Without Powell's intervention, the Dollar and US Treasuries would have corrected on their strong trend

Markets

Markets tried to extend the Trump trade yesterday after higher US October producer price inflation and solid (low) weekly jobless claims. They sparked a reaction higher in the dollar and lower in US Treasuries. However those moves didn’t go far and even started a modest correction move on this month’s one-way traffic. Enter Fed Chair Powell. After European close he spoke on the economic outlook at a Dallas Fed event. He labelled the recent performance of the US economy as “remarkably good” in an echo to last week’s press conference following the Fed’s 25 bps rate cut. While he shied away from commenting on US politics, he did admit that the economy is not sending any signals that they need to be in a hurry to lower rates. These comments first of all indicate that the Fed embraces the recent market repricing on a landing zone for the policy rate next year (3.75%-4%; clearly above neutral). Secondly Powell seems to be closer to already pausing the interest rate cycle lower. While we stick to the view that we’ll see another 25 bps rate cut in December, it won’t take much to hold in January. US money markets are already contemplating the possibility of a skip at the final meeting of this year with a 25 bps rate cut only 60% discounted. Earlier on the day, dovish Fed governor Kugler said that the Fed must focus on both inflation and jobs goals. “If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts,” she said. “But if the labor market slows down suddenly, it would be appropriate to continue to gradually reduce the policy rate.” Kugler’s comments seem to be skewing to the upside inflation risks (stubborn housing inflation and high inflation in certain goods and services) which obviously carries some weight given her more dovish status. Daily US yield changes eventually ranged between +5.9 bps (2-yr) and -4.9 bps (30-yr). This flattening move contrasts with the bull steepening in Europe where German yields shed 6.4 bps (5-yr) to 0.9 bps (30-yr). EUR/USD closed at a new YTD low (1.0530) after testing the 1.05 mark during the day. The range bottom and 2023 low stands at 1.0448. Today’s US retail sales have the potential to trigger a test if they showcase more strength. We think risks are becoming asymmetric though. If it weren’t for Powell’s intervention, the dollar and US Treasuries would have already corrected on the strong trend. It’s our preferred scenario going into the weekend.

News and views

The Central Bank of Mexico yesterday cut its policy rate by 25 bps to 10.25%. Annual headline inflation rebounded to 4.76% in October while core inflation continued decreasing to 3.80% .The central bank forecasts headline and core inflation to converge to the 3% inflation target (with a tolerance band of +/- 1.0%) by the end of next year and stay there in 2026. Upside risks to this scenario remain. Looking ahead, the board expects that the inflationary environment will allow further reference rate adjustments, supported by expectations of ongoing weakness in the economy. The Mexican peso (MXN) since Q2 is on a downward trajectory against the dollar with recent political events in the US confirming this trend. USD/MXN currently trades at 20.48, compared to a low of 16.26 early April.

Japanese growth slowed from 0.5% Q/Q in Q2 to 0.2% Q/Q in Q3 (0.9% Q/Qa). The outcome was marginally stronger than expected (0.7% Q/Qa). The details show a mixed picture. Private consumption printed much stronger than expected at 0.9% Q/Q (from 0.7% in Q2 and 0.2% expected). On the negative side, capital spending was weak at -0.2% Q/Q (from 0.9% in Q2). Net exports also unexpectedly contributed negatively (-0.4%) to Q3 growth. In the previous quarter this negative contribution was only -0.1%. From a monetary policy point of view, the solid performance of domestic demand probably is the more important factor for the BOJ to gradually continue policy normalization. Recent weaking of the yen also points in the same direction. Markets are now looking forward to a speech and press conference of BOJ governor Ueda next Monday. Analysts currently are divided whether a next step should already take place in December or only come at the January meeting. USD/JPY tentatively extends its gain trading north of 156, to be compared to sub 140 levels mid-September.

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