The European Central Bank (ECB) made a widely expected move by cutting its deposit facility rate to 3.25%. This action, the third in the current cycle of monetary easing, aligned with market expectations as reflected in OIS futures, and was unanimously anticipated by analysts, including Rabobank's Bas van Geffen. The futures market anticipates a further 37.7 basis points cut at the ECB's December meeting. ECB President Christine Lagarde has expressed concerns about economic growth, particularly in the manufacturing sector, where rising energy costs, competitive pressures, and slower growth in key export markets, like China, are causing challenges.
However, manufacturing is not the only sector facing difficulties. Rabo Research, led by Elwin de Groot and Maartje Wijffelaars, has pointed out a perceived 'catching down' effect impacting services, with indicators declining in tandem with manufacturing. This is primarily attributed to weak consumer demand rather than spillover from manufacturing challenges. Lagarde noted that despite expectations of increased consumer spending amid brisk wage growth and ongoing disinflation, consumer demand has been unexpectedly weak. Rabo Research remains optimistic that conditions for increased consumer spending exist, citing the potential normalization of household savings rates, real wage growth, and continued monetary easing.
Despite these conditions, a significant divergence is evident between European and American consumers. U.S. retail sales data showed a robust 0.7% month-on-month increase in control group sales, surpassing expectations and previous readings. This led to an upward revision in the Atlanta Fed's GDP Nowcast from 3.2% to 3.4%. Additionally, U.S. initial jobless claims were lower than expected, with figures at 241,000 against a consensus of 259,000. In financial markets, the U.S. Treasury curve bear-steepened, with 2-year yields increasing by 3.2 basis points and 10-year yields by 7.7 basis points.
Conversely, Germany's Bund curve also steepened with rising long-end yields, but short-end yields fell due to dovish signals from the ECB and a softer-than-anticipated CPI print, leading to a sharp rise in European stock markets. Regarding the Federal Reserve, Fed-dated OIS suggest only 42.7 basis points of cuts for the remaining 2024 FOMC meetings, with Rabobank anticipating a 25 basis point cut at each meeting, reflecting a common market sentiment following Fed Chair Jerome Powell's strong forward guidance at a recent NABE conference.
Nonetheless, the combination of stronger-than-anticipated data and comments from Fed officials Daly and Bostic hinting at a potential pause in rate cuts has affected the U.S. rates curves. Consequently, the S&P 500 ended slightly lower, while the Nasdaq was largely unchanged, and the Dow Jones gained slightly. In the commodities market, Brent crude oil saw modest price increases following geopolitical developments involving Israel and confrontations with Hamas. Gold prices peaked at a new all-time high of $2,693 per ounce, reflecting investor caution.
Turning to Australia, the country's labor market has shown remarkable resilience, with the September employment report revealing 64,100 new jobs compared to a consensus estimate of 25,000. The unemployment rate remained steady at 4.1%, despite upward revisions to the participation rate and employment-to-population ratio to new highs. This robust performance suggests the Australian labor market is not sending signals supportive of near-term rate cuts by the Reserve Bank of Australia (RBA). Rabobank maintains a more hawkish stance, forecasting the first rate cut in May next year, as opposed to market speculation of February, where the probability of a 25 basis point cut has decreased to around 67% based on OIS futures.
The outcome might further hinge on the upcoming third-quarter CPI report due in a few weeks. Whether or not a third time will charm monetary policy adjustments and inflation remains to be seen.
