Yields Slide as Disinflation Bets Rise; German Inflation Set to Slow Again

Economic

Summary:

If disinflation starts to become a concern, then rates could be cut in response, rather undermining the recent narrative put forward by Fed chairman Jay Powell that rates need to stay higher for longer.

Yesterday saw another soft session for markets in Europe on the back of more light profit taking as we ease closer to month end, and what has been a strong month for stock markets.

US markets also struggled initially but found the downside limited after comments from Federal Reserve governor Christopher Waller that monetary policy was currently well positioned to slow the economy and get inflation back to target.

This was taken to mean that the Fed was not only done on when it comes to further rate hikes, but also that rate cuts could come sooner rather than later. He went on to say that if disinflation starts to become a concern, then rates could be cut in response, rather undermining the recent narrative put forward by Fed chairman Jay Powell that rates need to stay higher for longer.

The sharp fall in the US 2-year yield to 3-month lows along with the US dollar, however his remarks were tempered by more hawkish comments from another Fed governor Michelle Bowman who argued that more rate hikes might be needed due to the continued resilience of the US economy.

Despite this, markets chose to focus on Waller's comments given his previously hawkish stance on rates in a sign that the consensus was starting to shift on the FOMC, however one should also be careful not to read too much into Waller's comments in that while some modest rate cuts might come over the next 12 months, rates are unlikely to come down anywhere near as quickly as they were raised.

One main takeaway is that there is unlikely to be a rate hike in December, with the Fed on course to fall short of its Fed funds target rate of 5.6% by year end, although that was never really in doubt given recent economic data.

In any case, yesterday's comments saw US markets finish the session mostly higher, although the Russell 2000 closed lower.

In Europe inflation has also been slowing sharply and today's German flash CPI for November could add further downside risk to yields with German 2-year yields already close to 5-month lows.

If we see another sharp slowdown in German inflation for November, like we did in October when we fell from 4.3% to 3%, then that would only serve to add further fuel to the argument that the ECB is blowing smoke when it comes to the idea that more hikes are possible. A slowdown to 2.5% is expected for November CPI.

If anything, further weak numbers could mean that the ECB may end up being the first central bank to start cutting again, as soon as the end of Q1 next year.

Of slightly more concern yesterday was crude oil prices finishing the day strongly higher, wiping out the losses of the last 2 days and acting as a reminder that high energy prices could well play a part in slowing the recent decline in inflationary pressure.

The last few days has seen the pound gain ground against the US dollar, as well as the euro predominantly down to a modest shift in thinking about the UK economy and the prospect that rates might not be cut as quickly as markets originally had been pricing.

This assertion was reinforced yesterday by Dave Ramsden, Bank of England deputy governor who wanted that inflation was becoming more “home grown” and that rates would need to stay higher for some time.

Nonetheless the improvement in recent UK economic data probably has more to do with lower inflation, as well as the slide in borrowing costs seen since the middle of the summer as mortgage rates have come down.

Today's October mortgage approvals as well as consumer credit numbers might offer some hope in this regard.

The first half of this year saw a modest improvement in mortgage approvals, after they hit a low of 39.6k back in January. The slowdown towards the end of last year was due to the sharp rise in interest rates which weighed on demand for property as well as house prices.

As energy prices have come down, along with lower rates, demand for mortgages picked up again peaking in June as approvals rising to 54.6k.

It's been downhill since then with the sharp rise in rates during the summer months, prompting a sharp fall-off which saw approvals fall to 43.3k in September, and the lowest number this year

We have seen interest rates come down since the summer which might offer some respite to the housing market, however recent housing data would appear to suggest that consumers are holding back when it comes to the purchase of a new house. Expectations are for mortgage approvals to edge higher to 45.3k.

Net consumer credit has been slightly more resilient coming in at £1.4bn in September, which hasn't been dissimilar to previous months. A similar number is expected today.

The latest iteration of US Q3 GDP is expected to see a modest upward revision to 5%, with personal consumption forecast to remain unchanged at 4%.

EUR/USD – pushed through the 1.0960 area and up towards the 1.1000 area with the next key resistance at the 1.1060/70 level. Upside momentum remains intact above the 1.0840 area.

GBP/USD – pushed up to the 1.2720 area yesterday, and the 61.8% retracement of the 1.3140/1.2035 down move, before drifting back. Support currently at the 1.2590 area which is the 50% level, with further upside towards 1.3000 possible on a break above 1.2740.

EUR/GBP – continues to drift lower with another lower low with a break below 0.8650 opening a move towards 0.8620. Resistance currently back at the 0.8720 area.

USD/JPY – the failure at the 149.70/80 level has seen the US dollar slip back and below the lows of last week at 147.15. This break of key support and the 147.00 area could potentially open up a move towards 144.50.

To stay updated on all economic events of today, please check out our Economic calendar

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ING

Economic

Central Bank

Size of the decline beats expectations

The October CPI inflation print of 4.9% YoY was a fair bit lower than the consensus expectation which only had inflation dropping to 5.2% (ING f 5.0%) from 5.6% in September.

If you pore through the month-on-month data, the main contribution apart from lower transport costs, which were mainly due to lower motor fuel prices (more of that to come next month given what is happening to crude oil prices) was from housing.

The main housing component slowed from 0.8% MoM to 0.4% MoM
This was mainly because rents went from a 0.3% MoM increase in September to a 0.4% decline in October - is RBA rate policy finally beginning to bite even against industry data that points to a still robust property market (at least as far as purchases go)?
Home furnishings fell in MoM terms for a second month - not a sign of health in the property sector, surely?

There was also some volatility in things like recreation and holiday prices - which are extremely seasonal. So this probably doesn't represent more than the usual monthly noise at this time of year. Financials also slowed to zero after a couple of months of higher readings, which will also have helped. Tobacco prices continued to rise at a reasonable pace - probably lagged effects of earlier bi-annual excise duty adjustments. This should not extend into next month.

Inflation still strong across the board

Despite a softer reading for October, annual inflation rates for most components are still much higher than the Reserve Bank's (RBA) 2-3% inflation target. Of the main sub-groups, only communications, recreation, furnishings and clothing were within or below the 2-3% YoY range. Two-thirds of the main sub-components were higher, and in some cases a lot higher than the target.

Stripping away volatile items also shows that there is still work to be done by the RBA.

Trimmed mean inflation fell this month from 5.4% to only 5.3%. There was a larger decline in the CPI ex-volatile items inflation rate to 4.7% from 5.3%, and the CPI-ex volatile items and holidays inflation rate fell from 5.5% to 5.1%. Australia: Some Welcome News on Inflation_2

Australia: Some Welcome News on Inflation_2

Further declines in inflation over the next 2 months barring accidents

The outlook for the next two months is that we should see further, and perhaps rapid falls in inflation. Indeed, it is only thanks to upward rounding from two decimal places that inflation in October registered as 4.9%, not 4.8%, so we are already well on the way to a further reduction just on rounding.

Last year's weather-induced food and energy price spikes, plus outsize post-Covid re-opening surges in holiday-related costs around December will hopefully not be repeated, at least not as substantially as last year. That said, we are still in an El Nino weather pattern, so freak cold or wet weather and the ensuing impacts on prices cannot be ruled out, though will hopefully be less disruptive and damaging than in 2022.

If so, then we could well see some further substantial reductions in headline inflation taking us into the New Year of 2024 and delivering a much more benign inflation backdrop in early 2024 than we had in early 2023. If so, that could well temper any lingering thoughts of further RBA hikes.

We still think that RBA rate-policy has peaked, but the main risk will come later on in 2024, in February and March, when the base effects (from Jan and Feb inflation) turn much less favourable. And so unless we see the month-on-month run rate for Australian inflation dropping more convincingly by then, there is still, in our view, a slight risk of a final 25bp rate hike around then. If we get past that point, it will look increasingly likely that the peak came with the last hike in November.

Markets move to price in more cuts in 2024

The market response following this inflation data was to price in a greater chance of a rate cut in 2024 than had been assumed. Yesterday, only 0.148 of a 25bp rate cut was priced into the December 2024 cash rate contract. Today, that has risen to 0.733. The AUD monetarily dipped on the news, but then recovered, overshot and settled down to roughly where it was. Clearly, USD weakness is the dominant currency theme right now, not the local rate story.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Economic

As Asia's banking sector navigates a peak in global interest rates and risks of slower growth, investors are wagering that banks in India and Indonesia have the strongest loan and profitability profiles to provide returns next year.

Over the past 18 months Asian central banks tracked the U.S. Federal Reserve tightening monetary policy to battle inflation, but their interest rates hikes were smaller and slower, resulting in better interest income for the region's banks without loan growth suffering.

Banking indexes in India, Indonesia and Thailand have all outperformed the broader MSCI Asia ex-Japan index as well as the S&P banks index since March 2022, when the Fed started raising rates.

But now, as a steep global rates cycle peaks and the spectre of recession looms, investors are turning selective and focusing on banks that kept funding costs down while expanding loans.

"The hope is that we're going to see a mild rate-cutting cycle coming into next year, nothing too aggressive ... that should generally be positive for the financial sector in Asia because it should spur loan growth," said Frederic Neumann, chief Asia economist at HSBC.

Neumann points to India, where banks have delivered double-digit loan growth over the past few months due to rising demand for credit in the world's most populous but under-banked nation.

Loan growth at Asian banks is estimated to rise from 4.5 per cent this year to 10 per cent next year, LSEG data shows, with banks in India and Indonesia leading with 15 per cent and 11 per cent growth, respectively.

Analysts at J.P. Morgan say Asian banks, excluding China's, have led in the global demand for aggregate loans, and their interest margins of 2.4 per cent in 2022 were already at pre-pandemic levels.

Xin-Yao Ng, investment manager of Asian equities at UK fund manager abrdn, says the easy wins for banks from rising borrowing costs are over, which makes him selective.

"We think rates have peaked or are near peak, but the way down will be less steep than the way up. Thus, this headwind will be more gradual, not an earnings shock," Ng says.

Ng likes banks in India and Indonesia, given the better economic growth in those economies and ability of banks to sustain margins.

LSEG data shows profits at banks in India and Indonesia will grow 13 per cent and 11 per cent respectively next year, nearly double the 6 per cent average rise across Asia-Pacific banks.

Indian banking bellwethers HDFC, ICICI, Kotak Mahindra Bank and Axis Bank comprise a major part of the portfolio of Vinay Agarwal, Asia portfolio manager and director at FSSA Investment Management.

Agarwal said the increase in disposable income in India will mean consumers will more than just a bank deposit, leading him to pick banks which are market leaders even in asset management and insurance businesses.

Indonesia's Bank Central Asia (BCA) "is just a class apart," said Agarwal.

Morgan Stanley added BCA to its focus list for Asia-Pacific excluding Japan this month, citing its strength in deposit franchise and loan pricing.

The risk for investors lies in the rich valuations of these banks. HDFC and ICICI trade at a price-to-book (P/B) ratio, a metric that compares stock price with underlying assets, of 3, while Axis trades at 2.3 and BCA at 5.

That compares to price-to-book ratio for MSCI's index for all-country Asian banks of 0.9.

India and Indonesia also face elections next year, which could mean more volatility in those markets.

Laggards are in markets such as Singapore, Hong Kong and South Korea, whose more mature financial sectors and low interest rates reduce the scope for banks to manoeuvre.

Profit growth expectations too are lower in these developed markets. Banks in Australia are estimated to see a drop of 5 per cent in profit in 2024 while profits at Singapore banks will be flat. South Korean banks are expected to see a profit growth of 4 per cent.

For banks in China where monetary policy is still being loosened, the market is in the process of pricing in continued net interest margin pressure, analysts at Morgan Stanley wrote this month, while retaining their underweight stance.

Source: Reuters

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Warren Takunda

Traders' Opinions

As the new week unfolds, the New Zealand Dollar (NZD) exhibits early softness, contrasting its robust performance over the past week and month. Ranked as the second-best performing G10 currency for the prior week and third-best for the past month, NZD faces critical dynamics, notably in the GBP/NZD range. The imminent Reserve Bank of New Zealand (RBNZ) decision introduces potential volatility, with focus on interest rates and the central bank's guidance. Analysts anticipate a nuanced communication challenge for the RBNZ, balancing market guidance without signaling drastic policy shifts. City Index analysis points to NZD/USD finding support, while technical analysis unveils patterns across monthly, weekly, and daily charts, hinting at potential market movements.

The New Zealand Dollar (NZD) is ushering in the new week with a hint of softness. This subtle dip follows a period of commendable strength, positioning NZD as the second-best performing G10 currency for the preceding week and the third-best over the past month.

The GBP/NZD has caught the attention of traders and analysts alike. Locked in a tight range, the pair showcases a respectful adherence to the 23.6%-38.2% Fibonacci retracement of the August to October decline. Chart analysis suggests potential resistance hovering above 2.0775 and substantial support at 2.0583, setting the stage for potential movements.

Adding an element of anticipation to the week, the Reserve Bank of New Zealand (RBNZ) decision scheduled for Wednesday looms large. While expectations point towards the maintenance of interest rates, market participants eagerly await the central bank's guidance regarding future policy moves.

The RBNZ's potential resistance against rate cut expectations emerges as a pivotal narrative. The central bank may opt to counter aggressive market projections that aim to ease New Zealand's monetary conditions. Such a stance could potentially bolster the NZD, influencing its performance in the immediate aftermath of the RBNZ decision.

However, this strategic communication by the RBNZ is no small feat. Analysts anticipate a delicate balancing act, requiring the central bank to convey a tone that guides markets without signaling abrupt shifts in policy. The potential risks are perceived to be tilted towards the upside for the Kiwi on a non-dovish outcome.

Insights from financial institutions contribute to the multifaceted analysis. ANZ expects the RBNZ to stay the course, maintaining a vigilant stance while remaining in data-watch mode. The potential risks, however, seem skewed to the upside for the Kiwi, contingent on a non-dovish outcome.

City Index, in its analysis, points to NZD/USD deriving support from broken resistance levels, establishing higher lows. The critical support to defend in this scenario is identified around the 0.6050 mark.

RBNZ's Tightrope Act: ANZ's Projections and Risks for the Kiwi Currency_1

Zooming in on technical analysis, the monthly chart unveils a long-term sideways range since 2017, with recent peaks in March 2020 and August 2023. The weekly chart highlights a potential lower movement following a manipulation candle in August 2023. However, the recent price range between 2.1000 and 2.0600 introduces an element of caution.

RBNZ's Tightrope Act: ANZ's Projections and Risks for the Kiwi Currency_2

On the daily chart, a symmetrical triangle pattern emerges in shorter timeframes, signaling a potential downward correction with a retest of the resistance zone before moving towards the previous peak.

As the week progresses, the NZD's performance remains intertwined with the unfolding RBNZ decision, nuanced communication, and the ever-evolving technical landscape. Traders and investors navigate the complexities, seeking cues for potential market movements in the dynamic realm of foreign exchange.

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Thomas

Economic

Bond

Asian stocks briefly made one-week highs on Wednesday, bonds rallied and the dollar sank on new hints at U.S. interest rate cuts, while the New Zealand dollar jumped after its central bank said another hike may be necessary if inflation proves stubborn.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 per cent in early trade before weakness in Hong Kong tech shares dragged it back to flat.

Japan's Nikkei fell 0.2 per cent. The New Zealand dollar was last up 1.1 per cent at a four-month high of $0.6207, having blown past resistance.

The U.S. dollar, meanwhile, slid to fresh multi-month lows on the euro, yen, sterling, the Australian dollar, yuan and Swiss franc. Gold hit a seven-month high above $2,051 an ounce.

Overnight Fed Governor Christopher Waller - an influential and previously hawkish voice at the U.S. central bank - told the American Enterprise Institute that rate cuts could begin in a matter of months, provided inflation keeps falling.

Fed funds futures rallied on the remark to price more than hundred basis points of cuts in 2024 and 40 per cent chance they begin as soon as March. Two-year Treasury yields fell sharply and along with the dollar fell further still in Asia.

"The market clearly moved on Governor Waller's opening up the possibility of cuts," said Tapas Strickland, head of market economics at National Australia Bank in Sydney. Waller's remark echoed earlier comments made by Fed Chair Jerome Powell.

The two-year yield hit its lowest since mid-July at 4.70 per cent and the benchmark 10-year yield fell 4 bps to its lowest since September at 4.30 per cent.

The dollar was last down 0.5 per cent at 146.68 yen, its lowest since Sept. 12 and a drop of nearly 2 per cent in three days. It touched a 3-1/2 month low at $1.1017 per euro.

Waller said that if the decline in inflation continues, "for several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower."

"There is no reason to say we will keep it really high," he said.

Conditionality

Waller's remarks extended what has been a two-week rally in stocks and bonds around the world since a benign U.S. inflation report two weeks ago - except in China where doubts about the economy have investors decidedly downbeat.

Global stocks are up almost 9 per cent in November and are tracking toward their best month in three years. The Hang Seng is flat and hasn't posted a positive month since July.

The latest negative news came from Meituan which flagged slowing fourth-quarter growth for its mainstay food delivery business. Shares fell 8 per cent to a 3-1/2 year low on Wednesday, despite the company promising a $1 billion buyback.

The Hang Seng fell 0.9 per cent on Wednesday. Mainland blue chips fell 0.4 per cent and are heading for a fourth monthly decline in a row with a 1.9 per cent fall in November.

Some analysts are also wary that markets have run with parts of Fed officials' remarks - flagging possible rate cuts - even though the comments have been conditional on further declines in inflation and on financial conditions staying restrictive.

New Zealand sounded something of a warning note on Wednesday when the central bank slightly lifted its interest rate projections and warned hikes may not be over.

"Bets ought to be guided by conditionality that policy is appropriately tight, not indulged with abandon on over-confidence that Fed is done (premised on linear projections of dis-inflation)," said Mizuho economist Vishnu Varathan.

Elsewhere Australian inflation eased by more than expected. In commodities Brent crude futures steadied to $81.75 a barrel but were set for a monthly drop, while Singapore iron ore futures are up 9.6 per cent in November at $130.50 a tonne.

Source: Reuters

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Westpac

Economic

Central Bank

Short description: The RBNZ left the OCR at 5.5% as expected but was more hawkish on future prospects. The RBNZ's projections continue to reflect the risk of further increases in the OCR in 2024. An easing cycle looks quite some time off.

The RBNZ's projections for the OCR were revised 10bp higher to a peak of 5.69% in September 2024, implying around a 75% chance of a further 25bp rate hike. The projections imply a gradual easing of policy from the first half of 2025. The long-run neutral OCR was adjusted up 25bp to 2.5%.

The RBNZ's short term CPI forecasts have been revised down slightly in the near term but significantly higher from mid-2024 reflecting a concern that migration driven population growth will add to demand and the housing market. CPI inflation still gets back inside the range in Q3 2024, but the RBNZ sees upside risks here.

Our overall impression is that this is in line with our concern that more tightening may be required to ensure inflation returns promptly to target.

Talking tough and maybe doing something.

As widely expected, the RBNZ left the OCR at 5.5% at its final policy review for this year. Of much greater interest to markets was what the Bank had to say about the outlook for the OCR next year and beyond.

In summary, the updated projections in the accompanying Monetary Policy Statement (MPS) contained significant revisions from those published back in August. The projections continue to reflect a risk that a higher OCR will ultimately be required, with the probability of a further 25bp hike in 2024 now estimated at around 75% compared with 36% previously (the peak OCR increased to 5.69% from 5.59% previously). Thereafter, with CPI inflation forecast to move back inside the target range in Q3 next year (unchanged from the August forecast) the RBNZ's projections imply a modest easing cycle might be possible from mid-2025 – much later than implied by current market pricing.

The most notable changes in the press statement and meeting record from those which accompanied the October policy review was increased concern that inflation would remain persistent and upside risks from these upwardly revised forecasts. A key driver is increased concern that migration and population would drive increased demand and medium-term inflation pressures. The RBNZ's forecast for house prices was revised up from 4.3% to 5.5% for 2024 reflecting these pressures. The statement of record also notes that government investment looks set to be stronger (in line with PREFU) which also adds to medium term demand concerns.

Our overall first impression is that the RBNZ is concerned that further increases in interest rates may be required towards the middle of 2024. Key will be migration and housing market indicators over the next few months and the next couple of CPI outturns. The new government's fiscal projections in the HYEFU before Christmas will also be a key focus. OCR cuts certainly do not seem to be on the radar for the RBNZ right now.

We will publish a bulletin with further commentary and analysis later today, including implications for our call on the outlook for the OCR, once we have had time to read the full MPS and observe the Governor's post-meeting press conference.

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Titan FX

Forex

GBP/USD Technical Analysis

The British Pound started a major increase above the 1.2450 level against the U.S. dollar. GBP/USD even climbed above the 1.2550 level to enter a positive zone.

GBP/USD Eyes Additional Gains, U.S. GDP Next_1

Looking at the 4-hour chart, the pair settled above the 1.2600 level, the 100 simple moving average (red, 4 hours), and the 200 simple moving average (green, 4 hours).

It even tested the 1.2730 resistance before there was a consolidation phase. On the upside, immediate resistance is near the 1.2730 level. The next key resistance is near the 1.2750 level. A close above the 1.2750 zone could open the doors for more upsides. The next stop for the bulls might be 1.2800.

If there is a downside correction, the pair might find support near the 1.2665 zone. There is also a key bullish trend line forming with support at 1.2600 on the same chart.

The trend line is close to the 50% Fib retracement level of the upward move from the 1.2449 swing low to the 1.2732 high. If there is a downside break below the trend line, the pair could decline toward the 1.2550 support.

The 61.8% Fib retracement level of the upward move from the 1.2449 swing low to the 1.2732 high is also near 1.2550. The next key support sits at 1.2450, below which the pair could test the 1.2420 pivot level in the near term.

Looking at Gold, there were strong bullish moves above $2,025 and there could be more upsides toward $2,050 in the coming sessions.