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The NFIB's Small Business Optimism Index rose 8.0 points to 101.7 in November, exceeding market expectations for a smaller increase to 95.3.

Nine out of ten subcomponents improved on the month, with the share of businesses reporting current inventories to be too low being the only unchanged category. The largest increases came from the share of businesses expecting the economy to improve (up 41 points to 36%), those expecting higher real sales in six months (up 18 points to 14%), and those reporting that now is a good time to expand (up 8 points to 14%).

The net share of businesses planning to increase employment rose 3 points to 18%, reaching its highest level in a year. The share of firms with unfilled job openings ticked up by 1 point to 36%. Quality of labor concerns declined in November, with 19% of business owners identifying this as their top business problem, as they are now roughly tied with inflation concerns which also fell on them month.

The net share of firms currently increasing employee compensation rose 1 point to 32%, while the net share planning to do so over the next three months rose 5 points to 28% - the highest level of the year. The share of businesses 'raising' average selling prices increased by 3 points to 24% while the share of those 'planning’ to raise average selling prices increased by 2 points to 28%.

Key Implications

Small business confidence hit its highest level in over three years in November as the Republican sweep in Washington enhanced expectations for a more accommodative fiscal and regulatory environment in the coming years. This shift in sentiment was borne out across the survey's subcomponents related to expectations, with most notching multi-year highs. However, relatively slim Congressional majorities and higher trade uncertainty kept the small business uncertainty index at a historically elevated level.

On a more concerning note for the Federal Reserve, the share of small businesses raising average selling prices has become stuck at an elevated level, similar to the recent trend in core PCE inflation. This appears to be in part driven by a recent uptick in plans to raise employee compensation, however with labor market conditions continuing to come into better balance it is unlikely this will pose a material risk to the Fed's current rate cut trajectory. We expect interest rate cuts to continue with another 25 basis-point cut in December, followed by additional easing through 2025.

Small businesses have become more optimistic since the November election, as evidenced by an eight-point jump in the Small Business Optimism Index. There was a similar jump in 2016 following Donald Trump’s victory.

The index jumped to 101.7, above its historical average of 98, with improvements in nine out of ten components (current inventory unchanged). The biggest gains were driven by expectations of an improving economy.

Promises of protectionist policies and tax cuts have fuelled these expectations. Between November 2016 and September 2018, the Russell 2000 index of small-cap companies gained almost 50%, compared with around 35% for the S&P 500. The initial surge in the Russell 2000 on Trump’s victory explains the expectation of outperformance by smaller companies. However, since early December, this index has been falling based on expectations of tighter monetary policy for the foreseeable future. In contrast, the Nasdaq100 and the S&P500, which are filled with giants and less sensitive to interest rate movements, are regularly hitting all-time highs.

Will this divergence continue, or will we see a return to the 2016-2018 pattern? We are leaning towards the latter scenario but would prefer to see confirmation first in the form of the Russell2000 updating highs above 2460.

The Reserve Bank of Australia kept its cash rate unchanged at 4.35%, maintaining it at a 13-year high for the past 13 months.

Most of the RBA’s peers have moved to ease monetary policy at various points this year, including aggressive cuts by neighbouring RBNZ, suggesting that inflation is on a downward trajectory. Australian consumer inflation was 2.1% in September and October (latest data available). However, this is not enough for the RBA, which noted that the core inflation rate of 3.5% is still above the 2.5% target.

However, the RBA has indicated growing confidence that inflation will return to target, seemingly opening the door to an easing of policy soon. Weak economic growth is also a case for easing. GDP growth slowed to just 0.8% last year. Barring a double dip, this is the slowest pace since 1991, the last time the economy was in a natural recession.

On the news of the rate, the AUD temporarily lost its footing and returned to the local lows of the last three trading sessions below 0.6400. Conventional logic would suggest that tighter monetary policy should cause the Aussie to strengthen against rivals that are cutting rates. But in Australia’s case, traders are more likely to be swayed by the outlook for the economy and monetary tightening promises to further suppress economic growth.

The AUDUSD, at 0.6400, is trading at the lower end of its range of the past two years, having lost around 8% over the past 10 weeks. Technically, this was a reversal to the downside from the 200-week moving average. Now, it is important to watch how the pair performs in the coming weeks. A break of the long-term support will open the way for a decline to 0.55. The ability to hold above will trigger a scenario of a return to the 0.70 area.

Markets

EUR/GBP set a minor YTD low today at 0.8250. The move came as UK Gilts underperformed German Bunds. UK yields currently add 2.1 bps (2-yr) to 4.6 bps (30-yr) compared with German yields sliding by up to 3.9 bps at the front end of the curve. The euro remains in the defensive going into Thursday’s ECB meeting. While ECB President Lagarde won’t find common ground to step up the pace of rate cutting (25 bps to 50 bps), we do believe that the central bank’s third consecutive rate cut will be accompanied by some dovish hints. Think about dropping the reference to sticking with a restrictive monetary policy, downward revisions to GDP/CPI forecasts and a more formal return to forward looking decision making. The UK (and sterling) are in a different spot with Bank of England governor Bailey being forced into wait-and-see mode by Chancellor Reeves’ expansive 2025 budget as it triggered an upward revision in the expected CPI peak next year (+0.5 ppt) and delay in the expected return of inflation below the BoE’s 2% inflation target (2027 instead of 2026). The BoE meets a final time this year next Thursday (Dec 19). The monetary policy split and rising UK/EU (2y) yield differential suggest that EUR/GBP is heading for a test of the post-brexit low at 0.8203. A similar dynamic is at play in EUR/USD (1.0525). The pair failed to rebound beyond 1.06 after extensively testing the downside of the 2023-2024 trading range (1.0448) in the wake of US elections. The US treasury yield curve bear steepens today with yields rising by 1.4 bps (2-yr) to 3.1 bps (30-yr). Technical charts suggest – like in Europe – some tentative bottoming out at the longer end of the curve. Upcoming 10-yr and 30-yr Note/Bond auctions are at play as well. Today’s eco calendar was extremely thin with only a consensus-beating increase in November NFIB small business optimism (101.7 from 93.7 vs 95.3 expected). The three-year high in the index is more evidence of enthusiasm after Trump’s election win. Details moreover showed that a net 28% of businesses planned to raise prices over the next three months, the largest share since May. It adds to rising short term inflation (expectations) (eg yesterday’s NY Fed Survey or Friday’s Michigan consumer confidence) and effectively hampers the Fed’s normalization plans (as set out in September) next year. We think that there’s room to pause the rate cut cycle in January 2025 after a 25 bps rate cut at next week’s final Fed meeting of the year.

News & Views

The Bank of International Settlements in its quarterly report once again warned for the threat of soaring government debt. It singled out the US, where investors are facing a potentially toxic combination of debt oversupply and stimulus spending that could boost inflation. The BIS head of the monetary and economic department Borio said there were more reasons to be worried now than when it issued a similar warning earlier this year. The BIS report mentioned there was a supply-demand imbalance in the US Treasury market, with dealers holding record amounts of unsold US bonds on their books. Estimates by the Institute of International Finance suggest that global sovereign debt could rise by a third by 2028 (to $130tn) amid continued large government budget deficits. While the so-called bond vigilantes for now keep their powder dry, the BIS warned that policymakers should not wait for markets to wake up and start adjusting policies in time.

Norwegian inflation eased less than expected in November. The headline index fell from 2.6% to 2.4% on a 0.3% m/m pace. Housing, water & energy were among the main drivers, rising 1.1% m/m, followed by health (0.5% m/m) and clothing & footwear (0.5%). Transport and household equipment were among the biggest drags (both -0.4% m/m) even though both did support the y/y print. Core inflation broke a year-long easing streak with an acceleration from 2.7% to 3%. The numbers were higher than analysts expected but didn’t come as a surprise to the Norwegian central bank. The Norges Bank had penciled in 2.6% for headline and 3% for core. The central bank in November said it expects the current policy rate to remain unchanged at 4.5% through the end of the year. Markets have been aligning neatly with this guidance and do not see today’s numbers as a key reason to change tack ahead of the December 19 meeting. Stronger-than-expected Q3 GDP growth, low & stable unemployment and especially a still-weak Norwegian krone are key arguments for the Norges Bank to proceed cautiously with rate cuts. EUR/NOK trades little changed around 11.72. This compares to the recent highs (NOK lows) around 12, surpassed only during the pandemic-driven liquidity crunch in early 2020.

Daily Pivots: (S1) 1.0526; (P) 1.0560; (R1) 1.0589; More...

Intraday bias in EUR/USD stays neutral and outlook is unchanged. Rebound from 1.0330 short term bottom could still extend higher. But outlook will remain bearish as long as 55 D EMA (now at 1.0711) holds. On the downside, break of 1.0471 minor support will turn bias to the downside for retesting 1.0330 low. Firm break of 1.0330 will resumed the decline from 1.1213, and sustained trading below 1.0404 key fibonacci level will carry larger bearish implication.

In the bigger picture, focus stays on 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404. Strong rebound from this level will keep price actions from 1.1273 (2023 high) as a medium term consolidation pattern only. However, sustained break of 1.0404 will raise the chance that whole up trend from 0.9534 has reversed. That would pave the way to 61.8% retracement at 1.0199 first. Firm break there will target 0.9534 low again.

Daily Pivots: (S1) 1.2712; (P) 1.2756; (R1) 1.2794; More...

Intraday bias in GBP/USD stays neutral and outlook is unchanged. Rebound from 1.2486 short term bottom could still extend higher. But outlook will stay bearish as long as 55 D EMA (now at 1.2839) holds. On the downside, below 1.2615 minor support will bring retest of 1.2486 first. Firm break there will target 1.2298 cluster support zone. However, sustained break of 55 D EMA will argue that the near term trend has reversed, and targets 1.3047 resistance for confirmation.

In the bigger picture, price actions from 1.3433 medium term are seen as correcting whole up trend from 1.0351 (2022 low). Deeper decline could be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. But strong support is expected there to bring rebound to extend the corrective pattern.

Daily Pivots: (S1) 0.8763; (P) 0.8784; (R1) 0.8808; More…

Intraday bias in USD/CHF stays mildly on the upside for the moment. Corrective fall from 0.8956 could have completed at 0.8735 after hitting 55 D EMA. Further rally is in favor to retest 0.8956 high first. However, considering head and shoulder top pattern, firm break of the EMA will argue that whole rise from 0.8401 might have completed, and bring deeper decline to 61.8% retracement of 0.8401 to 0.8956 at 0.8613 next.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with rise from 0.8374 as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes.

Daily Pivots: (S1) 150.16; (P) 150.76; (R1) 151.82; More...

Intraday bias in USD/JPY stays neutral for the moment. With 151.94 resistance intact, further decline remains in favor. On the downside, below 148.64 will strengthen the case that rise from 139.57 has already completed at 156.754. Deeper fall should then be seen to 61.8% retracement of 139.57 to 156.74 at 146.12 next. Nevertheless, firm break of 151.94 resistance will revive near term bullishness and bring retest of 156.74 high.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8267; (P) 0.8279; (R1) 0.8290; More...

EUR/GBP's down trend resumed by breaking through 0.8259 low. Intraday bias is back on the downside for 0.8201 key support level next. Strong support could be seen there to bring rebound. On the downside, above 0.8282 minor resistance will turn intraday bias neutral first. Further break of 0.8363 resistance will be the first signal of bullish trend reversal. However, sustained break of 0.8201 will carry larger bearish implications.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 0.8201 (2022 low), but strong support should be seen there to bring rebound. However, outlook will remain bearish as long as 0.8624 resistance holds even in case of strong rebound. Decisive break of 0.8201 will indicate long term bearish reversal.

Euro's selloff accelerated today, breaking to a new 2024 low against Sterling. The common currency also weakened notably against the Swiss Franc, even as it remained relatively steady against other peers. Market sentiment appears to be pricing in dovish guidance from ECB at its upcoming meeting, where a standard 25bps rate cut is expected over a more aggressive 50bps reduction.

Economic struggles in Germany and France, the bloc’s largest economies, remain at the heart of the Eurozone’s troubles. Growth momentum has faltered since mid-year, with the temporary boost from the Paris Olympics fading quickly. Political uncertainty is adding to the strain, with Germany facing policy gridlock and France grappling with ongoing governance challenges. Sentix Investor Confidence data released yesterday highlighted the extent of this economic malaise, further dampening market sentiment. Externally, the prospect of renewed US tariffs under President-elect Donald Trump looms large, posing additional threats to the Eurozone's export-reliant economies.

ECB is under pressure to support the faltering economy while balancing inflation risks. Markets are now pricing in a cumulative 152bps reduction in the deposit rate by the end of 2025, bringing it down from 3.25% to approximately 1.75%.

This anticipated pace of easing of ECB contrasts sharply with BoE's more measured approach. Despite wide dissatisfaction with the Autumn Budget, the UK government under Prime Minister Keir Starmer appears politically stable for now. BoE has signaled a cautious path forward, likely implementing only four rate cuts next year, leaving Sterling better positioned relative to the Euro.

Across the Atlantic, Fed is expected to deliver another 25bps rate cut in December. However, a pause in January seems increasingly likely as the Fed assesses the economic implications of incoming policies from the Trump administration. Expected inflationary pressures from fiscal stimulus and trade measures are likely to temper Fed’s pace of easing, supporting a relatively firmer Dollar.

Overall in the currency markets, Aussie and Kiwi remain the weakest performers of the day, driven by RBA’s dovish shift and fading optimism over China’s latest economic stimulus pledges. In contrast, Loonie leads the pack, followed by Sterling and Dollar while Yen and Swiss Franc are positioning in the middle.

Technically, EUR/USD would be a focus in the next two days, with US CPI and ECB rate decision on agenda. Price actions from 1.0330 are so far corrective looking which suggests that fall from 1.1213 is still in progress. Break of 1.0471 minor support will argue that the corrective recovery has completed, and target 1.0330 and below.

In Europe, at the time of writing, FTSE is down -0.64%. DAX is up 0.08%. CAC is down -0.70%. UK 10-year yield is up 0.035 at 4.315. Germany 10-year yield is down -0.001 at 2.216. Earlier in Asia, Nikkei rose 0.53%. Hong Kong HSI fell -0.50%. China Shanghai SSE rose 0.59%. Singapore Strait Times rose 0.49%. Japan 10-year JGB yield rose 0.024 to 1.066.

RBA holds rates steady, dovish shift raises odds of Feb cut

RBA held its cash rate steady at 4.35% as widely expected, but the accompanying statement marked a clear pivot towards a more dovish stance. While May remains the more likely timing for the first rate cut, February is now emerging as a real possibility, depending on upcoming Q4 jobs and inflation data from Australia.

The most striking change in the RBA's statement was its removal of the phrase "not ruling anything in or out" regarding future monetary policy decisions. This change aligns with the board's growing "confidence that inflationary pressures are declining." RBA acknowledged that some upside risks to inflation have eased and noted the gap between aggregate demand and supply capacity is continuing to narrow.

Recent activity data, according to the RBA, has been “on balance softer than expected,” with the central bank pointing out risks of a slower-than-anticipated recovery in consumer spending. These factors collectively suggest a step away from inflation vigilance and a move closer to easing policy.

Governor Michele Bullock later emphasized that the wording adjustments in the statement were deliberate. While she clarified that a rate cut was not discussed during today's meeting, she acknowledged uncertainty over whether one could occur as early as February.

Markets responded swiftly, with swaps traders raising the probability of a February rate cut to over 60%, up from 50% the previous day. Market expectations now fully price in two rate reductions by May.

Australia’s NAB confidence turns negative to -3 as business conditions deteriorate

Australia’s NAB Business Confidence index slid sharply to -3 in November, down from 5 in October, returning to below average levels. Business conditions also weakened notably, dropping from 7 to 2, marking declines across trading, profitability, and employment metrics. Trading conditions fell to 5 from 13, profitability shifted into negative territory at -1 from 5, and employment conditions edged down to 2 from 3.

Cost pressures showed little relief, with input costs largely unchanged. Labor cost growth held steady at 1.4% in quarterly terms, while purchase cost growth edged slightly higher by 0.2 percentage points to 1.1%. On the pricing side, output price growth remained unchanged at 0.6% in quarterly terms, with retail price growth retreating to 0.6% and recreation and personal services easing slightly to 0.7%.

China's trade data highlights persistent import weakness amid export slowdown

China's trade data for November showed weak signals as exports grew 6.7% yoy to USD 312.3B, down sharply from October's 12.7% yoy expansion and missing expectations of 8.5% growth.

Export performance varied across key regions, with shipments to the US rising 8% yoy, to the EU up 7.2% yoy, and to ASEAN growing by 14.9% yoy. However, exports to Russia declined by -2.5% yoy.

On the import side, the picture was decidedly more negative. Imports fell by -3.9% yoy, marking the steepest decline since September 2023, and missing expectations of a slight 0.3% yoy increase.

Weakness was broad-based, with imports from ASEAN dropping -3% yoy, the US contracting by -11% yoy, and the EU and Russia both registering declines of -6.5% yoy. These numbers underscore persistent weak domestic demand, consistent with recent data showing subdued consumer inflation.

Trade balance widened from USD 95.7B to 97.4B, above expectation of USD 92.0B.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8267; (P) 0.8279; (R1) 0.8290; More...

EUR/GBP's down trend resumed by breaking through 0.8259 low. Intraday bias is back on the downside for 0.8201 key support level next. Strong support could be seen there to bring rebound. On the downside, above 0.8282 minor resistance will turn intraday bias neutral first. Further break of 0.8363 resistance will be the first signal of bullish trend reversal. However, sustained break of 0.8201 will carry larger bearish implications.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 0.8201 (2022 low), but strong support should be seen there to bring rebound. However, outlook will remain bearish as long as 0.8624 resistance holds even in case of strong rebound. Decisive break of 0.8201 will indicate long term bearish reversal.