ECB In A Hurry, FOMC Not So Much

Where We Stand – Markets had a ‘calm before the storm’ vibe to them yesterday, as month/quarter-end passed in largely uneventful fashion, and participants sat on their hands ahead of the busy data docket which lies ahead this week, culminating in the September US jobs report on Friday.

It did, though, prove to be yet another day of dismal economic news within the eurozone, amid reports that the German government are set to abandon their forecast for any economic growth this year, seeing at best stagnation, in new forecasts due to be released next week. Clearly, the mood does not look set to improve in Europe’s largest economy any time soon, with “Schwarze Null” having now become not only the deficit target, but the growth target as well!

Nevertheless, at least the ongoing loss of economic momentum seems increasingly likely to provoke a policy response from the ECB. President Lagarde spoke yesterday, noting that recent developments “strengthen confidence” in a return to the inflation target in a “timely manner”, and that policymakers will take said confidence into account at the October meeting.

Interestingly, this language mirrors almost exactly the comments made by Chair Powell at Jackson Hole before the FOMC’s first cut of the cycle a month later. Even without that recent parallel, Lagarde’s remarks cement the likelihood of a 25bp ECB cut in October, with the EUR OIS curve discounting around a 90% chance of such an outcome.

Speaking of Chair Powell, his remarks yesterday broadly stuck to the script outlined at the September press conference, noting that policy will move to a neutral stance “over time”, and that the FOMC will make decisions “meeting-by-meeting”, with policy not on a preset course.

There was little in Powell’s comments for participants to get their teeth into though one could argue, at the margin, that they do imply a preference for a slower pace of easing than markets currently price, as Powell flagged that the FOMC “doesn’t feel like it’s in a hurry” to cut rates quickly. Though this did cause some knee-jerk equity weakness and USD strength, the moves pared relatively quickly, with the USD OIS curve still discounting a one-in-three chance of a second straight 50bp cut in November. Stocks, meanwhile, ended the day at the highs, after significant buying flow into the close.

All that said, with data-dependency the order of the day, Friday’s jobs numbers are much more likely to shift this pricing than anything Powell might, or might not, have to say.

Elsewhere, yesterday, it was notable to see the Treasury curve flatten for the second session in three, largely a result of the aforementioned comments from Chair Powell. A degree of reluctance to rush rate cuts has seemingly alleviated some concern that policymakers may be easing too much, too soon, into an economy that remains resilient, though again Friday’s jobs data could upend all that.

Treasuries selling-off, led by the front-end, helped the USD to find a bid, against most G10 peers, though I continue to favour selling USD rallies here, with the Fed still seemingly in much more of a rush than most peers to get rates back to a neutral level. Short USD vs. the most reluctant G10 cutters – the GBP, AUD, and NOK – is a basket that I still see as attractive.

Interestingly, though, higher Treasury yields weighed on gold, with the yellow metal losing ground for the second day running, and notching its biggest daily loss in around 6 weeks. Perhaps the typical fundamental drivers of gold are beginning to re-assert themselves, after a long period of the precious metal space being little more than a momentum trade. If this were to be the case, a rather significant pullback could be on the cards, given that gold’s rally of late has had little other than momentum buying to drive it, leaving the market vulnerable to a reversal, as crowded long positioning unwinds.

Look Ahead – A busier data docket awaits today which should give participants plenty to chew over. US economic releases highlight proceedings, with the ISM manufacturing PMI set to have ticked higher to 47.5 last month, implying a modestly slower pace of contraction compared to August. Meanwhile, the August JOLTS job openings figure is set to provide further evidence of normalising labour market conditions, with 7.66mln openings foreseen, the lowest level since January 2021.

Elsewhere, September’s ‘flash’ eurozone CPI figures are likely to be the final jigsaw piece in the October ECB cut puzzle. Headline CPI is set to fall to 1.8% YoY, undershooting the ECB’s target, and the lowest level since April 2021; core CPI, meanwhile, is also expected to dip, to 2.7% YoY, signifying an easing in underlying inflationary pressures.

Handily – or otherwise, depending on your view – four ECB speakers are on deck today to provide some greater colour on the October meeting, and will be joined by four FOMC policymakers, BoE Chief Economist Pill, and new SNB Governor Schlegel. Most should reiterate their respective central banks continuing to take a ‘data-dependent’ approach.