Markets remain buoyed by expectations for significant central bank easing cycles next year. With the Fed, ECB and BoE all meeting next week the question is around the extent of pushback there will be to policy easing. Solid US payrolls data saw some reduction of rate cut pricing in the US, putting the brakes on the declines in Treasury yields and supporting the US dollar. Speculation that the Bank of Japan could be preparing to tighten policy drove a sharply higher yen, with the local Nikkei index underperforming this week.
Key US employment data beat expectations, bolstering conviction in the outlook that the Fed can deliver a soft landing for the economy. However, some of the rate cut pricing for 2024 was pared back (to around 110bps) and this may be subject to further revision at next week's Fed meeting. Nonfarm payrolls (NFPs) increased by 199k in November, above expectations (185k) but boosted by the return of 30k auto workers from strikes in the prior month. Net revisions subtracted 35k from payrolls over September and October; however, the 3-month average increase on NFPs lifted from 192k to 204k. The main surprise was the unemployment rate falling back to lows since July at 3.7% from 3.9% (underemployment also declined from 7.2% to 7%), which came alongside a rise in the participation rate to 62.8% (from 62.7%). Consistent with cooling inflationary pressures, growth in average hourly earnings eased to a 4%yr pace (slowest since June 2021). Meanwhile, a 5.2% productivity increase in Q3 saw unit labour costs fall by 1.2%q/q.
A Reuters interview with the ECB's Isabel Schnabel was the catalyst for a deepening of rate cut pricing into next year's profile. Around 130bps of easing is now priced, with markets seeing the March meeting as a 50/50 bet for the first rate cut. But the more pressing matter is the ECB's meeting next week. Schnabel (seen as one of the more hawkish members on the Governing Council) said the fall in the euro area's headline inflation rate from 2.9% to 2.4%yr in October (a low to mid 2021) made further tightening "unlikely" and gave no explicit pushback to easing next year saying the data will dictate policy. Over in the UK, the BoE is looking at markets pricing 75bps of easing going into next week's MPC meeting. But at the press conference that followed the release of the BoE's Financial Stability Report, Governor Bailey said rates would likely need to remain at current levels "for an extended period" to be assured of bringing inflation back to the 2% target.
Australia has joined the global shift in rates markets with RBA easing now expected in 2024, a major change from last week when additional tightening was assessed as a live possibility. That view was giving acknowledgment to the RBA's tightening bias that it could hike further if the data outperformed expectations. But the outlook changed after the September quarter National Accounts reported GDP growth slowed to 0.2% quarter-on-quarter, surprising materially on the downside of expectations (0.5%). The day before, the RBA signed off for 2023 holding rates unchanged (4.35%), leaving markets with the message that it is open to doing more if the data over the summer warrants it (see here). Governor Bullock's statement revisited the factors behind the decision to resume the tightening cycle in November while highlighting that a follow-up move wasn't required due to only "limited information" coming to hand since the last meeting.
The slowdown in the Australian economy looks to be sharper than what the RBA (and most analysts) had expected. Growth through the year is now running at 2.1%, down from a 5.8% pace a year ago as households have been hit with headwinds from cost of living pressures, higher interest rates and rising taxes. In response, household consumption slowed to the point of stalling in Q3 and was near flat on a year ago (0.4%). More broadly, private demand is weak (0.2%q/q, 1.4%Y/Y), with growth being bolstered by the public sector (1.4%q/q, 4.2%Y/Y). If these dynamics continue, which appears likely, it would argue for an easing of domestic inflation pressures in 2024. Please see my feature review of the Q3 National Accounts for more here. Other local highlights this week included a sharp narrowing in the current account surplus to a broadly balanced position in Q3 (see here), an uplift in the trade balance to $7.1bn in October (see here), and a 5.4% rise in housing finance in October (see here).
