American Views on Linking Trade Policy with Climate Performance

Economic

Summary:

Adopting a federal carbon price to reduce domestic greenhouse gas emissions has been an ongoing topic of American climate policy for decades. Thus far, the political hurdles have remained insurmountable, leaving the United States the lone G7 member without a national carbon tax or cap-and-trade system. Twelve states, however, continue to operate carbon cap-and-trade programs. Federal policies to reduce carbon dioxide emissions have instead focused primarily on financial incentives to accelerate production and use of clean energy and regulation through the Clean Air Act.

But what about putting a price on carbon emissions attributable to products imported into the United States from nations that release greater emissions per unit of production? Would the American public support this? These could take the form of tariffs linked to climate policy such as a carbon price or emission records from exporting nations, paid by importers upon American arrival with most costs likely passed along to consumers. In recent years, members of Congress from both parties have begun to explore some version of this option. Legislation currently in play includes bills that would establish a federal measurement system for carbon emissions across industries and among international trade partners, impose carbon tariffs on imports; or combine such tariffs with a domestic carbon price. Another major greenhouse gas, methane, has begun to receive some legislative attention as a possible tariff candidate in Congress, although this would be linked to a legislated American fee on domestic emissions from the oil and gas sectors that was designed to go into effect in 2024.

None of these bills can plausibly pass before the January inauguration of Donald Trump, but they could be part of a future agenda examining climate, energy, and trade policy. A self-described “tariff man,” Trump might decide to act unilaterally on some form of this. As Douglas Irwin has noted in his magisterial study of American tariff history, this policy tool has been frequently employed throughout the life of the republic for varied political and economic purposes. However, it has never before been linked with environmental or climate concerns as is now being considered. Carbon tariffs are also being actively explored or implemented abroad, most notably in the European Union (EU), which has a very robust continental carbon pricing system and a sustained history of achieving substantial carbon emission reductions. The EU is currently gathering data from trade partners, intending to use this to launch its own “carbon border adjustment mechanism” in 2026 on nations with weaker climate records. Other nations including Australia, Canada, Taiwan, and the United Kingdom are following suit with exploration of their own border pricing initiatives.

The Summer 2024 round of the National Surveys on Energy and Environment (NSEE) has included for the first time a short battery of questions addressing this trade-climate nexus. Based at the Muhlenberg College Institute of Public Opinion (MCIPO), the NSEE has examined American attitudes, beliefs, and policy preferences regarding climate and energy matters since 2008 through probability-based survey methodologies. This latest round is designed to begin filling a general research gap on public opinion concerning climate related trade issues in the United States and internationally. It is based on the responses of 715 American adults who were interviewed by phone in early July, using a probability-based sampling procedure that is designed to produce a representative sample of adult Americans. The 2024 NSEE wave was funded exclusively by the MCIPO.

American support for a tariff targeting greenhouse gas emissions of other countries

The survey indicates considerable support for the proposition that “the United States should place a tariff on goods manufactured in other countries that are produced with more greenhouse gas emissions than in the United States, even if it raises the cost of buying those goods in the United States.” Sixty-eight percent of respondents agreed, either strongly or somewhat, versus only 30% who somewhat or strongly disagreed. This support level is far greater than for a domestic carbon price involving either a carbon tax or carbon cap-and-trade system, questions which have been addressed regularly in previous NSEE surveys. For example, in the 2022 NSEE wave only 41% of Americans supported the adoption of a domestic carbon tax to reduce the emissions of greenhouse gases and address climate change.

There is considerable consistency in support for a tariff targeting foreign greenhouse gas emissions, cutting across such major individual characteristics as partisan affiliation, age, gender, or educational attainment. The striking similarities across partisan affiliation shown in Figure 1 are most notable because of the contrast with the deep partisan divides that are usually present in American opinions regarding climate change and climate policy.

American Views on Linking Trade Policy with Climate Performance_1

American views on following international trade agreements

The issue of carbon tariffs is nested in a larger discussion about the future of American trade policy. Long-standing support from both political parties for sustaining existing trade agreements and pursuing new ones has declined markedly in the last decade. Donald Trump’s hostility to trade pacts is well known, although he did preside over renegotiation of North American trade terms, leading to the 2020 United States-Mexico-Canada Trade Agreement. Joe Biden will leave office next January as the first President in the modern era who did not complete a single new trade deal. His signature Inflation Reduction Act is designed to accelerate American production and use of clean energy technology through a wide array of financial incentives. It is widely seen abroad as an effort to discourage American imports of such products as batteries, solar panels, and electric vehicles.

How do Americans view global trade given these major political and policy shifts, both in general terms and given possible future linkages between trade and climate performance? As evident in Figures 2 and 3, strong majorities support propositions that “it is important that the United States follow international trade agreements” and that “when negotiating a trade agreement with other countries, the United States should prioritize the reduction of greenhouse gas emissions.” Once again, we find fairly limited differences in views on this proposition in terms of partisan affiliation, although Democrats are somewhat more likely to respond affirmatively to both questions than Republicans and Independents. These findings suggest that Americans do not take commitments to international trade regimes lightly and support efforts to address climate change through trade policy.

American Views on Linking Trade Policy with Climate Performance_2

American Views on Linking Trade Policy with Climate Performance_3

Do Americans perceive a superior U.S. carbon emissions record to trade partners?

The idea of linking climate change with trade tariffs inevitably raises the question of how one credibly measures climate performance in a world in which no common metric has been established. Much economic analysis of potential carbon border adjustments has presumed that each national carbon price would serve as a central, straightforward measure for that nation. This idea has animated the EU’s development of its emerging border adjustment program, linked to its long-term support for carbon pricing and a continental price through its multi-sectoral Emissions Trading System that has ranged from 60 to 100 Euros per ton of emissions for most of the period between January 2022 and the present.

Sustained American aversion to any domestic price has prompted a shift from using pricing as a metric for climate performance toward measures of carbon emissions intensity that assess emission levels per unit of production. This is often linked to assertions that America has achieved less carbon-intensive production than its major trade partners. A 2023 Niskanen Center study of emission patterns across 19 major industrial sectors indicates that the United States maintains a significant carbon performance advantage over some trade partners, including China, India, and Russia. However, it also finds that the United States lags behind other nations in this regard, including the EU, Japan, and the United Kingdom, while ranking quite closely to others such as Canada, Mexico, and South Korea. A 2020 study by the Climate Leadership Council examined emissions patterns across 20 major sectors and found a significant American “carbon advantage” in direct comparison with China, Russia, India, and Mexico. Any American advantages over Brazil or Canada were more modest, and it ranked behind the EU in 14 sectors. This study did not include Japan, South Korea, or the United Kingdom in its comparative analysis, while the Niskanen study did not include Brazil. Both studies also attempted to compare American emission averages across industrial sectors with those of other nations, finding comparatively stronger American records. There is currently no official American governmental source that makes such comparisons.

In the latest NSEE, we did not ask respondents to delve into these methodological issues but rather sought their understanding of whether “goods manufactured in the United States produce more, less, or about the same amount of greenhouse gas emissions as goods manufactured” in other nations. By decisive margins, respondents believe that American manufacturing is cleaner than in China and “most other countries,” as seen in Table 4 (A and C). Republicans are more decisive than Democrats in assuming American superiority, although differences across other demographic categories are fairly modest.

At the same time, respondents also believe that American manufacturing outperforms European countries in terms of lesser climate impact, albeit by less decisive margins than in the other national comparisons. Party affiliation leads to substantial differences on this question, with a 58-to-11% affirmation of United States’ carbon superiority over European countries by Republicans compared with a 37-to-31% margin among Democrats and a 41-to-28% margin among Independents. This contrasts with findings from both the Niskanen Center and Climate Leadership Council studies that the EU has a superior carbon emissions intensity record to the United States in most examined industrial sectors.

Conclusion

These findings suggest considerable support across partisan divides for placing American carbon tariffs on imports (68% in agreement), American prioritization of greenhouse gas emissions in trade negotiations (78% in agreement), and American fealty to international trade pacts (79% in agreement). Most notably, the reticence Republicans have traditionally demonstrated regarding domestic carbon pricing mechanisms such as carbon taxes and cap and trade systems is significantly absent in these findings, with over six out of ten Republicans supporting a tariff targeting greenhouse gas emissions from manufacturing abroad. It also offers perspective on how Americans view the carbon emissions performance of its national industries in comparison with those of major trade partners.

This survey does not address public views on the particulars of any proposed American trade-climate policy legislation and did not have capacity to include a larger suite of questions linked to potential policy alternatives. We intend to revisit these broader issues in future iterations of the NSEE. Nonetheless, we believe that this analysis provides some important initial views on public sentiments at the intersection of trade and climate policy at the very moment that it gains saliency on policy agendas in the United States and around the world. We hope that this preliminary work encourages expanded study of trade-climate issues through survey research as well as other policy science methods.

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Cohen

Economic

Central Bank

TOKYO (Nov 15): Bank of Japan (BOJ) governor Kazuo Ueda will deliver a speech and hold a news conference in the central Japan city of Nagoya next Monday, the BOJ said, an event that will be closely watched by markets for hints on whether it might raise interest rates next month.

It will be Ueda's first opportunity to speak directly on monetary policy since Donald Trump's victory in the US presidential election on Nov 5, and follows Japan's third-quarter gross domestic product (GDP) data, which showed surprising resilience in consumption.

Ueda's comments will be scrutinised by markets for clues on how soon the BOJ could raise interest rates again, with analysts divided on whether it may come in December or January next year.

Having faced criticism for amplifying an August market rout with its surprise interest rate hike in July, Ueda may drop hawkish hints if the BOJ wants to prepare markets for the chance of a rate increase at the Dec 18-19 meeting, some analysts say.

The yen's recent renewed fall adds pressure on the BOJ to hike rates soon, as the currency's weakness pushes up inflation and hurts households by boosting import costs, they say.

After a brief rebound to around 141 to the dollar in September, the yen has slipped back to levels before the BOJ's July rate hike. It is now hovering around 156 yen, approaching the 160 line seen as a level that heightens policymakers' alarm.

"As long as wages and services prices keep growing by around the current pace, the BOJ may find it sufficient to adjust the degree of monetary support," said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"There's also renewed inflationary risk from the weak yen," which heightens the chance of a December rate hike, she said.

Wholesale inflation accelerated in October at the fastest annual pace in more than a year, as renewed yen falls pushed up import costs for some goods, data showed on Wednesday.

Japan's short-term government bond yields rose to their highest in more than a decade on Thursday, as investors braced for the chance of a near-term BOJ rate hike.

At Nagoya, Ueda will deliver a speech and take questions from business executives from 10:00am to 11:30am (0100-0230 GMT), followed by a press conference from 1:45pm to 2:15pm (0445-0515 GMT), the BOJ said on Friday.

BOJ governors historically visit Osaka and Nagoya each year, to exchange views with business executives and explain the reasoning behind the central bank's monetary policy decisions.

The BOJ ended negative interest rates in March, and raised its short-term policy rate to 0.25% in July, on the view that Japan was on the cusp of durably achieving its 2% inflation target.

A Reuters poll conducted on Oct 3-11 showed a very slim majority of economists projecting the BOJ to forgo raising rates again this year, although nearly 90% expect rates to rise by end-March.

Source: Theedgemarkets

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Westpac

Economic

The Wage Price Index increased 0.8% in the September quarter and 3.5% over the year. This was in line with our expectations but – as Westpac Economics Senior Economist Justin Smirk pointed out – slightly below consensus expectations. The extent of the step down in the year-ended growth rate was well anticipated, because it reflected the dropping out of the outsized 2023 National Wage Case and related decisions from the calculation.

The RBA does not publish a full quarterly wages forecast profile, only the forecasts for year-ended growth as at June and December quarters. So, we do not know exactly what they expected for the September quarter. However, it would now need to see a bounce back in quarterly growth to around 1% for the December quarter for its end-2024 forecast to come true. Even allowing for some recent health-care agreements, we consider such a bounce to be beyond the bounds of plausibility given how smooth this series tends to be. There are no strong reasons for a change of direction of this kind, either. Surveys, data on awards and enterprise agreements and feedback from our own customers would all suggest that a sudden bounce back in wages growth is not happening.

We therefore expect that the RBA will have to revise down its near-term wages growth forecasts again in February, having already done so in November.

Forecasting is hard, so some revisions and near-term misses are par for the course. Even so, is there something going on with the way some observers think about domestic labour costs, that could be affecting their interpretation of the economic outlook? And in the case of the RBA, could this be affecting its monetary policy decision-making?

Some insights can be gleaned from the following passage from the latest Statement on Monetary Policy:

At current rates of productivity growth, WPI growth remains somewhat above rates that can be sustained in the long term without putting upward pressure on inflation. All else equal, when productivity growth is positive, WPI growth is able to outpace inflation while still being consistent with inflation at the midpoint of the target range. As trend growth in labour productivity is likely below its rate in previous decades, the sustainable WPI growth rate is probably lower than in the past and below the current rate of growth. That suggests it would be difficult to sustain wages growth at its current pace in the longer term without a higher pace of trend productivity growth.

There are a few things worth noting about this passage.

First, this reasoning comes from the markup model for forecasting inflation. As explained in a previous note, this model starts from the presumption that prices are a (roughly stable) markup over costs, including labour costs. A bit of algebra later leads to a relationship that states that wages growth minus productivity growth is approximately equal to inflation (prices growth). As discussed in that previous note, there are a lot of assumptions underlying the use of this relationship for forecasting. But more fundamentally, the WPI is not the measure of labour cost growth that maps most closely to the one implied in that relationship. Rather, the more volatile average earnings measures from the national accounts are more relevant.

Presumably the RBA has used the smoother WPI measure for ease of exposition. In that case, though, one should be even more circumspect about how tightly the relationship should hold.

Second, there are some interesting implied choices of time period used in that paragraph. For example, it is stated that future trend productivity growth is expected to be slower than the average of previous decades. This is not controversial: the late 1990s was a period of strong productivity growth globally, largely because of the adoption of personal computers and other new technologies. More recent productivity growth was slower, but not zero. The real question is whether future productivity growth will be slower than the average of more recent times, such as the years leading up to the pandemic. Perhaps this is true, but the reasons for a further slowdown have not been elucidated. While any boost from AI and other technology will indeed take time to show up in the productivity figures, just as PCs did, a further decline in global trend productivity growth is not the base case for the profession more broadly.

Third, even granting the reduced noise from using the WPI, and assuming a further slowdown in global productivity, there is the question of why the RBA repeatedly referenced the sustainability of the current rate of growth. At the time of publication, this was the year to the June quarter figure of 4.1%, not the year to September quarter figure of 3.5% just reported. Yet the RBA surely anticipated the step down in growth that was already baked in to awards and many enterprise agreements. Why the focus on the sustainability of a growth rate that everyone knew was not going to be sustained? The question also arises of how we reconcile wages growth having already rolled over, to annualised rates in the low 3s, with the RBA’s view that the labour market is still tight.

Later in the document, the step down in unit labour cost growth from 7% annualised to 3½% annualised in just six months was noted (as we had previously expected and written about). So why the implication that growth in labour costs was much stickier than that?

The deeper question is: with wages growth tracking in the low 3s and productivity growth not being zero, why has the RBA focused so much on the risk that wages growth is unsustainable?

I can’t help thinking that this partly reflects deep-seated narratives about the Australian economy not being competitive. These narratives stemmed from the so-called ‘real wage overhang’ that emerged in the 1970s following the policy-induced wages breakout then. Another bout of this belief system emerged after the mining boom and attendant strong income growth. Since then, restoring competitiveness by crimping wages growth has been a common go-to in the policy discourse in Australia, far more than elsewhere in my observation. It is as if people forget that exchange rates tend to move much faster than domestic labour costs.

In any case, even if productivity growth averages a touch lower than 1% (worse than recent history), then by the RBA’s own figuring, WPI growth averaging 3.2% (the annualised rate of the past three quarters) is well and truly consistent with inflation averaging 2½% or below. Perhaps we need to let go of the pandemic-era hangover.

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Economic

Understanding overbought conditions in trading

When markets become overbought, prices have risen more quickly than underlying fundamentals may justify. This often occurs during strong rallies when buying enthusiasm pushes prices to seemingly unsustainable levels.

Technical traders typically identify overbought conditions using momentum indicators such as RSI, which generates a signal when readings exceed 70, or the Stochastic Oscillator which generates overbought signals above 80.

Understanding Overbought and Oversold Trading Conditions_1

Overbought conditions don't guarantee immediate reversals. In strong uptrends, markets can remain overbought for extended periods while prices continue climbing, making timing crucial for traders.

Overbought signals in an uptrend may suggest exiting a long trade, while overbought signals in a downtrend or sideways trend may suggest a short sell position for traders.

Identifying oversold market conditions

Oversold conditions represent the opposite scenario, where prices have fallen more rapidly than the fundamentals may have suggested they should. These situations often emerge during panic selling or market capitulation phases.

Many technical traders may watch for RSI readings below 30 or Stochastic readings below 20 to identify oversold conditions.

Understanding Overbought and Oversold Trading Conditions_2

These signals tend to be most reliable in ranging markets rather than strong trends. Traders using contract for differences (CFDs) should be particularly careful during trending markets, as oversold conditions can persist.

Like overbought signals, oversold conditions don't automatically trigger rebounds. Markets can remain oversold during prolonged downtrends, especially during broader economic uncertainty.

Oversold signals in an uptrend may suggest entering a long trade, while oversold signals in a downtrend or sideways trend may suggest an exit sell position for traders.

Trading strategies for overbought markets

When markets become overbought, experienced traders often reduce their long positions. This defensive approach helps protect profits and manage risk during potential reversals.

Some traders look for short opportunities, particularly when overbought signals align with other technical indicators. However, it's crucial to wait for confirmation rather than trading on a single signal.

Spread betting traders often use multiple timeframes to confirm signals. This helps avoid false readings that could trigger premature position exits.

Risk management becomes especially important during overbought conditions. Traders should consider tightening stops and reducing position sizes until the market direction becomes clearer.

Trading strategies for oversold markets

Oversold conditions can present opportunities for entering long positions, particularly when prices show signs of stabilising. However, timing these entries requires patience and confirmation.

Successful traders often scale into positions gradually rather than committing all capital at once. This approach helps manage risk while still capturing potential reversals.

Many traders combine oversold readings with support levels for long entry.

Understanding Overbought and Oversold Trading Conditions_3

Combining oversold signals with an uptrend is also considered a more reliable approach to finding long entry using these oscillators.

Understanding Overbought and Oversold Trading Conditions_4

While overbought signals against the uptrend might be used to exit / sell long positions.

Trading strategies for overbought markets

Overbought conditions can present opportunities for entering short positions, particularly when prices show signs of stabilising.

However, timing these entries requires patience and confirmation.

Successful traders often scale into positions gradually rather than committing all capital at once. This approach helps manage risk while still capturing potential reversals.

Many traders combine overbought readings with resistance levels for short entry.

Understanding Overbought and Oversold Trading Conditions_5

Combining overbought signals oversold signals within a down trend is also considered a more reliable approach for short entry using these oscillators.

Understanding Overbought and Oversold Trading Conditions_6

While oversold signals against the trend might be used for short exit signals.

Common mistakes to avoid

The biggest mistake traders make is treating overbought and oversold signals as guaranteed reversal indicators. These conditions can persist longer than expected, particularly in strongly trending markets.

Another common error is ignoring the broader market context. Traders should consider factors like market sentiment, economic data, and sector performance before acting on technical signals.

In summary

Overbought and oversold conditions are technical trading signals that help identify potential market reversals, though they don't guarantee them. Markets become overbought when prices rise faster than fundamentals justify (RSI > 70, Stochastic > 80) and oversold when prices fall too rapidly (RSI < 30, Stochastic < 20).

These signals are most reliable in ranging markets rather than trends, as markets can remain overbought or oversold for extended periods during strong trends. In trending markets, signals aligned with the trend are considered more reliable for entries, while counter-trend signals are better used as exit triggers.

Successful trading strategies involve:

Using multiple timeframes and indicators for confirmation;

Scaling into positions gradually;

Combining signals with support/ resistance levels;

Maintaining proper risk management with stops and position sizing;

Considering broader market context before taking action.

The key is to avoid treating these signals as guaranteed reversals and to always consider them within the broader market context.

Opening an online trading account doesn't guarantee success with these strategies. Proper education and practice through a demo account are essential.

Using single indicators in isolation often leads to poor results. Successful traders typically combine multiple technical tools with fundamental analysis for more reliable signals.

How to trade overbought and oversold conditions

Research overbought and oversold indicators thoroughly, understanding their limitations;

Choose whether you want to trade or invest;

Open an account with us;

Practice identifying signals using our advanced charting tools;

Place your first trade using appropriate position sizing and risk management.

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ING

Central Bank

Economic

The central bank kept its rate unchanged in October

The National Bank of Hungary (NBH) kept its base rate unchanged at 6.50% in October. The interest rate corridor also remained unchanged, with a range of +/- 100bp around the base rate. In line with its stability-oriented approach, this decision was driven by the significant weakening of the Hungarian forint due to global risk aversion shocks. Although there were some positive developments in the economy from a monetary policy perspective, the decision did not come as a big surprise due to market stability issues. Something similar can be said about the upcoming decision in November.

The main interest rates (%)

Source: NBH

Inflation outlook and risk perception on the sidelines, again

Headline inflation rose slightly by 0.2ppt to 3.2% year-on-year in October, below expectations. Services prices fell by 0.9% month-on-month, partly due to cheaper “other travel” (airfares) and health services, but the downside surprise was mainly due to an unexpected fall in telecommunication services prices (-6.8% MoM). However, it may be that this only reflects the impact of the free data packages offered during the September floods. If this is the case, then it was a one-off event that may re-accelerate inflation next month. Nevertheless, looking at the data, the picture is satisfactory in the short term, but there is a lot of uncertainty in the medium term, for example due to the expected high wage increase next year. All in all, the short-term inflation situation in itself could even have opened the door to an easing, but taking other factors into account, this is clearly no longer the case.

As far as risk perception is concerned, the National Bank of Hungary sees this through the lens of fiscal developments and external balances. The October budget deficit was the second largest since 2002, but this could also be a one-off event due to the September floods. The government has published the draft budget for 2025, which aims to maintain the previously telegraphed deficit level of 3.7% of GDP, and it looks more or less realistic, although we could point to several risks. On the external balances side, we haven't seen any significant deterioration from recent trends. All in all, risk perceptions alone won't play a major role in the decision-making process this time.

Headline and underlying inflation measures (% YoY)

Source: HCSO, NBH, ING

Financial market instability drives monetary policy decision

Under normal circumstances, the inflation picture and risk perceptions might move the needle a little towards easing, but with the instability in the financial markets, this idea is no longer a possibility. And the door to easing has been slammed shut, judging by the central bank's latest communication.

Since the last NBH rate-setting meeting (22 October), core rates have moved significantly higher, with both the short and long ends of the US yield curve rising by around 25bp by 13 November. The 10-year Bund also moved higher by around 7bp. This time, however, such a move in core rates did not translate into a higher risk premium for Hungarian government bond yields, as the spread between 10-year HUF and PLN government bond yields narrowed by 7bp compared to the October meeting.

The EUR/HUF exchange rate is therefore now the key issue for financial market stability. Since the October meeting, the exchange rate has moved sharply higher on the back of rising geopolitical risks and the outcome of the US presidential election, with Trump and the Republicans winning big. The already fragile currency and these changes pushed EUR/HUF to as high as 412 (3% weaker than mid-October), and the forint remained the underperformer from a regional perspective. A clear red flag in this currency move is that the market has already priced out the possibility of rate cuts in the coming months. This also means that an on-hold decision will be in line with market expectations, which is crucial given the HUF's vulnerability.

Performance of CEE FX versus EUR (end-2023 = 100%)

Source: NBH, ING

Our call

In our view, the National Bank of Hungary will leave the interest rate complex unchanged at its next rate setting meeting on 19 November. This will leave the key interest rate at 6.50%, which is a high conviction call. We also expect the Monetary Council to leave both ends of the interest rate corridor unchanged.

As the market has the same expectation, the focus will be on the communication and the forward guidance itself. While some may expect an open communication on rate hikes, citing an emergency case, such an admission itself could turn out to be a self-fulfilling prophecy and would be premature. We also don't see the central bank pulling the trigger on any kind of liquidity tightening right now, as all possible options have some limitations and could open a Pandora's box for the markets to test the central bank's pain thresholds. We therefore expect the central bank to balance the messages, to be hawkish but not to go the extra mile.

Looking further ahead, we do not expect another rate cut under the current administration (end of February 2025), and while this is not a high conviction call, the new administration will probably not be able to start cutting rates immediately either. We see the dollar continuing its gradual strengthening, the current account could weaken and there could also be some slippage in the budget. All things considered, we expect the cycle of rate cuts to continue, but not until next summer.

Our market views

In pre-election market positioning, the HUF was one of the most short currencies in the EM space, however, the market reaction disappointed, allowing some short position closing and relief for the HUF. However, the market quickly reverted back to the original view of a Trump negative scenario for CEE. Indeed, we should see weaker performance in the CEE region, global trade headwinds and more room for rate cuts in general. The HUF has fallen from an already weak position into a global view which makes a problem for a potential recovery of the currency. Positioning is probably a bit softer than before the election but still clearly short HUF.At the same time, the market has stopped pricing rate hikes into very front-end FRAs. This tells us that while the market is not aggressively negative on HUF assets, it is also too early for any major relief and the market has room to add shorts if it sees reason, which could be both local and global.

Next week's NBH meeting may put the HUF under pressure again. We thus expect EUR/HUF to remain around 410 with constant pressure from the dollar. And in the medium term, we expect EUR/HUF to move higher to 420 next year. The market has outpriced almost all rate hike expectations from very front-end FRAs and FX implied yields, while two rate cuts have returned to pricing in the longer term after the HUF market saw some relief after the US election. Valuations still look cheap in both IRS and HGBs from this perspective. However, as with FX, it is hard to see a major rally here at the moment. Although local data of low inflation and weaker growth would indicate more rate cuts, it seems clear the NBH does not want to go in that direction for some time and the risk of a rate hike has not been completely taken off the table by the market given the fragile FX. Still, in these conditions the belly and long-end should have some chance to normalise slightly and revert some of the steepening we've seen in previous months. Overall, we prefer to wait a bit longer on the sidelines here before we see any major signs of relief.

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NIESR

Economic

Growth in average weekly earnings continues to ease, recording 4.8 per cent for regular pay in Q3 2024. Total pay growth (including bonuses) recorded 4.3 per cent, which is affected by base effects from the one-off public sector bonus payments last year.

For Q4 of this year, we forecast a slight uptick in both total and regular pay growth to 5.0 per cent due to base effects.

With inflation falling, annual growth in real regular pay remains strong at 2.2 per cent in September, meaning workers will see a continued recovery in their standard of living.

Unemployment rose to 4.3 per cent, and employment slightly increased to 74.8 per cent. However, it is worth nothing that LFS data remain volatile, and therefore should be treated with caution.

We forecast unemployment to remain slightly above the 4 per cent mark through the coming months but remains below its natural rate.

As vacancies continue to fall, the vacancy-to-unemployment ratio is now close to pre-pandemic levels, leading to a reduction in wage pressures.

Growth in services sector wages has notably fallen in recent months, recording 4.1 per cent in Q3, compared to an average of 5.6 per cent in the first half of this year. This is positive news for inflation and might provide the Bank of England with increased confidence regarding interest rate cuts. With Inflation Falling, Workers Continue Making Real Income Gains_1

With Inflation Falling, Workers Continue Making Real Income Gains_1

“Recently ONS figures indicate that wage growth continues to ease, recording 4.8 per cent (excluding bonuses) in the third quarter of 2024, its lowest level since June 2022. With vacancies falling and unemployment rising, we forecast wage pressures to ease in the coming months, although the announced rise in National Living Wage would exert some upward pressure in April. Given today's figures, we expect the Bank of England to continue gradually cutting rates in 2025.”

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FastBull Featured

Daily News

Economic

[Quick Facts]

1. Fed's Powell says there is no hurry to cut interest rates.

2. Kugler says Fed must focus on both inflation and jobs goals.

3. U.S. weekly initial jobless claims drop to 217,000.

4. ECB's Guindos says inflation data is heading in the right direction.

5. ECB officials saw risk management as key for October rate cut.

6. U.S. PPI increased by 0.2% month-on-month in October.

[News Details]

Fed's Powell says there is no hurry to cut interest rates

The Federal Reserve is gradually shifting its policy toward a more neutral stance, Fed Chairman Jerome Powell said at a Federal Reserve event in Dallas on November 14. The path to achieving this goal is not predetermined, and the path of policy rates will depend on incoming data and economic outlook. Moving too quickly to reduce policy restrictions could hinder inflation progress, while moving too slowly could excessively weaken economic activity and employment.

The labor market remains strong, but it has gradually cooled from the overheating state of a few years ago, and it no longer represents a major source of inflationary pressure. Inflation is closer to the 2% long-term target, but it has not yet been achieved. In a labor market that is broadly balanced and with inflation expectations well-anchored, inflation will continue to decline toward the 2% target, although there may be some bumps along the way.

There are no signals from the U.S. economy suggesting the Fed needs to cut interest rates quickly. The current strength of the economy gives the Fed the ability to make cautious decisions. If the data allows, it might be wise to slow down the pace of rate cuts.

Kugler says Fed must focus on both inflation and jobs goals

Fed Governor Adriana Kugler said on Thursday that policymakers must focus on both inflation and jobs goals. Currently, the labor market is cooling, and progress in inflation moving back toward the 2% target has slowed.

The combination of a continued but slowing trend in disinflation and cooling labor markets means that we need to continue paying attention to both sides of our mandate, Kugler said. If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts. But if the labor market suddenly weakens, it would be appropriate to continue to gradually lower policy rates.

When asked if a higher threshold for further rate cuts has been set, Kugler said that both types of risks must be considered.

U.S. weekly initial jobless claims drop to 217,000

The U.S. Department of Labor reported on Thursday that initial jobless claims for the week ending November 9 dropped by 4,000 to 217,000, lower than the market expectation of 223,000. The number of continuing claims was 1.873 million, in line with expectations.

This decline suggests that the U.S. job market remains stable. The slowdown in October jobs growth was just an anomaly. The surge in jobless claims in early October was caused by the effects of hurricanes "Helene" and "Milton" and a Boeing workers' strike. However, layoffs remain at historically low levels, supporting the economy.

Although many employment-related indicators suggest a clear softening of the job market this year, this has not yet affected unemployment insurance data.

ECB's Guindos says inflation data is heading in the right direction

European Central Bank (ECB) Vice President Luis de Guindos said on Thursday that the Eurozone's October CPI data has undoubtedly encouraged ECB policymakers, but economic growth remains weak. We expect inflation in the services sector to slow down in the coming months, Guindos said. Our inflation outlook is that it will approach price stability in a clear and stable way, i.e., achieving the 2% target.

The evolution of monetary policy will depend on inflation. The economic recovery hasn't been as strong as we expected. Although household income has recovered, it has not translated into consumption growth.

ECB officials saw risk management as key for October rate cut

On November 14, the ECB released the minutes of its October meeting, showing that last month's rate cut was seen as an insurance measure against unexpectedly low inflation. However, policymakers seem divided on the risk of inflation remaining too low. Given weak economic activity and falling price pressures, further easing policies were expected, although the timing and scope of these measures remained uncertain.

Policymakers unanimously agreed that by the end of 2025, inflation would reach 2% ahead of previous forecasts, but they had different views on the situation thereafter. Some believed it was impossible for inflation to be below the target, while others argued that there was an increasing risk of inflation falling below the target.

If the slowdown in economic activity and the unexpected decline in inflation turn out to be temporary, the October rate cut decision may simply have brought forward the expected rate cut in December. Therefore, the rate cut was seen as having little risk, especially considering that interest rates would remain in restrictive territory and continue to support the disinflation process.

U.S. PPI increased by 0.2% month-on-month in October

The U.S. Department of Labor reported on November 14 that the seasonally adjusted PPI increased by 0.2% month-on-month and by 2.4% year-on-year in October, in line with market expectations. This was a 0.1 percentage point increase from September's growth.

Core PPI increased by 0.3% month-on-month and 3.1% year-on-year. Service prices rose by 0.3% month-on-month, while goods prices increased by 0.1%. However, food and energy prices decreased by 0.2% and 0.3%, respectively.

Although U.S. PPI remains above the Fed's 2% long-term inflation target, the trend indicates that price increases are slowing. Inflation is mainly driven by isolated factors, and it is unlikely to have a significant impact on the Fed's actions in its last monetary policy meeting of the year. According to CME Group data, market bets on a 25 basis point rate cut in December have slightly decreased to 75.4%, but there is still a large chance of a rate cut.