipated 11.

In contrast, the non-manufacturing sector, which includes services, saw its index decline to 33 from 34, marking the first deterioration in two quarters. The outlook for non-manufacturers held steady at 28.

On a bright note, large Japanese companies across sectors plan to boost capital expenditure by 11.3% in the fiscal year ending March 2025. This is a notable increase from the 10.6% projection in the September survey and surpasses market forecasts of 9.6%.

New Zealand’s BNZ Performance of Manufacturing Index dipped from 45.7 to 45.5 in November, marking its lowest reading since July 2024 and extending the contraction streak to 21 consecutive months. Despite some improvement in select components, the sector remains under significant strain, highlighting the challenges of achieving a meaningful turnaround.

Production weakened further, dropping from 44.0 to 42.5, signaling continued struggles in output. New orders also plunged from 48.5 to 44.8, underlining the persistent lack of demand. In contrast, employment improved modestly from 46.0 to 46.9, and finished stocks edged higher from 47.8 to 49.3. Deliveries saw the most notable recovery, rising from 44.9 to 49.9, yet still narrowly missed returning to expansion territory.

The sentiment among respondents remains predominantly negative, with 56% of comments in November reflecting pessimism, slightly up from 53.5% in October. Recurring concerns revolve around weak order volumes and the enduring pressures of high living costs. However, this negativity has moderated from its peak of 71.1% in mid-2024, suggesting some stabilization.

Doug Steel, Senior Economist at BNZ, noted that while manufacturers are beginning to show improved confidence about the future, “the main message of a manufacturing sector still under significant pressure remains. There is scant evidence of a general turnaround in activity to date.”

Full NZ BNZ PMI release here.

The RBA’s language change this week revealed a change in thinking driven by shifts in the data. But some data surprises might just be head fakes.

Something happened between 28 November and 9 December to shift the RBA’s thinking. The first of these dates marked a speech by Governor Bullock that can only be described as hawkish. It highlighted the RBA’s post-Review framework of treating instances of inflation above target as a sign of a positive output gap. The labour market was characterised as being too tight to be consistent with full employment. The slowdown in wages growth was not even mentioned.

Roll forward less than two weeks, and the language in the Board statement following the December meeting was rather different. The post-meeting statement highlighted that ‘some of the upside risks to inflation appear to have eased’. The possibility of a rate hike was no longer canvassed. And it dropped the ‘not ruling anything in or out’ and ‘vigilant’ language that had been in the post-meeting statement for most of the year.

Post-meeting comments by both the Governor and Deputy Governor have highlighted that both wages growth and the national accounts were weaker than expected. The Wage Price Index data were already available in time for the Governor’s speech, so it must have been the combination of the two that forced the shift in thinking. (The national accounts also include important measures of growth in wages and labour costs, which slowed noticeably in the quarter.)

The change in language certainly shifted market pricing of future rate moves. And to be fair, the probability of a rate cut earlier than our current base case of May 2025 has lifted, both because of the data flow and the RBA’s evident response to it. But a lot can happen between now and May.

One example of the ‘lot that can happen’ is that, since then, we have seen the surprisingly strong labour market data for November. But, Westpac Economist Ryan Wells cautions that this could, like last year, be a bit of a ‘head fake’ related to shifting seasonal patterns rather than an indication of a genuinely stronger labour market. Black Friday sales are becoming a bigger thing than they used to be, which is shifting the seasonal pattern of both employment and consumer spending. (Normal seasonal adjustment processes can’t fully offset seasonality that is shifting.)

Given ongoing cost-of-living pressures, it is no surprise that households are responding by going hard in the sales and holding back when things aren’t on sale. This also means that the next couple of months of household spending data could also be a bit of a ‘head fake’. And because Black Friday came late in the month, the December figures will be affected as well, as we saw in the Westpac Card Tracker this week. The RBA, and other observers of the economy, will need to be careful that they don’t jump at economic shadows in the next few months.

Along with seasonality, the labour market data might be providing a bit of a ‘head fake’ because of the skewed nature of current employment growth. As we have previously highlighted, most of the growth in employment over the past year or so has been in the non-market sector. Governor Bullock correctly pointed out in her post-meeting media conference that the expansion of the care economy represents important work in its own right – and work that frees up family members from unpaid care work.

But, as we have noted previously, the current skew towards care work has two implications that can be misleading if not treated carefully.

Firstly, care work tends to be lower-paid and less capital-intensive than many other jobs. So these jobs account for less GDP per hour worked than most other jobs. The result is apparent weakness in productivity growth driven by compositional change, even though individual workers and firms are not becoming less productive. If you wondered at Deputy Governor Hauser’s comment this week – that the narrative about slow productivity did not resonate with the RBA Board members involved in businesses – this is why. They are involved in market-sector industries, where labour productivity growth has been reasonable in recent quarters.

The problem here is that the models the RBA uses to estimate the output gap rely on estimates of trends in potential output that in turn rely on estimates of trend productivity growth. These estimates of trend are based on statistical techniques that impose considerable smoothness on those estimated trends. They are not designed to capture the kinds of compositional effects currently occurring.

Secondly, the current run-up in non-market employment will not last forever. The rapid run-up in spending in these areas has already spurred a reaction. Some news reports suggest that growth in NDIS spending is slowing a bit earlier than originally planned. As spending on these programs slows, so will the expansion of care-related employment. When that occurs, what will keep employment growth swift enough to keep pace with still-rapid population growth?

One thing working in the other direction is that labour force participation might not stay where it is either. Participation rates in Australia have been on a multi-decade upward trend, reflecting rising female participation in the workforce as well as increased participation by older people of both sexes as life expectancy and health outcomes improve. Around that upward trend, participation can fluctuate in line with job opportunities. At least some of the recent increase in participation was likely to have been a response to cost of living pressures, as we have previously noted. As those pressures ease, so too could the participation rate. As was the case this month, this could hold down unemployment due to people exiting the labour market. It would also contribute to other measures of labour market slack and could even mislead some observers about the true state of demand and the labour market.

Given all this, it will be worth taking care to avoid getting too hung up on every data point in the next few months, and instead focus on how they fit together.

Key insights from the week that was.

While the RBA’s decision to leave the cash rate unchanged at 4.35% was widely anticipated, there were noteworthy shifts in language in the decision statement. Most poignant was the removal of the “not ruling anything in or out” guidance that stood in place for the much of this year, suggesting risks to the outlook are becoming more balanced. Indeed, the Board also made it known that it is “gaining some confidence that inflationary pressures are declining in line with [their] recent forecasts”, and that it is relatively less concerned about upside inflation risks. Mirroring these developments, Governor Bullock adopted a decidedly less hawkish tone in the subsequent press conference, speaking at length about the dataflow since the previous meeting which, on balance, has supported the shift towards more neutral language. When pressed on the possible timing of interest rate relief, the Governor conceded that there are scenarios in which the next meeting, in February, could see an initial rate cut, but stopped short of describing one, however.

Given these developments, an interest rate cut in February or April cannot be entirely ruled out; but on balance, May remains the most likely candidate for the start of the normalisation cycle. The next few months of data will prove critical to both the timing and scale of the rate cutting cycle. We continue to expect a relatively short episode, a cumulative 100bps of easing delivered from May through Q4 2025 to 3.35%, a rate we consider to be broadly neutral for the economy.

Data-wise, this week also saw some significant surprises in the latest labour market update, employment rising at a solid clip (+35.6k) and the unemployment rate falling sharply to 3.9%. We caution against reading too much into these results given some underlying anomalies – a ‘pull-forward’ of jobs from December to November due to shifting seasonal patterns and weaker supply jolted the unemployment rate lower in November but may reverse in December. On a multi-month view, it is notable that all key measures of underutilisation are finishing the year near where they started; all the while, wages growth has been decelerating at pace. Provided these dynamics persist, there is a risk that the RBA might find the labour market is closer to balance than its current forecasts imply.

Major US data releases over the last seven days dominated the dataflow offshore. Last Friday’s labour market report was broadly in line with market expectations and our view that slack in the US labour market is building gradually. The payrolls figures showed a 227k increase in November and modest revisions of 56k to the September and October readings. These outcomes left the six-month average gain at 143k, down from 207k in the first half of the year and below the 200k per month we believe are necessary to keep the labour market in balance. The unemployment rate was 4.2%, up 0.1ppts from the prior month and 0.5ppts from the beginning of the year. Nevertheless, growth in hourly earnings remained unchanged at 4%yr, at the top of the range broadly consistent with consumer price inflation of 2%yr. The gradual softening of the labour market should see wage growth continue to soften, limiting inflationary pressures across the economy.

This week’s US CPI release was also broadly as expected and consistent with our view that US disinflation is proceeding. Headline and core CPI indices were both up 0.3% for respective annual rates of 2.7%yr and 3.3%yr, little changed from October. Core goods stood out in the detail, with the steepest increase in 1½ years of 0.3%mth. It was mainly driven by increases in the used and new car categories, likely linked to the impact of recent hurricanes. The shelter component was also up 0.3%mth, leaving the annual rate at 4.7%yr, 1.5ppts below the rate seen at the end of last year. Leading indicators point to the downtrend in shelter inflation continuing, although admittedly it has been slower to come through than expected. Overall, this week’s data has seen market pricing for a 25bp cut at the December FOMC meeting firm to a near certainty. We concur with the market’s view. Critical for 2025 will be the FOMC’s current assessment of risks, as evinced by both the quantitative forecasts and Chair Powell’s guidance in the meeting press conference.

Other major central banks continued easing monetary policy this week. The ECB delivered another 25bp cut at their December meeting, as expected. The tone of the post policy-meeting communication was dovish, with the downtrend in inflation given weight by ECB staff revising their forecasts lower and President Lagarde making known the Governing Council’s confidence and commitment to ease policy towards neutral in coming quarters. Meanwhile, the Bank of Canda acted more forcefully, delivering another 50bp cut. The outsized move followed a further increase in the unemployment rate, disappointing activity growth in Q3 and partial data pointing to further weakness in Q4 which seems likely to persist into next year. With the policy rate now close to its neutral level, decisions about further easing will be made meeting by meeting based on the Bank's assessment of risks.

After this week’s Chinese CPI data release showed annual inflation remaining near zero into year end, at 0.2%yr, the focus for China quickly turned to news headlines from the latest Politburo meeting and the Central Economic Work Conference. While subtle in tone, the wording used in post-meeting communications carries significant meaning. According to press reports from the official Xinhua news agency cited by Bloomberg, the Politburo has made clear that, for the first time since the GFC, 2025 will see “moderately loose” monetary policy as well as “more” pro-active fiscal policy. Premier Li Qiang subsequently pledged to “forcefully lift consumption” by “every means possible” and, after the Work Conference, a similar message was given as “lifting consumption vigorously” and stimulating overall domestic demand were made authorities’ top priority, reportedly for only the second time in 10 years. Press reports also carried references to improving the social safety net, a long-needed reform. We will likely have to wait until early-2025 for clear guidance on policy detail, but it a material increase in policy support is coming. To what extent its benefit is offset by US trade policy will only be known in time. Westpac remains constructive on China’s real economy in 2025, but believe it will take time for participants to gain confidence and markets to price improving fundamentals.

Key Highlights

• USD/JPY started a fresh increase above the 151.00 resistance zone.
• It cleared a key bearish trend line with resistance at 151.20 on the 4-hour chart.
• EUR/USD failed to recover above the 1.0620 level and trimmed some gains.
• Ethereum extended gains and might stabilize above the $4,000 level.

USD/JPY Technical Analysis

The US Dollar started a fresh increase from the 148.65 zone against the Japanese Yen. USD/JPY surpassed 150.50 and 151.00 to move into a short-term positive zone.

Looking at the 4-hour chart, the pair surpassed the 38.2% Fib retracement level of the downward move from the 156.75 swing high to the 148.64 low. It cleared a key bearish trend line with resistance at 151.20.

The bulls even pushed the pair above the 100 simple moving average (red, 4-hour) but they faced hurdles near the 200 simple moving average (green, 4-hour).

The 50% Fib retracement level of the downward move from the 156.75 swing high to the 148.64 low also acted as a resistance. On the upside, the pair could face resistance near the 152.70 level.

The first major resistance is near the 153.20 level. A close above the 153.20 level could set the tone for another increase. The next major resistance could be the 154.50 level, above which the price could climb higher toward the 155.00 resistance.

On the downside, immediate support sits near the 151.00 level. The next key support sits near the 150.50 level. Any more losses could send the pair toward the 150.00 level.

Looking at EUR/USD, there was no upside break above the 1.0620 resistance and the pair might now start another decline.

Upcoming Economic Events:

• US Import Price Index for Nov 2024 (MoM) – Forecast -0.2%, versus +0.3% previous.
• US Export Price Index for Nov 2024 (MoM) – Forecast -0.2%, versus +0.8% previous.

Short Term Elliott Wave view in GBPJPY shows decline from 10.30.2024 high ended at 188.14 as wave 1. The decline unfolded as a 5 waves diagonal Elliott Wave structure. Pair has turned higher in wave 2 to correct this 5 waves decline. The internal subdivision of wave 2 rally is unfolding as a zigzag Elliott Wave structure. Up from wave 1, wave i ended at 191.53 and wave ii ended at 190.3. Wave iii higher ended at 192.2, wave iv dips ended at 190.91, and final wave v higher ended at 192.37. This completed wave (i) in higher degree.

Pullback in wave (ii) ended at 190.58. Pair has rallied higher in wave (iii) towards 193.4 and pullback in wave (iv) ended at 192.44. Final leg wave (v) ended at 195 which completed wave ((a)) in higher degree. Pullback in wave ((b)) is in progress to correct cycle from 12.3.2024 low. Internal subdivision of the pullback is unfolding as a zigzag structure. Down from wave ((a)), wave (a) ended at 192.91. Expect wave (b) rally to fail below 195 and pair to turn lower in wave (c) to complete wave ((b)). Near term, as far as pivot at 188.14 stays intact, expect pullback to find buyers in 3, 7, 11 swing for more upside.

GBPJPY 60 Minutes Elliott Wave Chart

GBPJPY Elliott Wave Video

https://www.youtube.com/watch?v=yBmKBmnk8LM

• GBPUSD reversed from resistance level 1.2780
• Likely to fall to support level 1.2635

GBPUSD currency pair recently reversed down sharply from the resistance level 1.2780 (which reversed the price for the last 5 consecutive trading sessions) standing close to the 50% Fibonacci correction of the downward impulse from November.

The downward reversal from the resistance level 1.2780 started the active minor impulse wave 1, which belongs to the higher impulse wave (1).

Given the multi-month downtrend, GBPUSD currency pair can be expected to fall further to the next support level 1.2635 (low of the previous wave (B) from the end of November and the target for the completion of wave 1).

• GBPAUD reversed from resistance zone
• Likely to fall to support level 1.9800

GBPAUD currency pair recently reversed down sharply from the resistance area between the upper daily Bollinger Band, key resistance level 2.0045 (former multi-month high from April) and the resistance trendline of the wide daily up channel from October.

The downward reversal from this resistance zone created the daily Japanese candlesticks reversal pattern Shooting Star Doji.

Given the strength of the aforementioned resistance area and the overbought daily Stochastic, GBPAUD currency pair can be expected to fall further to the next support level 1.9800.

• The ECB decided to cut its three policy rates by 25bp, in line with market expectations. The most important decision taken today, though, was to remove the pledge to keep monetary policy restrictive. The ECB now simply guides that it will use the three-tiered reaction function inputs as key metrics (inflation outlook, underlying inflation and strength of monetary policy transmission) to set its policy rates.
• Markets didn’t take a specific cue from today’s press conference and continue to price 125bp of rate cuts in 2025.

Removing the hawkish bias

Today’s decision was not clear cut, in our view, as the ECB could have opted for a 50bp rate cut in light of the weak economic growth outlook. However, staff projections showing inflation at target made it conclude that a 25bp rate cut was sufficient.

The decision was a dovish 25bp rate cut though, and we assess the communication around it to be as close as possible to 50bp without delivering such a cut. Lagarde also said that there were deliberations about a 50bp rate cut today. Overall we found the language on growth, labour market and underlying inflation on the dovish side. In particular, we highlight that Lagarde said that the risk to inflation is now ‘clearly’ two-sided.

While Lagarde didn’t provide guidance on the end point of the rate cutting cycle, nor about the size of rate cuts at a particular point in time, the policy rate outlook is linked to the three-tiered reaction function (inflation, underlying inflation and transmission mechanism). Lagarde said they didn’t discuss the neutral rate level, but referenced the study from earlier this year that pointed to a range of neutral real rate between -0.5% and 0%, thus they will discuss once they come closer. She said that conventional wisdom suggests that the neutral rate is probably a little higher than before.

Lower growth in the staff projections and downside risks

Lagarde highlighted that the economy grew more than expected in Q3 mainly due to oneoffs from tourism. More importantly, she said that the economy is now losing momentum as manufacturing activity continues to decline and services growth is slowing down. The labour market remains solid, but she noted that vacancies are falling, and surveys point to less job creation.

The new staff projections were revised down across the entire forecast horizon on growth and see downside risks to the projections. GDP growth is now expected at 0.7% y/y in 2024 (from 0.8%), 1.1% in 2025 (from 1.3%), 1.4% in 2026 (from 1.5%). For the first time, the staff also projected 2027 growth, which is seen at 1.3%, in a sign of the ECB may be adjusting the potential growth in the euro area. The increase in growth next year is mainly driven by rising real incomes that will support consumption. Rising global demand will also help the economy in the absence of large trade disruption.

The disinflation process is well on track and inflation risks are “clearly two-sided”

In terms of inflation, the staff projections made a small downward revision to the headline forecast while the forecast for core inflation was left unchanged. Importantly, Lagarde noted that risks are “clearly two-sided”, which shows that the ECB is increasingly acknowledging that inflation could undershoot the target. Headline inflation is now expected at 2.4% y/y in 2024 (from: 2.5%), 2.1% y/y in 2025 (from: 2.2%), 1.9% y/y in 2026 (from: 1.9%) and 2.1% in 2027. The ECB said that the disinflation process is well on track and that most measures of underlying inflation suggest that inflation will settle at around the 2% target on a sustained basis. The new staff projections see core inflation at 2.9% in 2024, 2.3% in 2025, 1.9% in 2026, and 2.1% in 2027 like in September. The ECB notes that domestic inflation remains high, but that it is mostly due to wages and prices in certain sectors that are still adjusting to the past inflation surge with a significant delay. Hence, compared to earlier communications the ECB now clearly downplays the role of elevated domestic inflation and focuses more on forward looking measures, which is a dovish signal. She also highlighted lower market-based inflation measures. Another dovish communication on inflation was that Lagarde said that lower wage growth and higher productivity in staff projections means unit labour costs are expected to increase less than previously expected.