Independent Australian and global macro analysis

Friday, October 25, 2024

Macro (Re)view (25/10) | Election trades take up the running

A quiet macro calendar this week seemingly saw markets turning their attention to the US election. Higher treasury yields and further US dollar strength reflect the increasing probability of a Trump victory in betting markets. Growth differentials also continue to play their part, with more signs of strength in the US economy contrasting with weakness in Europe, opening up the possibility of a 50bps rate cut from the ECB in December. Meanwhile, the Bank of Canada stepped up its easing cycle by announcing a 50bps rate cut to 3.75%, citing the need to support growth and keep inflation at the midpoint of the 1-3% target band. 


The Fed's Beige Book - touted as a key input behind the FOMC's decision to deliver a 50bps rate cut last month - reported US economic conditions were broadly steady and employment increased across districts in September. The previous version in August highlighted a rise in the number of districts where growth had deteriorated from 5 to 9, one insight that may have pushed the FOMC to frontload the start of its easing cycle. Markets have subsequently reduced rate cut expectations as the incoming activity and employment data have surprised to the upside. This week, October's PMI was reported at 54.3, up from 54.0 in the prior month, a reading indicative of solid US growth early in Q4.   

A largely unchanged reading in the euro area composite PMI in October (49.7) suggests economic activity in the bloc has stalled, slowing from moderate growth in the middle of the year. With soft demand continuing to take pressure off inflation - output prices rose at their slowest pace since 2021 - the ECB is increasingly turning to addressing weak growth, as President Lagarde highlighted at last week's meeting. Comments from ECB officials throughout the week at the IMF summit reaffirm that another 25bps rate cut is on the cards at the December meeting, but market pricing factors in a material chance of a 50bps move. 

Within the PMI report, there were warning lights from a growth perspective, notably that growth within the bloc is weakest in Germany and France - the two largest economies - while employment also fell in both countries. Additionally, activity in the services sector - the growth engine for the euro area with manufacturing (45.5) having been in a downturn since late 2022 - slowed to an 8-month low (51.2). The 5th consecutive monthly fall in new orders gives a bearish view on the near-term outlook, while export orders declined amid weaker demand conditions abroad. 

A light week for events in Australia has added to the anticipation for the Q3 CPI report, due Wednesday morning (AEDT time). Government rebates on household electricity bills and lower fuel prices are expected to see headline inflation slow sharply to 0.3%q/q and 2.9Y/Y. While this could see annual inflation fall to a low since 2021, the Board has made clear that its focus is on underlying inflation, which is forecast at 0.7%q/q and 3.3Y/Y. Based upon robust labour market conditions and ongoing elevated underlying inflation, markets see the RBA delaying the start of its easing cycle until well into next year.