The US dollar remained bid this week as the Treasury curve steepened. Although a rate cut is still the expected outcome at next week's meeting, the Fed is set to guide towards a slower pace of easing in 2025. A more gradual easing approach from the Fed contrasts with the ECB that appears set to cut rates below neutral, while the BoC and SNB both cut rates by 50bps this week. Domestically, the RBA softened its hawkish tone.
A dovish pivot from the RBA opened the door to rate cuts in Australia from early 2025, with the recent data seeing the Board 'gaining some confidence that inflation is moving sustainably towards target'. However, easing expectations are modest - the futures curve is pricing in 75-100bps of RBA cuts over the coming year to a terminal rate of 3.5% - in light of a strong November labour force survey that indicated the labour market was tightening again.
For the 9th consecutive meeting dating back to November 2023, the RBA left the cash rate at 4.35%; however, the key development was the Board softening its policy guidance, removing from its decision statement the communication of needing to stay 'vigilant to upside risks to inflation' and maintain rates at a 'sufficiently restrictive' level. RBA Governor Bullock confirmed at the post-meeting press conference that this had been a purposeful move; recent data had come in softer than expected and risks to the inflation outlook appeared to be receding. For more analysis on this week's RBA meeting please see my detailed review here.
The RBA's next meeting in February had come into favouritism in market pricing for the timing of a rate cut, shifting forward from April ahead of this week's meeting; however, November's strong labour force report drove a reversal that now sees April as the anticipated start of RBA easing. A 35.6k rise in employment exceeded expectations (25k) - lifting from a subdued 12.1k last time out - to drive the unemployment rate down to an 8-month low of 3.9%, defying the consensus forecast to rise from 4.1% to 4.2%. An easing in the participation rate from 67.1% to 67.0% contributed to the fall in unemployment, but the level in November was just 0.1ppt below record highs. Alongside the decline in the unemployment rate, underemployment (6.2% to 6.1%) and underutilisation (10.3% to 10.0%) fell to their lowest levels since 2023, moves reflective of a tightening labour market. My review of the November Labour Survey covers the report in full here.
Neither last week's payrolls report nor this week's CPI data in the US have swayed markets from expecting a 25bps cut from the Fed at the December 18 meeting. Both headline and core CPI came in on expectations in November at 0.3%m/m, the headline rate lifting from 2.6% to 2.7%yr as the core rate held at 3.3%yr. However, markets sense that with growth remaining strong and the labour market solid, the Fed will signal that it will slow the pace of easing in 2025. Currently, the Fed's dot plot points to 100bps of easing next year, but this looks set to be scaled back to 75bps in next week's updated projections. The focus will also be on the Fed's growth outlook - projected at 2% across the forecast horizon - in light of President-elect Trump's policy agenda to lower taxes, implement tariffs and restrict border flows.
A 25bps rate cut to 3% on the deposit rate from the ECB came with dovish signals for more easing into 2025 with trade and political risks weighing on the growth outlook. According to a sources article from Reuters, some members on the Governing Council had pushed for a larger 50bps cut this week. The ECB has cut rates 4 times for a total of 100bps of easing since June, but policy remains in restrictive territory - well above the estimated 1.75-2.5% range for the neutral rate that ECB President Lagarde referred to in the post-meeting press conference. This gives a nod to rates continuing to fall next year, particularly as the ECB removed from its decision statement the pledge to 'keep policy rates sufficiently restrictive'. The ECB's latest projections kept the inflation outlook broadly unchanged, with the headline and core measures declining steadily to be back at the 2% target in 2026.
