USD rebound stalls ahead of key Fed speakers

USD: Powell and Williams in focus today   

The US dollar rebound after the sharp sell-off at the end of last week has stalled with DXY failing at intra-day highs yesterday and weakening modestly as the FX market consolidates ahead of some potentially key speeches today. The data calendar is relatively light today and hence the Federal Reserve’s Division of Research and Statistics Centennial Conference will grab the limelight today with Chair Powell opening the event with some remarks at 14:15 GMT which will be followed by the keynote speech by New York Fed President Williams (18:40). Neither speeches will be followed by Q&A. Fed Governors Cook (10:15), Barr (19:00) and Jefferson (21:45) will also speak today at separate events. There were no fewer than seven Fed speaking events yesterday and the stalling of momentum in US dollar appreciation toward the end of yesterday may reflect a degree of disappointment that there wasn’t stronger rhetoric pushing back on the easing of financial conditions last week.

The general tone of the comments from Fed officials yesterday was continued caution over expressing any sense of success or “job done” over bringing inflation lower but equally there was no strong indication that the Fed was considering or likely to hike rates at the December meeting. Governor Bowman was strongest with her message that she believed further rate hikes will be required. Most mentioned the fact that market yields moving higher since September had tightened financial conditions further. Essentially though, the tone of rhetoric will remain dictated by key incoming data over the coming weeks – in particular the CPI data on Tuesday and the retail sales and PPI data on Wednesday.  

Separately we did get some good news on global growth that all else equal would be classed as dollar negative – the IMF raised its GDP forecasts for China (from last month) by 0.4ppt for both this year and next to 5.4% and 4.6% respectively. The IMF country review process basically incorporated the CNY 1 trillion fiscal stimulus announcement that took place after the World Economic Outlook was released in October. Better global growth conditions would certainly help to reinforce US dollar weakness in circumstances of yields drifting further lower in the US as economic activity continues to slow. Still, despite this upward revision, we believe there will be limits to US dollar weakness in 2024 given the challenging global growth prospects.

DESPITE SLOWER GROWTH CHINA STILL NO.1 DRIVER OF GLOBAL GROWTH

Source: IMF & Bloomberg Calculations

GBP: BoE’s Pill prompts rate adjustment without much FX impact

The three-month SONIA futures rallied by about 10bps yesterday after BoE Chief Economist Huw Pill’s comments on Monday evening fuelled increased speculation that the BoE could be cutting its key policy rate by the middle of next year. The central bank shift in rhetoric goes along the lines of something like – (1) communicating the need to hike; (2) to communicating the need for rates to remain higher for longer; (3) to communicating the possibility of rate cuts further ahead; (4) to rate cuts might be more imminent. Generally we have moved from (1) to (2) recently and hence the comment from Pill that would suggest moving to (3) has come a little faster than expected. The BoE may well feel more confident in making a statement like this given we should certainly be on the cusp of UK inflation falling into line with elsewhere. The 80% increase in the OFGEM utility price cap in October 2022 will fall out of the annual calculations in the October CPI data released next week (15^th Nov).

With the potential for the annual CPI rate to fall below 5.0% next week, there can certainly be a little more focus by the BoE on growth and activity relative to a few months ago. That shift in focus would certainly imply more dovish rhetoric from the BoE as we approach year-end and enter 2024. Despite the adjustment yesterday, there remains scope for further adjustments lower in yields relative to other major economies. The OIS curve indicates around 40bps of rate cuts now priced by September 2024. The ECB pricing is 66bps while for the Fed the pricing is 62bps.

The economy is certainly much more resilient in the US than in the UK and the BoE must also be encouraged by the clear easing of demand for labour. The PAYE employment data shows three consecutive month-on-month declines in employment and this softening in the labour market is resulting in a slowdown in wage growth captured in the same PAYE data set. The annual growth rate in median pay slowed from 7.6% in August to 5.7% in September while the 6mth annualised growth rate slowed from 6.7% to 4.2% - the slowest pace since August 2020. Further evidence of wage growth slowdown like this will be crucial for this early sign of a shift in rhetoric being sustained.  While the Pill comments this week have not resulted in any broader underperformance of GBP, the risks will remain to the downside for now. Governor Bailey speaks in Dublin at 09:30 today..

PAYE EMPLOYMENT – MEDIAN PAY; YOY AND 6MTH ANNUALISED

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	08:45	ECB's Lane Speaks	--	--	--	!!!
IT	09:00	Italian Retail Sales (MoM)	Sep	-0.2%	-0.4%	!
IT	09:00	Italian Retail Sales (YoY)	Sep	--	2.4%	!
UK	09:30	BoE Gov Bailey Speaks	--	--	--	!!!!
EC	10:00	Eurogroup Meetings	--	--	--	!!
EC	10:00	Retail Sales (MoM)	Sep	-0.2%	-1.2%	!
EC	10:00	Retail Sales (YoY)	Sep	-3.1%	-2.1%	!
US	10:15	Fed Governor Cook Speaks	--	--	--	!!
CA	11:00	Leading Index (MoM)	Oct	--	0.08%	!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-2.1%	!
CA	13:30	Building Permits (MoM)	Sep	-1.6%	3.4%	!!
EC	14:00	ECB's Enria Speaks	--	--	--	!!
US	14:15	Fed Chair Powell Speaks	--	--	--	!!!
US	15:00	IBD/TIPP Economic Optimism	--	40.2	36.3	!
US	15:00	Wholesale Inventories (MoM)	Sep	0.0%	-0.1%	!
US	15:00	Wholesale Trade Sales (MoM)	Sep	--	1.8%	!
US	16:30	Atlanta Fed GDPNow	Q4	2.1%	2.1%	!!
US	18:00	10-Year Note Auction	--	--	4.610%	!!
CA	18:30	BOC Summary of Deliberations	--	--	--	!
US	18:40	FOMC Member Williams Speaks	--	--	--	!!!!
US	19:00	Fed Vice Chair for Supervision Barr Speaks	--	--	--	!!!
US	21:45	Fed Governor Jefferson Speaks	--	--	--	!!!

Source: Bloomberg