FX Daily: Is Next Week’s ECB Cut Really A Done Deal?

Forex

Summary:

Markets are almost fully pricing in an ECB cut of 25bp next week, but our economics team finds a few counterarguments that suggest the meeting may be a closer one than what pricing suggests. Today, Schnabel might want to clarify her remarks from last week which were interpreted as dovish. EUR/USD may rebound above 1.10 today, but downside risks persist.

USD: Looking outside of the US

The start of the week has been quite mixed in FX, with the low-yielding JPY and CHF rising and the high-beta AUD and NZD under additional pressure. The Chinese markets have reopened after a long holiday with another strong session as recent expansionary measures by Beijing continue to help sentiment in the region. That can weigh moderately on USD today, even though our view for the rest of the month remains generally constructive on the dollar, as discussed yesterday.

We have observed some quite limited spillover into FX from US 10-year yields hitting the 4% mark, which appears as the tail of the payroll-induced move that has already triggered some sizeable positioning readjustments in dollar crosses. There is a possibility that the FX market will take a break from being driven by rates now that the new, shallower 25bp per-meeting rate path by the Fed has become the market baseline. We suspect inflation data this week won’t prompt big directional changes in the dollar, which may instead respond more to the Middle East turmoil, and consequent moves in oil prices.

Still, we’ll be on the lookout for surprise reads in the NFIB Small Business surveys today, where the hiring plan sub-index has had a decent correlation with private payrolls. Our call remains a stabilisation in DXY around 102-103 with upside risks, even if we see a slightly lower dollar today.

EUR: Watch for a Schnabel clarification

Markets are virtually fully pricing in an ECB rate cut next week (23bp), but our economics team discusses here how the decision may well be much closer than the rates market suggests. That’s because the ECB already incorporated weaker growth and inflation below 2% in its latest projections, and while Isabel Schnabel’s latest speech focused on growth downside risks, she also remarked how monetary policy could do little to ease those risks. Incidentally, single-country data keeps pointing to sticky services inflation, and the recent oil price rise means a potential revision higher in the inflation forecasts at the next round of staff projections.

Markets are hardly ignorant of these factors, but are equally hanging on to dovish comments by ECB members like Villeroy and probably also the view that they can push the ECB into a cut by pricing it in fully on meeting’s day. There is an ECB meeting chaired by Isabel Schnabel today, and we’ll be interested to see whether she wishes to clarify her stance. A hawkish re-tuning on her side can send EUR/USD back above 1.10, but we are not sure markets will be giving up on an October cut very easily and the wide USD:EUR rate gap still points to some pressure on EUR/USD in the near term.

RBNZ: A pre-emptive 50bp cut

The Reserve Bank of New Zealand (RBNZ) announces monetary policy overnight (0200 BST), and both markets and consensus are leaning in favour of a 50bp rate cut. As discussed in our meeting preview, we agree.

The RBNZ has to operate with quite limited information on inflation and the jobs market, on which official data is only released quarterly. The only hard data input since the surprise August 25bp cut has been the second-quarter GDP report, which showed negative growth (albeit slightly better than consensus). That may well be enough to add pressure on the RBNZ to take rates to neutral at a faster pace, especially after the 50bp cut by the Fed in September.

A half-point cut before seeing third-quarter inflation figures obviously requires substantial confidence in the disinflation process. We see high risks of headline CPI having moved below 2.0% in the third quarter, which would make the real rate uncomfortably high if the RBNZ doesn’t keep cutting.

Markets are pricing in 45bp for this meeting, and 91bp in total by year end. We think a 50bp will add more pressure on the underperforming NZD, which may be trading closer to 0.61 than 0.62 once we get to the US election risk event.

CEE: Can the Czech central bank pause in December?

Yesterday's data across the region was rather stronger than expected but still does not offer much optimism on the CEE economy. Today's calendar in the region does not have much to offer except retail sales data in the Czech Republic. CEE FX is again slightly under pressure coming from Friday's EUR/USD move lower in our view and lingering geopolitical risk aversion. However, we believe inflation numbers in the second half of the week could return markets to the local story.

Perhaps the most interesting will be inflation in the Czech Republic, where our economist in Prague, David Havrlant, expects inflation to rise from 2.2% to 2.4% year-on-year, in line with market expectations. However, the risks are to the upside due to uncertain energy, food and housing prices. The problem is that there is a strong base effect in the coming months and the September number will significantly define the rest of the year and the Czech National Bank (CNB) rate path. David's baseline assumes a pause in the cutting cycle in December and February mainly because of the risky inflation numbers in December and January and the lag in releases.

Although my view is mixed on this one, looking at just normal seasonal movements and base effects, 3% inflation becomes a realistic forecast and a risk zone for the CNB, which after 275bp of cuts delivered may indeed consider a pause despite weak economic data. Although the market has priced out a lot of the CNB easing over the past two weeks, the terminal rate priced in is around 3.00-3.25%. This is close to our forecast but I still think a pause in the cutting cycle would be a negative surprise for the rates market but positive for the CZK despite the weak economic data. The koruna has so far proven to be the most resilient currency in the current sell-off in the CEE and EM space and I believe EUR/CZK will return to 25.00 once global markets calm down. Moreover, should the CNB confirm this hawkish approach, the CZK could see significant support.

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Justin

Economic

Japan saw the highest number of bankruptcies since 2013 in the six months through September, as companies were increasingly hit by rising costs.

Some 4,990 firms went bankrupt in that period, increasing 18.6% from the previous year, according to a report by Teikoku Databank on Tuesday. The number of firms going under in Japan has continued to increase since the second half of the year ending March 2022.

The jump in bankruptcies partly reflects the impact of higher prices, particularly for small companies. A record 472 out of the 4,990 firms cited inflation as the main reason they went bankrupt, the report showed. The country’s key price gauge has stayed at or above the Bank of Japan’s 2% target for over two years, as the weak yen has inflated import costs for everything from food to energy.

Construction, manufacturing and retail were among the sectors that had the highest number of cost-driven bankruptcies, according to the report.

Beyond rising prices, a record 163 firms cited labour shortages as a reason for their struggles. Japan’s unemployment rate has remained below 3% for over three years, the lowest level among developed economies.

The tighter labour market puts pressure on companies to boost salaries to retain their employees, further straining their budgets. While some Japanese companies successfully offered more than a 5% wage increase for their workers in pay negotiations earlier this year, many small and medium-sized firms have reported difficulties in following suit.

Looking ahead, another potential risk for companies is higher debt-servicing costs following the BOJ’s interest rate hikes in March and July. Some major and regional banks have already announced they will raise the lending rates on certain short-term loans.

Source: The edge markets

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Economic

While the delay in the EUDR implementation would give palm oil producer countries time to take the necessary steps to comply with the regulations, the regulator should ensure palm oil-producing countries are not unfairly labelled as "high risk" under its country benchmarking, said Johari.

“In the spirit of trade fairness, we hope that the European Parliament will play a more accommodative role to address this matter for the benefit of the world,” he said.

It is understood country benchmarking under the EUDR is a risk assessment framework that categorises countries into three groups — low-risk, standard-risk and high-risk — based on their deforestation and forest degradation levels, alongside governance factors such as law enforcement and adherence to international standards.

At a press conference on Tuesday, Johari reaffirmed that Malaysia is ready to comply with the EUDR, noting that 73% of the country’s palm oil industry is managed by large companies and estates, which are well positioned to meet the regulations.

Additionally, Johari said that the Malaysian Sustainable Palm Oil (MSPO) certification is set to gain global recognition, as it addresses key issues such as traceability, deforestation-free policies, the requirement for legitimate land ownership titles, and compliance with international labour practices.

He highlighted that 4.6 million hectares, equivalent to 81.24% of the country’s palm oil plantations, were MSPO-certified as of August.

Regarding the smallholders who have not yet complied with MSPO standards, the minister said that the government will continue to support them by promoting the use of quality planting materials, encouraging good agricultural practices, and providing financial assistance for replanting.

“We just need a little bit of time for our smallholders, and the government will assist them to comply over the period of time,” Johari told reporters after officiating the Malaysian Palm Oil Forum, an event organised by the Malaysian Palm Oil Council.

Last week, the European Commission announced its plans to delay the implementation of the EUDR by another 12 months, pushing it to Dec 30, 2025.

This decision followed criticisms from Malaysia, along with 16 other nations from Asia, Latin America, and Africa, which have expressed concerns about the regulations. Notably, both German Chancellor Olaf Scholz and the Biden administration supported calls for the delay.

In Europe, 20 of the EU’s 27 agriculture ministers backed the postponement, as did key figures such as European Parliament lawmaker Peter Liese and non-governmental organisation Fairtrade, which voiced concerns about the regulations' impact on producer organisations.

The EUDR, which regulates commodities linked to deforestation, covers items like palm oil, cocoa, coffee, soy, timber, and rubber. It requires complex geolocation data, polygon mapping, and due diligence statements from exporters.

Industry estimates suggest compliance could cost the palm oil sector US$650 million (RM2.74 billion) annually, with US$260 million of that burden falling directly on smallholders.

Source: The edge markets

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Forex

The Pound Sterling (GBP) strives to gain ground near a three-week low of 1.3060 against the US Dollar (USD) on Tuesday. However, the near-term outlook of the GBP/USD pair remains fragile as the US Dollar clings to gains close to a fresh seven-week high, with the US Dollar Index (DXY) trading around 102.50. The Greenback strengthens as market participants are not pricing in another larger-than-usual 50 basis points (bps) interest rate cut from the Federal Reserve (Fed) in November.

The Fed started its policy-easing cycle with a 50 bps interest rate cut in September, majorly focusing on reviving labor market strength after gaining confidence that inflation will sustainably return to the bank’s target of 2%.

Market participants anticipated that the Fed would aggressively extend the rate-cut cycle. However, that speculation was wiped out by upbeat United States (US) Nonfarm Payrolls (NFP) data for September, which showed a robust increase in labor hiring, a lower Unemployment Rate, and an increase in wage growth.

Despite market speculation for Fed large rate cuts has waned, the central bank is expected to remain on course to ease monetary policy further. Meanwhile, the comments from New York Fed Bank President John Williams, in an interview with Financial Times on Tuesday, have indicated that he favors a 25 bps rate cut ahead and is in no hurry to reduce interest rates quickly as the latest employment data has increased his confidence in consumer spending and economic growth.

Going forward, investors will focus on the US Consumer Price Index (CPI) data for September, which will be published on Thursday.

Daily digest market movers: Pound Sterling trades with caution on geopolitical tensions

The Pound Sterling trades cautiously against its major peers on Tuesday, with investors focusing on Middle East tensions driving market sentiment. In Tuesday’s Asian session, Iran's Foreign Minister Abbas Araqchi issued a warning to Israel that the nation will face a strong retaliation if it attempts to attack their infrastructure.

The British currency is also under pressure as traders adjust market expectations for the Bank of England (BoE) interest rate outlook. Market participants expect the BoE to cut interest rates again in November. BoE’s rate cut prospects increased sharply after last week’s comments from Governor Andrew Bailey indicated that the central bank could cut interest rates aggressively if price pressures decline further.

The United Kingdom (UK) inflation has remained sticky due to stubborn price pressures in the services sector amid stronger wage growth. UK annual service inflation accelerated to 5.6% in August from 5.2% in July.

This week, investors will pay close attention to the monthly Gross Domestic Product (GDP) and the factory data for August, which will be published on Friday. The data will provide fresh cues about the current economic health.

Technical Analysis: Pound Sterling trades below 50-day EMA

The Pound Sterling trades inside Monday’s trading range, with investors focusing on the US CPI data for September. The GBP/USD pair is expected to remain on the backfoot as it fails to hold the 50-day Exponential Moving Average (EMA), which trades around 1.3100. The Cable has weakened after falling below the upward-sloping trendline from the 28 December 2023 high of 1.2827.

The 14-day Relative Strength Index (RSI) declines to near 40.00. More downside would appear if the momentum oscillator falls below the above-mentioned level.

Looking up, the round-level resistance of 1.3100 and the 20-day EMA near 1.3202 will be a major barricade for Pound Sterling bulls. On the downside, the pair would find support near the psychological figure of 1.3000.

Source: FXSTREET

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ADP

Economic

There were a few data signals going into last Friday’s blockbuster jobs report that many market watchers and economists missed.

Layoffs, as measured by a rolling four-week average of initial jobless claims, hit their lowest level in more than a year and a half. August showed an uptick in job openings, a hint that companies were about to ramp up hiring. And September’s ADP National Employment Report suggested that a rebound in private-sector hiring was under way.

Even people who read these data signals, however, might have been unprepared for the big jump in hiring we saw in Friday’s non-farm payrolls report from the Bureau of Labor Statistics. Job creation was up 60 percent, to 254,000 new jobs in September from 159,000 in August.

Even after applying upward revisions to August and July, average job gains for the three months preceding September were only 140,000.

What happened? Why were employers slow to hire this summer but so willing to hire in September?

The answer is uncertainty.

Uncertainty versus risk

Economists make a sharp distinction between risk and uncertainty. For employers, both can describe an unknown.

Companies can gauge risk by assigning a probability that the situation in question occurs. Then they can prepare for that outcome.

Uncertainty, by contrast, can’t be measured, and companies therefore can’t prepare for it. Uncertainty can lead employers to delay hiring and investment decisions.

Uncertainty is heightened

In May 2023, the World Health Organization declared an end to the public health emergency caused by the global pandemic, effectively ending one of the most uncertain episodes in economic history. More than a year later, however, we’re still living with higher-than-normal uncertainty.

The United States is nearing the end of a four-year presidential election cycle, which tends to create economic inertia as some companies and consumers put off making big financial decisions while they wait to see if big policy changes are in the making.

Monetary policy and inflation create their own uncertainty. In September, the Federal Reserve cut interest rates from their highest level in two decades. Before that decision, economic commentators were in wild disagreement about the health of the economy as they debated the likelihood of a soft or hard economic landing and argued over the Fed’s ability to navigate too-high inflation while avoiding an economic slowdown.

Global tensions in the Middle East are another source of uncertainty, with the added potential side effect of oil price volatility on another bout of inflation.

Last week’s short-lived port strike could have restarted another inflation surge had it continued. The labor action reminded us how supply chain logjams can arise suddenly.

Finally, Hurricane Helene is proving to be one of the most destructive U.S. storms on record, as measured both the number of lives lost and the cost to the economy.

Taken together, these events show how vulnerable the economy is to an increased level of uncertainty, be it geopolitical, social, monetary, political, or weather-related.

The effect on hiring

This summer, we saw the impact of uncertainty on hiring, particularly for companies with more than 500 workers. ADP payroll data showed that monthly hiring by large employers averaged a moderate 53,000 from June to August. In September, hiring by these large companies jumped to 86,000.

Part of that increase may be attributable to the long-awaited start of Fed rate cuts. There also was clearer evidence than we’ve seen in months, maybe years, that the Fed had engineered a soft landing that will put us on a path to low inflation with little or no economic pain.

My take

Seventy-five percent of the jobs created last month were in sectors that are less sensitive to interest rate policy, including government, leisure and hospitality, and education and healthcare.

Cyclical sectors, where rates make a big difference, either continued to shed jobs (manufacturing) or held steady (construction).

That means last month’s hiring surge wasn’t directly attributable to lower interest rates or changing economic conditions. Instead, it was triggered by a reduction in the uncertainty that has been clouding employer decisions. Hesitancy to hire over the summer wasn’t driven by economic weaknesses or lack of demand for workers.

There’s a lesson here for the Federal Reserve: Clarity is the antidote to uncertainty. It’s okay to be data-dependent, but if investors, companies, and consumers are kept guessing on monetary policy, that uncertainty could lead to unwarranted economic stasis that looks like economic weakness even if it isn’t.

To stay updated on all economic events of today, please check out our Economic calendar

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S&P Global Inc.

Economic

The worldwide PMI surveys showed average prices charged for goods and services rising globally at an increased rate in September. However, the pace remained among the weakest seen over the past four years to suggest that global consumer price inflation remains subdued by recent standards. Regional variances were noteworthy, however. While central bank targets have come into view via the PMI data in the US as well as the UK and eurozone, the former saw an uptick in price growth to serve as a reminder that risks persist in achieving sustainably low inflation.

Global PMI selling price inflation holds close to four-year low

The latest global PM average prices charged index, at 52.5, was above 52.3 recorded in August. However, August's reading had been the lowest since October 2020, and September's reading was the second-lowest seen over this near-four-year period.

Global inflation was meanwhile estimated at 4.0% in August according to S&P Global Market Intelligence calculations from the latest available national sources, its lowest since September 2021 and following the cooling trend that had been signalled in advance by the PMI. The PMI data - which tend to lead official inflation data by around six months - hint at the rate of increase will moderate closer to 3% in the coming months.

Increased service sector inflation - which has been the main cause of elevated inflation since late-2022 - was the cause of the higher rate of overall selling price inflation in September, though the rise needs to be considered in the context of August's reading having been the lowest since December 2020. Thus, while the rate of services inflation remains above its per-pandemic decade average, it is subdued by recent standards.

Manufacturing selling price inflation meanwhile ticked lower and has now fallen back in line with the pre-pandemic average.

US inflation shifts higher but remains subdued

Among the major economies, the US notably reported an increased rate of selling price inflation to the highest since March, driven by increased rates for both goods and services. However, historical comparisons with official rates of inflation, such as core PCE prices, suggest that even the current higher level of the PMI Prices Charged Index is consistent with US inflation remaining close to the FOMC's 2% target, both when compared to annual rates of change and annualised monthly changes in core PCE inflation.

As such, the PMI data support the Fed's shift in focus away from inflation to supporting the labour market, though none the less serves as a reminder that inflation still needs to be watched for a potential uptick.

UK PMI inflation signal closes in on 2%

In the UK, selling price inflation dropped in September to its lowest since February 2021. The further decline brings the PMI prices charged index closer - though still slightly above - the Bank of England's 2% target when compared with official core inflation. Although manufacturing price inflation nudged higher, often linked to supply shortages, services inflation - which has been the main area of elevated inflation in recent months - cooled to a 43-month low in an encouraging sign for the door to be opened for further Bank of England interest rate cuts.

Eurozone prices

The PMI selling price data meanwhile showed falling inflationary pressures in the eurozone, the index covering charges levied for goods and services dropping to its lowest since February 2021 and down to a level consistent with consumer price inflation falling below the ECB's target. Prices charged for goods fell at the fastest rate for four months and prices levied for services rose at the slowest rate since April 2021.

Prices fall in mainland China

Elsewhere, the PMI data showed inflationary pressures persisting to a modest but - by historical standards - relatively elevated rate in Japan, while prices fell in mainland China. The latter reflected falls in prices charged for both goods and services, the former dropping at the sharpest rate for six months.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

Japan's inflation-adjusted wages fell in August while household spending also declined, but analysts say underlying trends point to a gradual recovery in pay and consumption and should support the central bank's plans for additional rate hikes.

Real wages in the world's fourth-largest economy fell 0.6% in August from the same month a year earlier, according to date released by the Ministry of Health, Labour and Welfare on Tuesday. That came after a revised 0.3% rise in July.

Real wages had turned up in June for the first time in more than two years as companies bumped up summertime bonuses, though the labour ministry had said the contribution of such special payments to the data would wane from August.

Those payments rose 2.7% in August versus a revised 6.6% in July and 7.8% in June.

At the same time, the August wage data showed base salary marked the biggest rise in nearly 32 years at 3.0%, reflecting this spring's labour-management pay negotiations that led firms to deliver the biggest hike in three decades.

"The real wages falling back to a negative territory was expected," said Masato Koike, senior economist at Sompo Institute Plus. "In terms of the data itself, it's not that bad."

Separate data showed household spending declining 1.9% from the year-earlier in August, potentially raising doubts about the strength of private consumption, which accounts for more than half of Japan's economy.

The fall, however, was smaller than the market estimate for a 2.6% drop based on a Reuters poll, and on a seasonally adjusted basis, spending rose 2.0% from the previous month, marking the fastest pace of increase in a year.

"Although the household savings rate remains high, consumption will probably recover gradually if the perception of wage increases improves consumer sentiment," said Yutaro Suzuki, economist at Daiwa Securities.

Sustained wage growth is a prerequisite for the Bank of Japan to raise interest rates again after its first hike in 17 years in March and a follow-up increase in July.

While the central bank said in its quarterly report on Monday that a rise in prices and wages was spreading across Japan, it also noted the concern of small and medium-sized enterprises regarding attendant pressure on profit.

Nominal wages, or the average total cash earnings per worker per month, grew 3.0% to 296,588 yen ($1,999.11) versus August last year, compared with an on-year 3.4% rise in July. Overtime pay, a barometer of corporate strength, grew 2.6%.

The consumer price index officials used to calculate real wages, which includes fresh food prices but excludes owners' equivalent rent, climbed 3.5% in August, the highest rise since October last year.

Japan's economy expanded by an annualised 2.9% rate on solid consumption and core inflation remains above the central bank's 2% target, keeping alive expectations for further rate hikes.

($1 = 148.3600 yen)

Source: Reuters

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FX Daily: Is Next Week’s ECB Cut Really A Done Deal?

USD: Looking outside of the US

EUR: Watch for a Schnabel clarification

RBNZ: A pre-emptive 50bp cut

CEE: Can the Czech central bank pause in December?

Japan Sees Most Bankruptcies in a Decade Amid Rising Costs

Source: The edge markets

Country Benchmarking Should be Reviewed in Spirit of Trade Fairness Amid EUDR Delay, Says Johari Ghani

Source: The edge markets

Pound Sterling Remains Fragile as Fed Seems to Cut Rates Gradually

Daily digest market movers: Pound Sterling trades with caution on geopolitical tensions

Technical Analysis: Pound Sterling trades below 50-day EMA

Source: FXSTREET

Hiring in an Age of Uncertainty

Uncertainty versus risk

The effect on hiring

My take

Global PMI Selling Price Inflation Holds Close to Four-year low in September

Global PMI selling price inflation holds close to four-year low

US inflation shifts higher but remains subdued

UK PMI inflation signal closes in on 2%

Eurozone prices

Prices fall in mainland China

Fall in Japan's Real Wages, Spending Likely Just Minor Bump for Further BOJ Hikes

Source: Reuters

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