In focus today

From the US, October PCE data is due for release. PCE inflation is expected to remain close to past month’s pace in both headline and core terms, in line with the CPI data released earlier. October durable goods orders and revised Q3 GDP data will be released at the same time.

In Sweden, the monthly financial markets statistics for October will be presented. The report contains interesting data such as lending data and average mortgage rates. Deputy Governor of the Riksbank, Per Jansson, will talk about current monetary policy and the economic situation at 8:30 CET.

Economic and market news

What happened overnight

In New Zealand, the Reserve Bank (RBNZ) lowered the interest rate from 4.75% to 4.25% in line with consensus expectations. Before the meeting there were some uncertainties about the size of the rate cut, with some participants expecting a very aggressive 75bp rate cut. Furthermore, Governor Orr signalled that more monetary loosening would come and did not rule out a further 50bp cut at the February meeting. Orr said that RBNZ expect cash rate to reach a neutral level between 2.5% and 3.5% by the end of 2025. NZD/USD rose above 0.5860 following this morning’s decision, and we expect the cross to trade close to its current level with 12m forecast of 0.58.

In the Middle East, Israel and Hezbollah agreed to a ceasefire. The ceasefire promises to end the conflict in across the border between Israel and Lebanon, which escalated after the Gaza war started last year. To repeat from yesterday’s DMM we wrote that President-elect Donald Trump previously communicated to Israeli Prime Minister Netanyahu that he wants the wars in Lebanon and Gaza to end before he enters office. Netanyahu’s willingness to sign a deal with Hezbollah could be part of his effort to please Trump and ensure he can still have US backing for his residual activities in Gaza, and possibly for targeting Iran.

What happened yesterday

In the US, the FOMC minutes released last night was in line with the signals provided by Chair Powell at the press conference, offering no significant surprises. The minutes reiterated that monetary policy is not on a pre-set course and underscored the importance of data dependency. Members, though, are particularly mindful of recent data volatility and the importance of focusing on the underlying tendencies. The minutes presented a positive view on inflation among members, with labour market data, inflation expectations, and pricing power indications reinforcing the disinflation narrative. We agree with these arguments and expect the FOMC to proceed with rate cuts at the next meetings.

US consumer confidence increased slightly more than expected in November to 111.7 (consensus: 111.3) against a revised-up October figure of 109.6. Labour market sub-indices gave somewhat mixed signals, as both “Jobs Plentiful” and “Jobs Hard to Get”-indices declined at the same time. Consumers still see their employment prospects as weaker than before the pandemic though. Plans for big ticket purchases declined a bit, but overall, nothing very surprising in the report.

In the euro area, the EU Commission approved French draft budget for now – but uncertainty remained. EU Commission said French draft budget met the requirements of the fiscal framework of being on a credible fiscal path. The only country that did not meet this requirement was the Netherlands. For 2025, the French budget’s net expenditure growth path was also assessed to be in line with the recommendation. The Netherlands was assessed not to be in line with the recommendation. Hence, the Commission had so-far approved the French budget, but the budget has not been passed in the French parliament yet. Marine Le Pen said that she could not support the budget in its current form, so French PM Barnier still risked losing a no-confidence vote on the budget if he did not change it. At the same time, he had to balance the risks of the budget then not being approved by the EU Commission. Hence, risks remained on French government finances until a budget was passed in Parliament even with today’s announcement from the EU.

Equities: Global equities were higher yesterday, which was particularly interesting as it marked the first full trading day following Trump’s post-election tariff comments. Consequently, it was no surprise to see the US significantly outperforming Europe, with European markets declining in response to Trump’s remarks. The surprise (if any) being that global equities were higher despite Trumps tariff threat.

There are two key takeaways here: Firstly, Trump’s messages do not provide much clarity on the potential outcome of trade war 2.0. Secondly, while Trump may believe his negotiation tactics are intelligent, they are damaging to the markets as they create uncertainty. In the US yesterday: Dow +0.3%, S&P 500 +0.6%, Nasdaq +0.6%, and Russell 2000 -0.7%. Asian markets are mostly lower this morning, except for Chinese markets, which are higher. Both European and US futures are mixed this morning, with core Europe underperforming.

FI: The divergence between US and German yields continued through yesterday’s session. US rates moved higher following the stronger than expected US consumer confidence data, while German bonds rose due to renewed political uncertainty in France. The OAT-Bund spread widened by 5bp to 127bp, the highest level since 2012, through following reports from Le Parisien that President Macron has lost confidence in PM Barnier and the government.

FX: NZD has been the outperformer over the last 24 hours amid this morning’s RBNZ meeting proving to be a slight hawkish surprise. EUR/USD has so far done little this week while the NOK has come under renewed pressure. SEK had a strong last week which in combination to the turn in NOK has brought NOK/SEK back to the 0.9840-mark – only two days after the cross tested the parity level. EUR/GBP remains in the last weeks’ trading range while USD/JPY continues its latest descent approaching new lows in November.

COLOMBO (Nov 27): Sri Lanka's central bank set a new single policy rate of 8% on Wednesday, easing monetary settings below previously used benchmarks, in an effort to shore up the island nation’s fragile recovery from a deep financial crisis.

The Central Bank of Sri Lanka (CBSL) said late on Tuesday that it will implement a single policy interest rate mechanism by introducing an overnight policy rate, instead of the existing rate corridor.

"With this change, the effective reduction in the policy interest rate would be around 50 basis points (bps) from the current level of the Average Weighted Call Money Rate, which continues to serve as the operating target of the Flexible Inflation Targeting framework," the bank said.

Previously, the CBSL set two key rates, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), which economists had expected would be reduced by 25bps each to 8% and 9%, respectively.

The SDFR and SLFR will no longer be considered policy interest rates, the bank said.

"There is no direct signalling of an end to the easing cycle," said Thilina Panduwawala, head of research at Frontier Research.

"But they do say that without further policy easing, they did not see further space for market rates to reduce. That might imply [that] CBSL assumes rates can bottom out after this rate cut, and that can make sense, given [that] their inflation forecast expects inflation to rise going into mid-2025."

The South Asian economy has gradually emerged from a debt crisis, after the country secured a US$2.9 billion (RM12.91 billion) assistance package from the International Monetary Fund (IMF) in March 2023.

Sri Lanka launched a long-awaited bond swap on Tuesday, a major step to completing its US$12.55 billion debt restructuring and enabling its fragile economic recovery to continue.

Bondholders have until Dec 12 to vote in support of the proposal, which would see them swap existing bonds for a set of new issues.

Completion of the nearly 30-month debt restructuring process and a budget aligned with the IMF programme could bring down interest rates of government securities and boost credit growth, analysts said.

After a gap of two years, Sri Lanka's economy is expected to grow by 4.4% in 2024, according to the World Bank.

Source: Theedgemarkets

The USD/CHF pair softens to near 0.8855 during the early European session on Wednesday. The weakening of the US Dollar (USD) ahead of the US October inflation data weighs on the pair. Meanwhile, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, edges lower to near the weekly low as profit-taking set in.

Traders prefer to wait on the sidelines ahead of US PCE data, which is due later on Wednesday. The US markets will be closed for the Thanksgiving holiday on Thursday. However, the strong US economic data and the cautious stance of the US Federal Reserve (Fed) are likely to cap the upside for the USD in the near term. The Federal Open Market Committee (FOMC) Minutes from the November meeting released Tuesday showed that Fed officials see interest rate cuts ahead but at a gradual pace. 

Traders pared back their expectations for an interest rate cut in December. Futures traders are now pricing in a 57.7% possibility that the Fed will cut rates by a quarter point, down from around 69.5% a month ago, according to the CME FedWatch Tool.

 On Tuesday, Israel approved a ceasefire agreement with Lebanon’s Hezbollah militants that would end nearly 14 months of fighting linked to the war in the Gaza Strip, per the AP News. US President Joe Biden said the deal between Israel and Hezbollah involves Israeli forces withdrawing from Lebanon over 60 days, with Lebanon’s military taking control of areas in the country's south to ensure Hezbollah does not rebuild forces. 

Investors will closely monitor the development surrounding the geopolitical risks. Any signs of the escalating tension could boost the safe-haven flows, benefiting the Swiss Franc (CHF). 

Source: FXSTREET

KUALA LUMPUR (Nov 27): Malaysia’s producer price index (PPI), which measures price changes of goods at the producer level, fell by 2.4% in October, said the Department of Statistics Malaysia (DOSM).

The index continued its downward trend after falling 2.1% in September.

Chief statistician Datuk Seri Dr Mohd Uzir Mahidin said similar to the previous month, the decrease in October was mainly attributed to the mining sector, which fell by 17.3% (September: -16.1%).

“The indices went down for both crude petroleum extraction (-21.7%) and natural gas extraction (-1.7%).

“Apart from that, the manufacturing sector also decreased by 2.6% (September: -1.5%), affected by the index of manufacture of coke and refined petroleum products (-21.6%),” he said. 

In contrary, Mohd Uzir said the agriculture, forestry and fishing sector went up by 13.8% (September: 5.8%), with the growing of perennial crops index recording an increase of 24.3%.

“For the utility sector, the water supply index increased by 6.9%, while the electricity and gas supply index edged up by 0.8%,” he added. 

On a month-on-month basis, Mohd Uzir said the PPI for local production decreased by 0.7% in October (September: -1.5%). 

All sectors recorded a decrease except the agriculture, forestry and fishing sector, which went up by 6.0% (September: 1.6%), contributed by growth in the perennial crops index (9.0%).

Looking at selected countries, the chief statistician said the US PPI went up by 2.4% in October, versus 1.9% in September, particularly due to the final demand index. 

He added that Japan’s PPI rose by 3.4% from 3.1% in the previous month, contributed by the cost of agriculture, forestry and fishery products. 

Regarding Malaysia’s current selected commodity prices, he said that according to the World Bank, commodity prices are anticipated to experience a 5.0% decrease in 2025, followed by a 2.0% decline in 2026. 

“These projections are primarily influenced by an expected fall in oil prices, moderated by increases in natural gas prices. 

Meanwhile, Mohd Uzir noted that crude palm oil prices, which hovered around RM4,400 per tonne in October, saw an increase from an average price of RM4,000 per tonne in the preceding month.

“The Malaysian Palm Oil Board attributed this rise to market uncertainties and a decline in Malaysia’s palm oil inventories. 

“These (uncertainties) include inventory levels of palm oil in India as the world’s largest importer, and global trends in the production and consumption of vegetable oils in 2025,” he said.

Source: Theedgemarkets

Key take out: OCR cut 50bps, RBNZ signals a high chance of a 50bp cut in February

As widely expected, the RBNZ cut the OCR by 50bps to 4.25%. The decision was reached by consensus and so no vote was taken.

The RBNZ’s projected track for the OCR was revised lower over 2025 but higher in 2026 from that seen in the August MPS.

The projected average OCR in Q4 2025 was revised down 30bps to 3.55%. This is consistent with around 75bps of cuts in 2025 that the Governor noted would likely be largely frontloaded into the February 2025 meeting.

The projected OCR for Q4 2026 was revised up 4bps to 3.17%, implying perhaps 1-2 25bps rate cuts in 2026.

The RBNZ assumes the OCR reaches around 3.06% in Q4 2027 (the final quarter of the forecast).

According to the RBNZ, the most important driver of today’s decision was that inflation remains well-contained and the economy has significant excess capacity. Hence there remains scope to continue cutting the OCR towards the neutral zone.

The RBNZ seems interested in continuing to frontload cuts to get to the neutral zone. That looks like a decent chance of a 50bps cut in February and then just one more 25bp cut in 2025 – all going according to forecast. From then, the OCR profile flattens out noticeably and seems consistent with the idea that the easing cycle will be to all intents and purposes complete by mid-2025. We don’t see much here that is consistent with the more dovish views of global investors we noted in our recent Client Pulse survey.

The RBNZ continues to emphasize the data dependence of future OCR moves. Either a 25bps or 50bps easing could occur in February depending on the performance of the economy.

Risks to the RBNZ’s central projections

The RBNZ singled out two key uncertainties regarding the near-term outlook – one concerning the persistence of some components of inflation where pricing behaviour is yet to normalise, and the other concerning the speed and timing of the recovery of growth in response to lower interest rates. The RBNZ also notes the possibility of greater inflation volatility over the medium term, reflecting geopolitical risks and climate-related energy and food risks. Other specific economic assumptions that are subject to uncertainty include the outlook for migrant inflows (and their impact) and the extent to which government spending evolves in a way that is consistent with the forecasts in Budget 2024 – the latter perhaps a warning shot to the Government as it begins to consider the fiscal strategy that will underpin Budget 2025.

Westpac’s OCR call

Given the Governor indicated that he saw a high chance the OCR would be cut by another 50bp at the February MPS we would concur this is more likely than not. Our forecasts of the key data between now and the February MPS are not very different to the RBNZ’s – hence it’s hard to hang our hats on any specific piece of data that might move the RBNZ back to a 25bp move.

After that the outlook is murkier. We didn’t see anything today that suggests our view of the economy is different. Hence a 3.5% trough in the OCR mid-year still looks appropriate. We think that last 25bp cut will come at the May MPS. A skip in the April review seems consistent with the neutral zone getting very close and we do expect some very tangible signs of strength in the housing market by then. It should also be evident that the peak in the Unemployment rate will be near by April based on business surveys and strengthening consumer confidence.

RBNZ forecast detail: Domestic inflation pressures persist, but import prices pose downside risk to overall inflation

The RBNZ’s updated forecasts show inflation sitting just above 2% for most of the projection period. Their longer-term inflation forecast is just slightly higher than they previously assumed, with domestic (non-tradables) inflation now expected to ease more gradually than the RBNZ assumed in August.

The upwards revision to the RBNZ’s forecasts for domestic inflation is consistent with their updated thinking on the economy’s productive capacity. As discussed below, the RBNZ now estimates that the economy’s rate of potential growth is lower than previously assumed, so there will be less spare capacity in the coming years than they had thought.

We agree with the RBNZ’s updated thinking on domestic inflation. Domestic inflation has consistently surprised to the upside of the RBNZ’s forecasts over the past two years. While inflation in interest rate-sensitive areas of the economy is cooling (like in the hospitality sector), we’re still seeing strong price increases in less interest rate-sensitive areas, like council rates and insurance premiums. That means total non-tradables inflation is only returning to average rates gradually. The RBNZ’s forecast for non-tradables inflation are now close to our own.

Despite the lingering firmness in domestic inflation, we still see downside risk to the RBNZ’s overall inflation forecasts as a result of weak imported prices (aka tradables inflation). Imported prices have been much weaker than the RBNZ assumed over the past year and have more than offset the persistence in domestic inflation. While the RBNZ expects inflation in these areas will lift relatively quickly over the year ahead, we think import prices will remain soggy for a while yet.

As a result, we think it’s likely that overall inflation will dip briefly below 2% in 2025. However, the undershoot of the target midpoint is likely to be temporary and modest and won’t alarm the RBNZ too much. Importantly, this is an area where the uncertain global backdrop will be crucial. Concerns about trade restrictions in the US have already pushed the NZD down in recent weeks, and that could limit or offset the falls in imported inflation that we’ve seen over the past year.

GDP growth forecasts revised lower

Compared to August, the RBNZ is actually slightly more confident about a pickup in economic activity in the near term, lifting its forecast for December quarter GDP growth from +0.1% to +0.3%. Beyond that, though, the RBNZ has substantially revised down its estimates of both actual and potential output over the coming years. It now expects GDP growth of 2.3%y/y for December 2025, compared to 3.3%y/y in the August statement.

The RBNZ’s growth forecasts are very similar to our own for 2025 (we are slightly more optimistic about 2026).

This downgrade of the economy’s growth potential was driven by a few factors. First, the RBNZ has assumed that New Zealand’s poor productivity growth performance in recent years will continue. Second, the RBNZ now sees a stronger link between population growth and potential GDP growth – which amplifies the effects of a downward revision to its net migration forecasts for the next few years.

Notably, Stats NZ today foreshadowed that there will be an upward revision to GDP growth over the year to March 2023 and the year to March 2024 when the September quarter GDP figures are released next month. The updated projections presented in today’s MPS do not incorporate these revisions, and so are based on the data as last published with the release of the June 2024 quarter GDP figures back in September. These revisions are sufficiently historic that they don’t tell us much about the current degree of spare capacity in the economy, but they do show that New Zealand’s labour productivity in recent years hasn’t been quite as poor as was previously reported.

The net effect of the RBNZ’s revised GDP assumptions is that it now expects a substantially less negative output gap in the years ahead – i.e. less spare capacity in the economy, with the gap being closed sooner. This change is in turn reflected in the upward revision to the RBNZ’s forecasts of non-tradables inflation in the years ahead.

In a similar vein, the RBNZ has revised down its forecast of the peak unemployment rate for this cycle, from 5.4% to 5.2%. That partly reflects a lower-than-expected starting point, with the unemployment rate rising only to 4.8% in the September quarter, compared to the RBNZ’s forecast of 5.0%. The RBNZ is assuming that this shortfall will persist, with more people dropping out of the labour force altogether as hiring remains soft. We made a similar adjustment to our forecasts after the September quarter labour market surveys, though we still expect a higher peak next year of 5.4%.

Key domestic data to watch ahead of the RBNZ’s February 2025 Review

The next RBNZ policy review will take place on 19 February 2025. Given the unusually long break until the next meeting, there will be a significant number of key domestic economic data releases ahead of that meeting. Indeed, the RBNZ will receive a new round of all of the top-tier quarterly indicators, and so there is plenty of scope for outcomes different to the 50bp rate cut signalled by the RBNZ. The most important releases are:

The Q3 GDP report (19 December): The outcome of this report will be compared to the RBNZ’s estimate, with any deviation having implications for the RBNZ’s estimate of the output gap and perhaps also its view on near-term growth momentum. As noted earlier, revisions to historical GDP data will also have a bearing on the RBNZ’s assessment.

The Q4 QSBO survey (14 January, TBC): The focus will be on indicators of spare capacity and cost/inflation pressures. It will also be interesting to see to what extent confidence, hiring and investment indicators are lifting from low levels as monetary conditions ease.

The Q4 CPI (22 January) and January Selected Price Indexes (14 February): With headline inflation now close to the RBNZ’s 2% target midpoint, the focus will be on whether the composition of the CPI – including key non-tradables prices – is evolving in a manner consistent with it staying there over the coming year.

Q4 labour market survey (5 February): Developments in both the unemployment rate and labour costs will be compared against the RBNZ’s updated estimates, while measures of labour input will provide some insight into how GDP might have fared during the quarter.

In addition to the above, key monthly activity indicators such as the BusinessNZ manufacturing and services indexes and the ANZ Business Outlook survey will also be of interest, as will developments in retail spending and housing indicators (albeit the latter tend to be difficult to read given that the housing market typically goes somewhat quiet over the holiday period). The Government’s Half-Year Economic and Fiscal Update and Budget Policy Statement (17 December) might also contain information bearing on expectations regarding the future stance of fiscal policy.

Aside from domestic indicators, the focus will be on any clarity that emerges regarding the implications of the Trump presidency for New Zealand’s export outlook and financial conditions (longer term interest rates and the exchange rate). The sustainability of this year’s rebound in dairy commodity prices will also move into focus as attention begins to turn to prospects for the 2025/26 season.

WELLINGTON (Nov 27): New Zealand's central bank cut rates for a third time in four months on Wednesday and flagged more substantial easing, including a likely half percentage point reduction in February, as inflation moderated to around the bank's target.

The Reserve Bank of New Zealand (RBNZ) lowered the cash rate by half a percentage point to 4.25%, as expected by most economists in a Reuters poll.

RBNZ governor Adrian Orr said there had been little discussion on cutting by anything other than 50 basis points (bps), a reality check for some in the market who had expected more, but signalled the likelihood of further loosening next year.

"Even with 50 basis points, we remain somewhat restrictive. There's significant output gap, significant spare capacity, so 50 (bps) felt right," he said at a news conference.

He added that the bank's forward projection for the February meeting was consistent with a further 50 bps cut.

The New Zealand dollar and short-end interest rates initially rose after the decision, which hit some in the market that had expected a larger 75-bps cut.

However, those gains partly disappeared, as investor focus shifted back to the governor's dovish comments.

Analysts broadly expect the central bank to cut by at least 25bps in February, but note there is a lot to happen before the next meeting.

"The RBNZ has left the doors wide open for its future moves, with no attempts to temper market expectations for the pace of future cuts," ASB chief economist Nick Tuffley said.

"It is also now a three-month gap until the RBNZ next meets, with a full cycle of quarterly domestic data and President (Donald) Trump’s inauguration in between," he said.

Orr said they expect to reach a neutral rate by the end of 2025, which he put at around 2.5% to 3.5%. The neutral rate is considered neither accommodative, nor restrictive for the economy.

Most of the major retail banks in New Zealand cut their interest rates, following the announcement.

Kiwibank chief economist Jarrod Kerr said while they expect the central bank to cut by just 25 bps in February, they saw scope for more easing later on.

"We believe rates need to be cut lower than the RBNZ's 2025 forecast track, to stimulate an economy struggling to get out of recession," he said.

The central bank noted that economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. Employment growth is expected to remain weak until mid-2025, and for some, financial stress will take time to ease.

New Zealand is one of several central banks around the globe that have started cutting rates, as inflation has moved lower. Neighbouring Australia, however, is an outlier to the broad easing trend, with cuts not expected until the first half of next year.

Source: Theedgemarkets