23/11/2024 Market Analysis

Week Ahead: Dollar’s Q4 Rally & Economic Developments

The dollar’s Q4 rally has been remarkable, with the Dollar Index rising more than 7% in the first eight weeks of the quarter. Last week saw half of the G10 currencies drop to new lows for the year. A significant factor behind the dollar’s strength is the diminishing expectation of Federal Reserve rate cuts. Market sentiment has shifted, and there is no longer any expectation of a 50 bp cut through mid-2025. The year-end effective Fed funds rate is now projected at 3.90%, compared to below 3% at the end of September.

Meanwhile, developments in Europe and Japan paint a less optimistic picture. Germany is grappling with political uncertainty, as an upcoming vote of confidence may force early elections in 2025. In France, a budget stalemate has led the government to consider bypassing parliament, a move that could trigger a confidence vote it is unlikely to win. Japan, facing its first minority government in decades, is leaning into fiscal stimulus, reinforcing a traditional approach to economic challenges.

Geopolitical tensions are adding to the complexity. Russia has tightened restrictions on refined uranium exports, and China is set to limit some rare earth exports starting next month. These actions highlight the growing economic and strategic challenges facing global markets.

The US economy continues to outshine its peers, with a stark divergence from other advanced economies. This strength is evident even before the anticipated policy changes under the next administration, which include tariffs, tax cuts, and deregulation.

This week will bring crucial updates on inflation from several major economies. The October PCE deflator in the US is expected to confirm the modest rise already reflected in CPI data. The eurozone’s flash October CPI is anticipated to show a second consecutive monthly increase, though markets are still pricing in a half-point rate cut next month. Japan’s Tokyo CPI, a key leading indicator, is likely to rebound to 2.2%-2.3% in November after hitting a yearly low of 1.8% in October. The BOJ is projected to continue its cautious tightening, with a 15 bp hike expected in December. Australia’s October CPI is also likely to rise for the first time since May, although the RBA isn’t expected to cut rates before Q2 2025. Conversely, the Reserve Bank of New Zealand is set to deliver its second consecutive 50 bp rate cut, bringing the cash rate target to 4.25%.

Key market focus this week will be on the Federal Reserve minutes and the US PCE inflation data, as investors gauge the potential for a slower pace of interest-rate cuts. Additional highlights include eurozone inflation data, New Zealand’s rate decision, and key economic indicators from Japan, where yen volatility remains a focal point. These developments reflect the growing divergence between the US and other advanced economies, shaped by economic strength, political shifts, and rising global tensions.

United States of America

Fed Minutes Could Offer Rate Policy Clarity

The Federal Reserve’s meeting minutes from earlier this month, set for release on Tuesday, are highly anticipated. Policymakers decided on a 25 bp rate cut after a 50 bp reduction in September. Investors are eager to understand if the pace of rate cuts might slow further. With recent data showing the U.S. economy holding firm and President-elect Trump’s policies likely to spur inflation, the need for aggressive rate reductions could diminish. Current market pricing reflects just over a 50% chance of another rate cut in December and a total of 67 bp reductions through the end of 2025.

Assessing Economic Health Through Data

Key economic indicators this week will provide insight into the U.S. economy’s resilience. On Tuesday, the Conference Board’s consumer confidence index for November and new home sales data for October will be released. Wednesday brings the second estimate of Q3 GDP, durable goods orders for October, and weekly jobless claims. October’s PCE inflation report, the Fed’s preferred inflation gauge, will also be closely watched. The Treasury’s auctions include $69 billion in 2-year notes Monday, $70 billion in 5-year notes Tuesday, and $44 billion in 7-year notes Wednesday. Markets will pause on Thursday for Thanksgiving.

Inflation and Fed’s Data-Driven Decisions

Recent CPI and PPI data suggest slightly firmer price pressures. October’s PCE deflator is expected to rise by 0.2%, bringing the annual rate to 2.3%, while the core deflator is likely to increase by 0.3% to 2.8%. These signals align with the Fed’s acknowledgement that inflation’s return to target will be uneven, requiring consistent data before reassessing its stance. Consumption expenditures and durable goods orders are both forecasted to rise, supporting a Q4 GDP growth estimate of 2.0%-2.5%.

Diverging Economic Trends Highlight Strength

The preliminary November PMI results underscore the sharp contrast between the U.S. economy and the struggles of Europe and Japan. The Dollar Index reached new two-year highs, surpassing the 50% retracement level of its previous decline, with further resistance near 109.00 and support around 107.00. The U.S.’s economic resilience continues to bolster the dollar, outpacing global peers.

Key Points:

• Fed minutes will be crucial for understanding rate cut probabilities.
• October’s PCE inflation data will reveal trends in price pressures.
• Consumer confidence, durable goods orders, and GDP estimates will gauge economic strength.
• Treasury auctions will offer insights into market demand.
• The Dollar Index remains supported by the U.S.’s economic divergence from global trends.

Australia & New Zealand

Australia’s Central Bank Adopts a Hawkish Stance

The Reserve Bank of Australia (RBA) has emerged as one of the most cautious yet hawkish central banks in the G10. Despite starting its policy tightening later than others and tightening less, it has firmly signalled that rate cuts are not on the horizon this year. Market projections suggest a potential first cut in July 2025, with some anticipating a 90% likelihood of a cut in May. Australia’s October inflation data, set for release on November 27, is critical, especially since monthly inflation figures have eased for four months to 2.1% for the headline rate and 3.2% for the trimmed mean. However, there is a risk that these figures may rise again. The RBA places more importance on quarterly data, with Q3 inflation averaging 3.65%, a decline from 4.1% in Q2.

New Zealand Prepares for Bold Rate Cuts

The Reserve Bank of New Zealand (RBNZ) is expected to announce another 50 basis-point rate cut on November 27, bringing the cash rate down to 4.25%. Markets anticipate further easing, with another 100 basis points in cuts forecasted for 2025. Speculation remains that the RBNZ could surprise with a 75 basis-point cut, as it seeks to inject momentum into the economy. This will be the last meeting before February, making this decision pivotal for New Zealand’s monetary policy.

Australian Dollar Resists Greenback Strength

The Australian dollar has shown resilience against a strong U.S. dollar, rising approximately 0.70% last week. Positive momentum indicators helped lift it above $0.6500 after dipping to a four-day low near $0.6470. This recovery maintains a consolidative tone, with further resistance anticipated around $0.6550-$0.6565.

New Zealand Dollar Hits Yearly Low

In contrast, the New Zealand dollar has faced selling pressure, dropping to a new yearly low of $0.5825. The next key support level is last year’s low of $0.5775, with historical lows near $0.5500 from 2020 and October 2022 providing potential downside targets.

Key Points:

• RBA unlikely to cut rates before mid-2025, with October inflation data in focus.
• RBNZ is expected to deliver aggressive rate cuts, possibly 50 or 75 basis points.
• Australian dollar remains resilient, while the New Zealand dollar faces further downside pressure.

Canada

Canadian Economy’s Growth Picks Up Slightly

September and Q3 GDP data, set for release at the end of the week, are expected to show modest economic growth. Following stagnation in August, estimates suggest the economy grew by 0.3% in September, marking its best monthly performance since April. For Q3, annualized growth is forecast at around 1.3%, a slowdown from 2.1% in Q2. This performance, coupled with October’s rising CPI and a weakening Canadian dollar, could temper expectations of a significant rate cut when the Bank of Canada meets on December 11.

Canadian Dollar Shows Relative Strength

The Canadian dollar emerged as the strongest G10 currency last week, appreciating by approximately 0.7% against the U.S. dollar. The only other G10 currency to post gains was the Australian dollar, which rose by 0.5%. The narrowing U.S. two-year yield premium over Canada, which fell for six straight sessions to about 95 basis points—the lowest in over a month—supported the Loonie’s strength. However, risks remain. The U.S. dollar found support near CAD1.3930, and a rise above CAD1.4020 could signal a test of CAD1.4100.

GDP Data’s Impact on Rate Cut Speculation

Canada’s Q3 GDP figures, due November 29, will be pivotal in shaping interest rate expectations. Stronger-than-expected GDP data may reinforce views that the Bank of Canada will opt for a smaller, 25-basis-point rate cut next month. However, a weaker-than-expected outcome could revive discussions of a more aggressive 50-basis-point reduction.

Key Points:

• September GDP growth was forecasted at 0.3%, the best monthly performance since April.
• Q3 annualized growth is expected to slow to 1.3% from 2.1% in Q2.
• Canadian dollar gained 0.7% last week but remains vulnerable to upward pressure on the U.S. dollar.
• GDP data will heavily influence the Bank of Canada’s interest rate decision in December.

China

November PMI’s Potential for Continued Improvement

The November PMI, set for release on Saturday, November 30, is expected to show further improvement, building on recent gains. After a solid performance in Q1, with the composite PMI peaking at 52.7 in March, it slid to 50.1 by August. However, stimulus measures in September helped stabilize the index, lifting it to 50.8 in October. While the manufacturing PMI has hovered below 50 for most of the year, it reached a neutral 50.1 in October. Meanwhile, the non-manufacturing PMI, though consistently above 50 since late 2022, hit a low of 50 in September before rebounding slightly to 50.2 in October. Sustained improvement in the November figures could signal that economic recovery efforts are gaining traction.

PBOC’s Strategy to Manage Yuan Movements

The People’s Bank of China has been setting the dollar’s reference rate significantly lower than market expectations, aiming to curb the greenback’s appreciation against the yuan. Despite these measures, the dollar has strengthened against the offshore yuan in nine of the past 11 sessions, peaking at CNH7.2670 before the weekend, its highest level since July. The greenback’s continued climb, including eight straight weeks of gains against the onshore yuan—the longest streak since 2018—suggests potential movement toward the July high of CNH7.31.

Economic Data Highlights Amid Monetary Stability

China’s official PMI readings will take centre stage in an otherwise quiet data week. Investors and economists are eager to see if the manufacturing sector continues its recovery, having snapped a five-month streak of contraction in October. The non-manufacturing PMI’s modest improvement last month adds to hopes that the government’s economic measures are starting to yield results.

On Monday, the PBOC will announce its medium-term lending facility rate. Following recent monetary easing, economists anticipate no change to the current rate, signalling a pause to assess the effects of earlier measures. Industrial profit data for October, due Wednesday, will provide further insights into corporate performance. After two consecutive months of sharp annual declines, any signs of stabilization or recovery could bolster confidence in the broader economic outlook.

Key Points:

• November PMI is expected to build on the stabilization seen in September and October.
• PBOC’s lower-than-expected reference rates aim to manage yuan depreciation, but the dollar remains strong.
• Manufacturing and non-manufacturing PMI readings will be closely watched for evidence of recovery.
• PBOC is likely to hold its medium-term lending facility rate steady amid recent easing.
• Industrial profit data will reveal corporate health as Q4 unfolds.

Europe

Anticipation Builds Around November Inflation Figures

Provisional inflation data for November, to be released on Friday, November 29, will be closely scrutinized as speculation mounts that the European Central Bank (ECB) may accelerate its pace of rate cuts. The prospect of a larger-than-expected 50 basis-point reduction in December has gained traction, with markets factoring in the possibility after disappointing eurozone PMI readings.

The eurozone’s flash inflation figures are expected to indicate a year-over-year increase in price growth, partly driven by challenging comparisons to a 0.6% decline in November 2023. A modest 0.2% monthly drop in November 2024 would keep the three-month annualized rate flat but push the annual rate higher to around 2.4%. This would mark the first consecutive year-over-year increase in inflation since late 2022.

Country-Specific Data Precede Eurozone Inflation

Before the eurozone’s headline data, key inflation numbers will emerge from member states. Spain and Germany will release figures on Thursday, with France and Italy following on Friday. Germany’s Ifo business sentiment survey for November, due Monday, will also attract attention, particularly in light of weaker-than-expected eurozone PMI data. October’s Ifo survey showed tentative optimism, but this was contradicted by the German ZEW survey, which indicated declining economic sentiment post-U.S. elections.

Consumer and Business Sentiment in Focus

Consumer and business confidence metrics will add further depth to this week’s eurozone narrative. On Wednesday, French consumer confidence and Germany’s GfK consumer climate surveys will shed light on public sentiment. Italy’s business and consumer confidence surveys, due Thursday, will provide additional clues about the broader economic outlook.

France and Germany Deliver Additional Insights

France will release consumer spending data and its final third-quarter GDP figures on Friday, adding to the eurozone’s data-packed week. Germany’s government bond auctions, including a €4 billion October 2029 Bobl offering on Tuesday, and Italy’s bond auctions on Tuesday and Thursday will also be closely monitored by markets.

Euro’s Slump Amid Economic Pressures

The euro has faced sustained downward pressure, falling for the third consecutive week by more than 1% and reaching a two-year low of $1.0335. This marks a significant decline from its Q3 close to $1.1135. A slight rebound to $1.04 provided some relief, but the sentiment remains bearish. The widening U.S.-German two-year yield spread, now at 235 basis points, reflects ongoing challenges for the euro.

Key Points:

• November eurozone inflation data will test ECB rate cut expectations, with potential implications for December policy.
• Flash inflation figures from Spain, Germany, France, and Italy will set the stage for the eurozone’s headline release.
• Consumer and business confidence data from France, Germany, and Italy will offer further insight into economic conditions.
• France’s consumer spending and Q3 GDP figures will cap a critical data week.
• The euro remains under pressure, with ongoing concerns tied to economic performance and rate differentials.

Japan

Tokyo CPI as a Key Inflation Indicator

Tokyo’s Consumer Price Index (CPI) for November will provide critical insights into Japan’s inflation trajectory. Often seen as a precursor to national CPI trends, it mirrors the way preliminary eurozone CPI or US CPI/PPI inform their broader inflation measures. In October, Tokyo’s CPI matched its yearly low of 1.8% across all key measures, marking its lowest point since March 2022. However, national CPI data for October showed slightly higher inflation, with a 2.3% headline rate and a 2.2% core rate.

Expectations for November suggest a modest rise in Tokyo’s core CPI to 2.1%, driven by fading government energy subsidies. This uptick signals potential upward pressure on nationwide inflation figures, aligning with the Bank of Japan’s (BOJ) ongoing efforts to normalize monetary policy despite subdued growth and soft inflation data.

Japan’s Economic Growth: A Fragile Recovery

Japan’s growth trajectory has been marked by intermittent contractions since 2005, with the economy shrinking in Q1 2024 by 0.6%. Subsequent quarters saw modest growth—0.5% in Q2 and 0.2% in Q3. Hopes for stronger Q4 performance will be tested by October’s employment, retail sales, industrial production, and housing starts data, all set to be released on November 29. Early indicators suggest a potential recovery in industrial output, supported by a rebound in car production and sustained demand for machinery.

Bond Auctions Signal Investor Interest

The Ministry of Finance will conduct two notable bond auctions this week. On Wednesday, it will reopen a May 2024 40-year bond issue, with 700 billion yen on offer. These long-tenor bonds are likely to attract institutional investors, including insurance companies and pension funds. Additionally, a 2.6 trillion yen auction of two-year sovereign notes is scheduled for Friday, November 29. Both auctions will provide insights into market sentiment and the demand for Japanese government bonds.

Yen Performance Under Pressure

The yen has been under significant pressure in Q4, with the US dollar strengthening in all but one week. The greenback reached a high of JPY156.75 in mid-November before consolidating last week within a range of JPY153.30 to JPY155.90. Momentum indicators suggest a potential pullback, but a deeper correction in US rates and a breach of JPY152 would be needed to signal a broader reversal.

Key Points:

• Tokyo CPI: November’s data will indicate whether inflationary pressures are building nationwide, with expectations of a 2.1% rise in core CPI.
• Economic Indicators: October’s employment, retail sales, and industrial production data will test Q4 growth prospects.
• Bond Auctions: Institutional interest will focus on Wednesday’s 40-year bond and Friday’s two-year sovereign note auctions.
• Yen Outlook: Continued pressure on the yen underscores the importance of US rate trends and support levels near JPY152.

United Kingdom

Bank of England Data Takes Centre Stage

In a quiet week for U.K. economic updates, the spotlight turns to the Bank of England’s (BOE) October consumer credit and mortgage lending data, set for release on November 29. While these figures are not typically market movers, they provide valuable insights into household borrowing and housing market trends. The BOE is expected to maintain its current policy stance next month, with markets pricing an 85% chance of a rate cut at its February 2025 meeting.

Declining British Economic Indicators

Recent British economic data has painted a gloomy picture. October retail sales fell twice as much as anticipated, compounded by downward revisions to September’s figures. Additionally, the flash composite PMI dropped below the critical 50 mark, signalling economic contraction. Despite these setbacks, a stronger-than-expected CPI reading has likely stayed the BOE’s hand for now.

Gilt Syndication Targets Long-Term Investors

The U.K. Treasury will syndicate 1.25% index-linked gilts maturing in 2054 during the week. This long-term issuance may attract institutional investors seeking inflation protection, given the economic uncertainty.

Sterling’s Struggles Continue

The British pound remains under pressure, falling below $1.25 for the first time in over six months. Sterling has now endured eight consecutive weekly declines, equaling the longest losing streak since 1973. Resistance near $1.26 could limit any immediate recovery, while the April low of $1.2300 serves as a critical support level.

Key Points:

• BOE Lending Data: October figures for consumer credit and mortgages will provide insights into household financial conditions.
• Economic Weakness: Downbeat retail sales and PMI data highlight the U.K.’s fragile economic state.
• Gilt Auction: The issuance of 2054 index-linked gilts reflects investor interest in long-term inflation hedges.
• Pound Outlook: Sterling’s downward trajectory underscores persistent pressure, with key levels at $1.26 and $1.2300.