A BoE 25 bps November Cut Priced In

Markets

Dutch chipmaker ASML sent shockwaves through the broader equity market yesterday. In its earnings report that it accidentally published one day ahead of schedule, Europe’s high-profile tech company cut the outlook for next year amid far less orders than investors expected. The EuroStoxx50 fell of a cliff after word from the economy-sensitive company got out, eventually tumbling about 2%. US stock markets ate the dust, the chip sector and broader tech in particular. The Nasdaq slipped around 1%. Asian stocks this morning lose territory in most cases but recovered from intraday lows. Chinese shares flirt with the green ahead of tomorrow’s news conference by the country’s housing minister. Long-term US yields were pressured as another sharp drop in oil prices capped the recent rise of inflation expectations. A disappointing NY manufacturing index (-11.9 vs +3.6 expected, from 11.5) and the risk-off resulted in losses of more than 9 bps (30-yr) eventually. The front end barely budged on any of the aforementioned triggers, suggesting markets are comfortable with current Fed pricing as we head into the November 5 US elections. German rates fell 4.7-5.4 bps across the curve. The USD eked out additional technical gains. EUR/USD broke below the 1.10 neckline of the double top formation earlier this month and slipped sub 1.0907 (50% retracement of the 2024 YtD low-high) yesterday. The 1.08 area still looks to be its short-term destination with the journey unhindered by today’s empty economic calendar. USD/JPY’s rally ran into resistance around the 150 lever. After a strong labour market report yesterday that pushed EUR/GBP back towards the YtD lows, UK inflation numbers this morning do the exact opposite. The pair jumps back higher (0.836) after the headline price level stabilized on a monthly basis to be 1.7% higher y/y. It’s the first sub 2% reading since April 2021 and fell short of a 1.9% consensus estimate. Underlying gauges such as core inflation (3.2%, down from 3.6%) and services inflation (4.9%, down from 5.6%) missed the bar for 3.4% and 5.2% respectively. Below-consensus PPIs topped it off. Bank of England governor recently called for a more activist approach in monetary easing, provided inflation continues to decelerate. Market importance of today’s numbers therefore outweigh that of yesterday’s. A 25 bps November cut is priced in.

News & Views

Inflation in New-Zealand dropped to 2.2% Y/Y in Q3 from 3.3% in Q2. It was the first time since March 2021 that annual inflation returned within the 1-3% target band of the Reserve Bank of New Zealand. ‘Prices are still rising, but not as much as previously recorded’, consumer prices manager Nicola Growden of Statistics New Zealand said. Consumer prices rose 0.6% from the previous quarter (was 0.4% in Q2), but this was still slightly below the 0.7% consensus estimate. Higher rent prices were the biggest contributor to annual inflation, up 4.5%. Price for local authority rates and payments increased by 12.2%. They were responsible for half of the quarterly 0.6% increase. Pharmaceutical prices increased 17% Q/Q. Tradables goods’ prices declined -0.2% Q/Q and -1.6% Y/Y. Non-tradeables rose 1.3% Q/Q and 4.9% Y/Y. RBNZ expected inflation at 2.3% in its August monetary policy statement. Inflation returning to target probably will convince the RBNZ that it can further reduce policy restrictiveness in order to support poor growth. Markets discount another 50 bps reduction at the November 27 meeting. Some even see a chance of a 75 bps step (35%). The kiwi dollar continues to trade in the defensive this morning at NZD/USD 0.606.

The Federal Reserve Bank of New York yesterday published its survey of consumer expectations. Consumers’ inflation expectations are mixed over the three horizons. Median inflation expectations remained unchanged at 3.0% at the one-year horizon, increased to 2.7% from 2.5% at the three-year horizon, and rose to 2.9% from 2.8% at the five-year horizon. Expectations on the labour market improved. The probability of leaving one’s job voluntarily in the next twelve months increased to 20.4% from 19.1% percent and the perceived probability of finding a job in the event of job loss increased to 52.7% from 52.3%. Year-ahead household income and spending growth expectations declined by 0.1 percentage point to 3.0% and 4.9% respectively. Perceptions and expectations of credit access improved compared to a year ago. However, the perceived probability of missing a minimum debt payment over the next three months increased to 14.2 % from 13.6%, the highest reading of the series since April 2020.