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Summary

• As widely expected, the FOMC cut rates by 25 bps at today's policy meeting. The decision was unanimous.
• The Committee noted that progress has been made in returning inflation to its target of 2% and that the risks of achieving its goals of price stability and full employment are roughly balanced.
• Despite 75 bps of rate cuts since the September 18 policy meeting, the stance of monetary policy remains restrictive. That is, the real fed funds rate remains above most estimates of "neutral." Therefore, we look for the FOMC to ease policy further at upcoming meetings.
• In our view, the FOMC will not react to potential policy changes that could be implemented by the incoming Trump administration until those policies are more fully formed. If, however, tariffs or other fiscal policies were to cause inflation to move higher next year, then we believe the nominal fed funds rate would not fall all the way toward 3%, as we had forecasted prior to the election.

Progress on Inflation and Balanced Risks Lead to Rate Cut

As widely expected, the Federal Open Market Committee (FOMC) decided at its policy meeting today to reduce the target range for the federal funds rate by 25 bps to 4.50%-4.75%. After peaking at a range of 5.25%-5.50%, the FOMC has now cut rates by 75 bps since September (chart). The decision to cut rates by 25 bps today was unanimously supported by all 12 voting members of the Committee. Federal Reserve Governor Michelle Bowman dissented at the September 18 meeting when the FOMC reduced the target range for the fed funds rate by 50 bps. Governor Bowman preferred a rate cut of only 25 bps at that meeting.

The statement that the FOMC released after its meeting today is similar to the one that it released on September 18. That is, the Committee noted in today's statement that "inflation has made progress toward the Committee's 2 percent objective." In that regard, the PCE deflator, which is the Fed's preferred measure of the rate of consumer price inflation, was up only 2.1% on a year-ago basis in September (chart). Furthermore, the FOMC judges "that the risks to achieving" its dual mandate of price stability and full employment "are roughly in balance." Therefore, "in support of its goals" the FOMC decided to cut rates by 25 bps today.

Stance of Policy Remains Restrictive Despite Recent Rate Cuts

Recently released data show that real GDP was up at a solid rate of 2.7% on a year-ago basis in Q3-2024 and that the unemployment rate was only 4.1% in October. If the economy is doing so well, why cut rates at all? The reason is that the stance of monetary policy, as measured by the real fed funds rate (i.e., the nominal rate minus the underlying rate of inflation) is restrictive at present. Indeed, Chair Powell noted the restrictive stance of policy in his post-meeting press conference. The "neutral" real fed funds rate, which is the real interest rate that neither stimulates the economy nor restrains it, is unobservable. However, most analysts estimate that the neutral real rate is somewhat around 1%. With the real fed funds rate currently above 2% (chart), Federal Reserve policymakers apparently judged that they needed to dial back the degree of policy restraint via a cut to the nominal fed funds rate. Otherwise, they risk a significant deceleration in economic activity, which could push up the unemployment rate by more than most Fed officials would feel comfortable.

The final FOMC meeting of 2024 will be held on December 18, and our current forecast looks for another 25 bps rate cut at that meeting as the FOMC "feels" its way back toward neutral. As we noted in a recent report, however, the sharp increase in tariff rates that the incoming Trump administration may levy on many of America's trading partners could lead inflation to move higher after their implementation. In our view, the FOMC will not make a policy decision at its upcoming meeting based on what it thinks the incoming administration may do. Rather, the Committee will wait until policies are more fully formed and their effects better understood before reacting, if appropriate, with its own response. Our most recent forecast, which was compiled before the election, looked for the FOMC to cut its target range for the fed funds rate to 3.00%-3.25% by the end of 2025. (We do not make assumptions about the outcomes of elections until the ballots are counted). But if the incoming Trump administration does indeed levy significant tariffs or adopt other inflationary policies, then we believe the fed funds rate may bottom out next year closer to 4% than to 3%.

• The Fed cut rates by 25bp in its November meeting, as widely expected.
• Powell delivered practically no new policy signals. Despite the political uncertainty, Powell affirmed that the Fed remains in a good place with cooling inflation and still stable economy.
• Market reaction was minimal. Markets price in around 65-70% probability of the Fed delivering another 25bp cut in the December meeting. We make no changes to our call and still expect cuts to continue in every meeting towards H1 2025.

While all eyes have been on Trump's election win this week, and focus has turned to his expansionary and potentially inflationary fiscal policy plans, the Fed is not yet overly concerned. Powell made it clear that the election result will not have any near-term policy impact even if in the longer run, fiscal policies can of course affect the economy. For the time being, as long as we know very little about policy change details, there is simply 'nothing to model'. On a more personal note, when asked if he would resign if requested to do so by Trump, Powell's answer was a very firm 'no'.

In the middle of all the political uncertainty, the Fed remains in a good place. Economy is on a solid footing, inflation continues to cool and labour markets are no longer a source of inflation. Powell noted that incoming data has generally been somewhat stronger than expected in the September meeting and that downside risks have eased, but avoided discussing how this could impact rates outlook for the December meeting and beyond.

Powell emphasized that all options remain on the table going forward, including faster cuts if labour markets weaken unexpectedly, but also slowing down the pace of easing if the Fed estimates it is approaching neutral faster than thought. The Fed is paying close attention to inflation expectations and Powell mentioned he had taken note of the recent uptick in market-based expectations following the election results. That said, the current 5y5y forward rate (2.55%) remains very close to the longer-run target when adjusted for the historical average spread between CPI and PCE inflation measures (0.3-0.4%). In addition, most consumer and business survey-based measures have returned very close to the Fed's target.

While we agree that the US economy is not in a dire need of easier monetary conditions, we also think the Fed has no reason to delay its return toward neutral any longer. Current ratio of job openings to unemployed job seekers remains below pre-pandemic levels and while layoffs remain low for now, the number has continued to edge higher. When labour markets are on a cooling trend, and forward-looking inflation measures are near target, the Fed is likely to continue cutting rates at steady 25bp intervals in the coming meetings.

If Trump's policy plans spark a more persistent uptick in inflation expectations, a pause in December could be warranted. In addition, if more expansionary fiscal policies suggest the neutral rate will shift higher, then we think the Fed could end the easing cycle short of our current terminal rate forecast (3.00-3.25%). Markets price in 30-35% probability for a pause in December, but for the time being, we make no changes to our Fed call.

• At today's monetary policy meeting the BoE cut the Bank Rate by 25bp to 4.75%, as was widely expected.
• In line with our view, the BoE delivered a hawkish twist to its guidance emphasising their gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February.
• The market reaction was modest with Gilt yields tracking slightly higher and EUR/GBP moving lower.

As expected, the Bank of England (BoE) decided to cut the Bank Rate by 25bp to 4.75%. The vote split was 8-1 in line with our expectation, with the majority of members voting for a cut and hawk Mann voting for an unchanged decision.

The BoE retained much of its previous guidance noting that "a gradual approach to removing policy restraint remains appropriate". From the minutes it was evident that this "gradual approach" increasingly is becoming the consensus view within the MPC. In line with our expectation the BoE revised its inflation and growth forecast higher following the fiscal announcement last week, which delivered a notably more expansive fiscal stance than assumed in the latest round of BoE forecasts from August. The BoE now sees CPI at 2.7% y/y (prev. 2.2%) and GDP at 1.7% y/y (prev. 0.9%) in Q4 2025. While we still think only a gradual cutting cycle is warranted, amid the inflationary boost from the fiscal policy announced, we highlight that the new forecasts were done with a market implied Bank Rate path from prior to the Budget announcement. This is important as this path was notably lower than current pricing, which in turn means that the upward revisions above should be taken with a pinch of salt.

Overall, we think the communication today supports our call of a more gradual approach to the cutting cycle. We expect the next 25bp cut in February with the Bank Rate ending the year at 4.75% in 2024 and 3.25% in 2025.

Rates. Gilt yields initially moved higher across the board on the hawkish twist to the statement but partly retraced the move during the press conference - also aided by the global fixed income rally. Overall, the UK-specific reaction in rates markets was muted. Markets price 5bp worth of cuts for December and 65bp by YE 2025. We still favour being paid in the very short-end of the Sonia-curve but highlight the potential for the BoE to deliver more easing in 2025 than currently priced.

FX. EUR/GBP moved lower on the announcement on the notion of a gradual cutting cycle. The guidance delivered today highlights the more cautious approach of the BoE, which supports our case of a continued move lower in EUR/GBP. This is further amplified by UK economic outperformance and tight credit spreads. The key risk is a soft BoE.

Our call. We expect the BoE to remain on hold at the December meeting and maintain its "gradual approach". In 2025, we expect cuts at every meeting starting in February and until H2 2025 where we expect a step down to a quarterly pace. This leaves the Bank Rate at 3.25% by YE 2025.

• EURAUD under bearish pressure
•  Likely to fall to support level 1.6125

EURAUD currency pair under bearish pressure after the earlier breakout of the support trendline of the daily up channel from the start of October.

The breakout of this up channel accelerated the active minor impulse wave 1 of the higher order impulse sequence (1) from the end of last month.

Given the strongly bullish Australian dollar sentiment seen across the FX markets today, EURAUD currency pair can be expected to fall to the next support level 1.6125 (which stopped the previous intermediate ABC correction (B) in the middle of October).

• GBPUSD reversed from support level 1.2840
• Likely to rise to resistance level 1.3050

GBPUSD currency pair recently reversed up from the support level 1.2840 (which stopped the previous intermediate correction (A) at the end of October).

The upward reversal from the support level 1.2840 created the daily Japanese candlesticks reversal pattern Piercing Line.

Given the clear daily uptrend and the strong US dollar sales seen today, GBPUSD currency pair can be expected to rise to the next resistance level 1.3050 (top of the previous minor correction 4).

Summary

The October Consumer Price Index will likely show that progress in wringing out the last bit of inflation remains frustratingly slow. We look for headline CPI to have advanced 0.2% in October, which would bump up the 12-month change in consumer prices to 2.5%. Excluding food and energy, prices are likely to have increased 0.3% for a third consecutive month as another increase in goods prices coincides with glacial easing in services inflation.

Glacial Slowing in Services and Firmer Goods Prices Bode Poorly for Overall Inflation Progress

The October CPI report will likely support the notion that the last mile of inflation's journey back to target will be the hardest. We look for the Consumer Price Index to have advanced 0.2% (0.21% unrounded) in October, causing the year-over-year rate to edge back up to 2.5% from 2.4% last month (Figure 1). Excluding food and energy, a third consecutive 0.3% monthly increase is expected to keep the core index up 3.3% year-over-year—still about one percentage point higher than its pre-pandemic pace.

A more temperate gain in food prices likely helped to keep October's headline gain in check. After grocery prices leapt 0.4% in September, we expect a slower rise in October (0.1%). About one-third of September's increase in food at home could be traced to eggs, but wholesale prices have eased in recent weeks, pointing to some giveback from September's hot reading. Amid a trend-like 0.3% rise in food away from home, we estimate the 12-month change in overall food inflation edged back down to 2.2%. Further offering consumers some reprieve was the continued easing of gas prices last month. We estimate energy goods prices fell roughly 1.4% in October and 13% from this time last year. However, the downdraft to overall inflation from energy is waning, and the risks to energy costs, at least for the time being, lie to the upside given geopolitical tensions in the Middle East.

Glacial Slowing in Services Keeping Inflation On

Excluding the more volatile energy and food components, the unwinding of pandemic-era price distortions has proven to be frustratingly slow. Our expectation for a 0.28% monthly gain would push the three-month annualized rate of core CPI up to 3.6% while keeping the 12-month rate at 3.3% for a second straight month.

Core goods prices look set for another rise in October, although it will likely be more modest (0.1% compared to 0.2% September) with a different set of drivers. After some of the largest gains of the past year in categories like apparel, household furnishings and other goods, we expect some mean-reversion in non-vehicle core goods. In contrast, the recent rebound in auction prices for used cars point to what could be the largest monthly gain in the CPI for used vehicles in about a year (Figure 2). We still think that the benefits of smoother supply chains and cooler demand have yet to fully run their course, but the deflationary impulses from new and used cars in particular may ebb through the final months of the year—especially as the devastation of Hurricanes Helene and Milton boosts demand for replacement vehicles and parts.

Having increased 4.8% in the year through September, services categories remain the real laggard in terms of core inflation settling back down (Figure 3). We look for a 0.34% rise in services ex-food and energy, which would be essentially unchanged from the prior monthly gain of 0.36%. Primary shelter likely advanced at a similar pace as September (0.3%), which would lead the 12-month change down a tick to 5.0%. Travel prices likely firmed up over the month as hurricane-related evacuations and displacements drove up demand for lodging away from home. However, smaller monthly gains for vehicle insurance, tuition and medical care should lead to an easing of the other core services, as service providers continue to be benefit from more stable prices for goods inputs and slower growth in labor costs (Figure 4).

While the journey back to price stability has not been completed, we have been of the view that the cooler jobs market, un-kinked supply chains, pickup in productivity and anchored inflation explanations would help drive inflation slowly back to the Fed's target over the course of the next two years. A number of upside risks remain in the near to medium term, however, including a pullback in labor supply, deglobalization's impact on import prices, the potential for worsening conflict in the Middle East and still-strong demand.

Many of the policies proposed by President-elect Donald Trump on the campaign trail are likely to contribute to these pressures and extend the journey back to the Fed's target, if not lead to a re-acceleration in price growth over the next year or so, in our view. We have discussed some initial policy implications of the 2024 election results, but will publish a detailed update to our medium-term inflation forecast with the release of our Annual Economic Outlook on November 21.

Markets

The consequences of yesterday evening’s decision by German Chancellor Scholz to sack his finance minister, Lindner, might by far-reaching. Lindner’s hard “no” against modifying the debt brake enshrined in the German constitution to allow for more spending in order to revive the economy mired in recession but also to grant more support to Ukraine for example, was the straw that broke the coalition’s back. Scholz tabled a confidence vote on December 15. Assuming he’ll lose it, snap elections could be set up for March (instead of September). German opposition leader Merz (CDU) today indicated he wants to speed things up with a confidence vote next week allowing for January elections. Lindner’s FDP backed that call. We think that German elections would effectively result in a looser fiscal policy stance, even as the CDU’s (leading in the polls) official view is still one committed to strict borrowing rules and against additional joint EU debt. Last week’s UK budget and this week’s US presidential elections proved that you can’t win an election running on any other platform than the economy/purchasing power (and safety/migration). Markets anticipate what could be coming. German Bunds underperform today more than reversing yesterday’s odd gains. German yields rise by 5.3 bps (2-yr) to 7.9 bps (30-yr). The Bund/swap spread turns positive for the first time on record in a sign of rising German credit risk. The inflationary monetary shift started a reversal from a deeply negative Bund/swap spread and that move accelerated under impulse of recent UK/US/German developments. It’s clear that governments are willing to take the inflationary risk to boost short term growth. This will have consequences for central banks, as evidenced by today’s Bank of England gathering and potentially at tonight’s FOMC meeting although the lack of new growth and inflation forecasts might push the issue to the December meeting.

The BoE cut its policy rate by 25 bps to 4.75% in a 8-1 vote. Catherine Mann preferred to maintain the rate at 5%. In a first estimate, the UK central bank measures the combined effects of the measures announced in Chancellor Reeves’ Autumn Budget as a boost to the level of GDP by around 0.75% at the peak in a year’s time compared to August projections: 1.7%-1.7%-1.1%-1.4% for 2024-2027 (from 2%-0.9%-1.5%; 2027 is a first estimate). The Budget is provisionally expected to boost CPI inflation by just under half of a percentage point at the peak: 2.4%-2.7%-2.2%-1.6% for 2024-2027 (from 2.7%-2.2%-1.6%). There remains significant uncertainty on the impact on the labour market. A gradual, data-dependent approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target have dissipated further. BoE governor Bailey at the press conference stressed that the UK central bank can’t cut rates too quickly or by too much. Market by and large anticipated today’s hawkish cut. Sterling made an attempt to go for test of the EUR/GBP 0.83 support, but the move never went far.

News & Views

The Swedish Riksbank accelerated its normalization cycle with a flagged 50 bps rate cut from 3.25% to 2.75%. The central bank argues that core CPIF inflation dynamics held close to the target since the start of the year. At the same time, activity remains weak and there are few signs of the hoped-for recovery. They stick with plans of easing policy further in December and H1 2025, but could accelerate the process compared with indications in the September forecast. Markets see the Riksbank policy rate close to 2% at the end of Q3 2025. After touching a short-term low just above EUR/SEK 11.70, the krone yesterday and today rebounded modestly. A return below 11.50 is needed to call off the short term negative alert on the Swedish currency.

Divergence in Scandinavian monetary policy persists. The Norges Bank left its policy rate unchanged at the cycle top of 4.5%. Policy restriction has cooled activity and dampened inflation, but a weak krone and a rapid rise in business costs will slow further disinflation. International policy rate expectations have increased as well. The Norwegian central bank maintained its guidance to gradually reduce the policy rate from Q1 2025 as indicated in September. Money markets discount a first 25 bps rate cut by the end of Q1. After almost touching the EUR/NOK 12 barrier earlier this week, the krone yesterday and even more today rebounded to the EUR/NOK 11.75 area.

Daily Pivots: (S1) 1.0628; (P) 1.0783; (R1) 1.0885; More...

Intraday bias in EUR/USD Is turned neutral first with current recovery. Some consolidation would be seen but further decline is expected as long as 1.0936 resistance holds. ON the downside, sustained break of 61.8% projection of 1.1213 to 1.0760 from 1.0936 at 1.0656 will pave the way to 100% projection at 1.0483.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage.

Daily Pivots: (S1) 1.2793; (P) 1.2920; (R1) 1.3007; More...

Range trading continues in GBP/USD and intraday bias stays neutral. With 1.3047 resistance intact, further decline is still expected. Firm break of 1.2842 will resume the fall from 1.3433 to 61.8% retracement of 1.2298 to 1.3433 at 1.2732. However, considering bullish convergence condition in 4H MACD, firm break of 1.3047 will indicate short term bottoming, and turn bias back to the upside.

In the bigger picture, considering mildly bearish divergence condition in D MACD, a medium term top is likely in place at 1.3433 already. Price actions from there are seen as correction to whole up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. Strong support should be seen there to bring rebound.