DXY depreciated by 0.5% to 103.4, modestly below the 103.52 level at the end of 2022. Markets should be leaning against the greenback into Thursday’s US PCE deflator mirroring the slowdown in CPI inflation a fortnight ago. Economists polled by Bloomberg expect headline inflation to decline to 3.1% YoY (0.1% MoM) in October from 3.4% YoY (0.4% MoM) in September and core inflation to 3.5% YoY (0.3% MoM) vs. 3.7% YoY (0.2% MoM).
Markets may cover their short USD positions into Fed Chair Jerome Powell’s fireside chat on Friday. Powell will not declare victory because of the resilience of the US economy. On 29 November, the Bureau of Economic Analysis will likely revise 3Q23 GDP growth to 5% QoQ saar from its advance estimate of 4.9%. Given the recent rebound in US equities on a retreat in the US long bond yields, the Conference Board’s consumer confidence index could surprise tomorrow. Pay attention to Thursday’s initial jobless claims for signs of resilience in the US labor market. Last week, claims surprised with a decline to 209k in the week ending 18 November; consensus had expected a shallower fall to 227k from 233k a week ago.
Powell should push back against the market’s rate cut bets by maintaining the need for “higher for longer rates” to return inflation to its 2% target promptly. The Fed will get more information from the monthly jobs report on 8 December and November’s CPI data on 12 December before deciding whether to deliver the hike pencilled in September’s Summary of Economic Projections at the FOMC meeting on 13 December.
EUR/USD is hesitant near the 1.10 resistance level and has languished between 1.0852 and 1.0965 the past fortnight. Today, European Central Bank President Christine Lagarde will likely tell the EU Parliament that the ECB could afford to pause its hiking cycle to observe the impact of past hikes on the stagnant Eurozone economy. Lagarde should also urge EU leaders to agree on their fiscal rules by the end of 2023, adding that the ECB needed clarity on the direction of fiscal policy in setting monetary policy. The ECB warned that the Eurozone banks were exhibiting early signs of stress from a squeeze on their profits from higher funding costs, a drop in lending volumes, a rise in loan defaults, and late repayments.
The ECB paused for the first time on 26 October after the real refi rate turned positive in September from the refi rate falling 450 bps to 4.50% from July 2022 to September 2023, and CPI inflation falling to 2.9% YoY in October vs. its 10.6% peak a year earlier. On Thursday, consensus expects CPI estimate to drop to 2.7% YoY in November from 2.9% in October and core inflation to decline to 3.9% from 4.2%. The ECB should pause again at its governing council meeting on 14 December. However, Lagarde was also keen to push back rate cut bets. She warned a fortnight ago that inflation could rise in the coming months on base effects and saw inflation back at the 2% target only in late 2025. Lagarde hinted that keeping rates high “long enough” meant no policy actions in the “next couple of quarters.”
Quote of the day
“Of course I have an opinion on many things but I don’t micromanage.”
Helen Clark
27 November in history
In 1999, Helen Clark became the first elected female prime minister in New Zealand.
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