ECB Expected to Cut Rates by 25 bps to 3.25%

Markets

Core bonds eked out some gains yesterday ahead of the ECB meeting and US data including retail sales and jobless claims scheduled for release today. Bunds outperformed Treasuries with yields losing around 4 bps across the curve. US yields lost between -0.8 (2-yr) and -2.4 bps (30-yr). Gilts rallied after September CPI decelerated more than expected. Even with underlying gauges still well above 2%, front-end yields in the UK tanked more than 11 bps as markets stacked up monetary easing bets. Sterling slipped but managed to claw back some of the losses against an overall weak euro as trading evolved. EUR/GBP rose from 0.833 to 0.836. Cable (GBP/USD) lost the 1.30 big figure (July interim high, September correction low & 38.2% retracement on the April-Sep 2024 rise). We don’t want to call it a formal technical break lower just yet. The pair may still rebound towards 1.32 to finish a developing head-and-shoulders pattern. The US dollar held the upper hand against all peers but CAD. DXY took out 103.34 (50% recovery on the YtD high to low). EUR/USD dropped further below 1.09 and closed in on intermediate support around 1.0835. The bottom of the bearish August-October double top formation is located around 1.08. The ECB is expected to cut rates by 25 bps to 3.25%. That’s a complete U-turn since ECB chair Lagarde basically ruled that out in September because of the short inter-meeting period. Ongoing disinflation and especially weak PMIs made many policymakers, led by Lagarde’s example, change tack. That’s data-dependency to the fullest – an argument we expect Lagarde to use to defend today’s decision. For that same reason she’s unable to offer much guidance for December, given there are two PMI’s, two CPI’s and Q3 wage data. That’s a recipe for volatility: markets currently expect 100 bps of cuts over the next four meetings (today included). Meanwhile inflation numbers are all but certain to pick up again in the coming months. One less dire PMI outcome and things may shift drastically. For the time being though, we hold on to our short-term target for EUR/USD around 1.08 amid ongoing (technical) USD strength. Front-end European yields discount enough rate cuts in our view, suggesting the recent October lows (around 2% for the German 2-yr, 2.2% for the swap equivalent) are a solid bottom.

News & Views

Data published by the Australian Bureau of Statistics this morning showed that the labour market remains strong. The economy added a net 64.1 k of jobs in September, up from 42.6 k in August. The rise was mainly due to a jump in full-time employment (+51.6k compared to a small decline of -5.9k in August). Measured by the overall change in employment, it was the sixth straight month that employment growth beat expectations. The unemployment rate was unchanged at 4.1%. According to the ABS, employment has risen by 3.1% in the past year, growing faster than the labour force. The participation rate also rose 0.1% to a record high 67.2%. “The record employment-to-population ratio and participation rate shows that there are still large numbers of people entering the labour force and finding work in a range of industries, as job vacancies continue to remain above pre-pandemic levels” ABS said. After the release of the report, money markets further reduced the chance of a first RBA rate cut in December to 30% from about 50%. Inflation in August declined to 2.7% Y/Y, within the RBA 2-3% target range, but this was mainly due to support measures of the government to cap electricity prices for consumers. The RBA probably will look through this decline and combined with an ongoing strong labour market, it won’t feel a rush to cut from the 4.35% currently. The Aussie dollar this morning rebounded modestly against a broadly strong dollar (AUD/USD 0.669).

At a press conference held this morning, China Housing Minister Ni Hong announced that the country will raise credit support for ‘white list’ housing projects to Rmb 4tn. The measure is part of series that were recently announced to address a deep-rooted real estate crisis in the country and prevent further negative spill-over effects to the economy. Until now, loans for the approved white list amounted to Rmb 2.23tn. White list projects can receive financing to facilitate that developers can further complete construction projects and deliver homes to buyers. For now, the reaction of Chinese markets to press conference was muted (CSI 300 +0.25%). The yuan is losing marginal ground against the dollar (USD/CNY 7.123).