Todays podcast

• Fed’s Waller inches open the US rate cut door
• Music to the ears for markets, yields drop
• Poor 7yr auction though weighs at longer end
• USD continues to fall (DXY -0.4%), AUD +0.8%
• Coming up: AU CPI Indicator, RBNZ, GE CPI, Beige Book

Events round-up

GE: GfK consumer confidence, Dec: -27.8 vs. -28.2 exp.
US: Conf. Board consumer confid., Nov: 102 vs. 101 exp.
BN: Fed’s Waller says he’s more confident policy is well positioned
US: 7Y notes draw 4.399% vs 4.378% pre-sale when-issued, bid/cover ratio 2.44 from 2.70; indirect bidding 63.9% from 70.6%

“What it takes to come alive; It’s the way I’m feeling I just can’t deny; But I’ve gotta let it go; We found love in a hopeless place”, We Found Love, Rihanna, Calvin Harris, 2011

Road to Damascus conversions don’t get any bigger then former Fed hawk Governor Waller who today opened up the possibility of rate cuts in three to five months’ time if inflation continues its trend down (If inflation continues to cool “for several more months — I don’t know how long that might be — three months, four months, five months — that we feel confident that inflation is really down and on its way, that you could then start lowering the policy rate just because inflation is lower”…“It has nothing to do with trying to save the economy or recession.”

US 2yr yields fell sharply in response, moving -13.8bps to 4.75% in response (low 4.75%; high 4.89%). The curve bull steepened with a smaller fall in 10yr yield of -4.8bps to 4.34% (low 4.33%; high 4.42%). Driving some move off the lows in longer-term yields was a poor 7yr auction of $39bn which was awarded at 4.399% vs 4.378%, giving a tail of 2.1bps. Equities are mixed with the S&P500 -0.0% heading into the last half hour of trade, along with the NASDAQ. The USD is down -0.4% on the DXY and BBDXY.

Fed Funds Futures imply around 100bps worth of cuts in 2024, up from 92bps of cuts yesterday. Fed Governor Bowman also spoke and favoured higher rates, but the market clearly moved on Governor Waller’s opening up the possibility of cuts, which echoes what Williams and Powell said earlier in the year about cutting rates before you got to 2% in order to keep the same level of restriction (i.e. stop real rates from rising). Waller also noted “I am increasingly confident that policy is currently well-positioned to slow the economy and get inflation back to 2%”.

In FX it has been a story of ongoing USD weakness. DXY is -0.4% and most pairs are higher. Yen is outperforming with USD/JPY -1.0% to 147.51, as is the AUD +0.8% to 0.6643 and NZD +0.7% to 0.6128. Smaller increases were seen in EUR +0.4% to 1.0980 and GBP +0.6% to 1.2685. The USD (DXY) since its October highs is now -4.2%, with all that coming in the context of markets seeing the US Fed as being done in this cycle, with cuts now on the agenda.

In that context, my NZ colleague notes JP Morgan’s Treasury client survey for the week ended 27 November showed that the most active investors in the US Treasury market are the most bullish they have been in the history of the survey, which dates back to 1991. Some 78% of active clients were long US Treasuries relative to benchmark, up from 56% the previous week, none were short, and the rest were neutral.

The data calendar has remained light and not a factor. US consumer confidence on the Conference Board measure rose for the first time in four months to 102.0 in November, close to expectations, albeit from a downwardly revised 99.1, supported by falling gasoline prices and rising stock prices. The labour market indicator based on the difference between those saying jobs were hard to get and those saying jobs were plentiful, was little changed, although this indicator of labour market pressures has been easing through most of this year.

Finally in Australia, yesterday’s October Retail Sales isn’t likely to influence the RBA given the shifting seasonality associated with November’s Black Friday/Cyber Monday. Instead of more interest was RBA Governor Bullock’s remarks at the BIS-HKMA conference. Here Bullock again re-iterated Australia’s inflation challenge was now more domestic. Ms Bullock also was more explicit around the mid-point of the 2-3%, which to us reinforces the RBA is likely to lag the global easing cycle given the RBA only forecasts core inflation at the very top of the 2-3% band by the end of 2025. NAB continues to see the RBA lifting rates again in February.

Coming Up

• Monthly CPI Indicator and Construction Work Done: All eyes on the CPI Indicator which is for October. NAB expects October CPI Indicator to fall back to 5.2% y/y from 5.6% y/y, in line with consensus. There is high uncertainty on headline driven by tricky seasonal patterns in holiday/travel, but we see few implications from Wednesday’s data for the near-term path of RBA policy. There is low coverage of services in October, so it is of little use for gauging the domestic pressures the RBA is now focussed on. The excluding volatiles and travel measure could print at 4.9% from 5.5%. We see a result in line with our October forecast as broadly consistent with the RBA’s November SoMP forecasts for Q4 underlying and headline inflation of 1.0% q/q and 4.5% y/y. More comprehensive services coverage will be in the November CPI Indicator (10 January) and in the Quarterly CPI (31 January) ahead of RBA on 6 February 2024. As for Construction Work Done, this is unlikely to be market moving with consensus at 0.3% q/q.
• RBNZ (on hold): With consensus on hold, more focus will be on what the MPS says about the likely pace of cuts in 2024. Our BNZ colleagues expect the RBNZ to convey that CPI inflation and the labour market are easing comfortably along the lines desired and previously forecast. So much so, the Bank is likely to soften its projection on the OCR, which, in the August MPS, entailed holding it at (or slightly above) 5.50% through to the end of 2024, with a gradual easing cycle commencing early 2025. The market has been anticipating this, currently pricing about 25bps of easing by August and 50bps by November 2024. The risk is the RBNZ comes across as more firmer than what market pricing suggests.
• German CPI (Spain/Belgium too) and EZ Confidence: Ahead of the wider Eurozone measures the next day, Germany, Spain and Belgium all publish flash CPIs. Consensus sits at 2.5 y/y for Germany, and 3.7% for Spain. Numbers on the soft side would reinforce easing expectations.
• BoE’s Hauser (future RBA Deputy) & Bailey: Hauser (who is the future RBA Deputy) speaks at the 50 year anniversary of the London Foreign Exchange Joint Standing Committee; BoE Governor Bailey speaks at the same event.
• Fed’s Beige Book, Inventories: Neither likely to be market moving here.

Market Prices

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