Everything Pushes Price Alignment
Market pricing for the policy outlook converged further over the past week, consistent with our view (see HEW: Shrinking Fed Exceptionalism ). Euro area inflation matched our low forecast while the bullish risk around US labour market data crystalised. Policy guidance compounded the impact as Chairman Powell leaned against the possibility of another 50bp cut with an explicit current expectation of cutting 25bp at the next two meetings. Meanwhile, Governor Bailey talked up the potential to become more aggressive, which in his case probably means the potential to cut back-to-back in December rather than seeking to push the possibility of 50bp in November.
Punchy payroll data raise the question of whether the Fed would have cut 50bp if it had known about this outcome. It had flimsily cited low numbers after revisions as a reason for going large despite US data outcomes broadly being at least as good as expected. Now, those payrolls no longer look as low, and September surges beyond them to a 254k rise vs the 140k consensus. Moreover, the unemployment rate declined again to 4.1%, only 0.3% higher than a year earlier. That hardly indicates that monetary policy is so tight that deep rate cuts are needed. Pay growth was also surprisingly strong at 0.4% m-o-m and revised up a tenth to 0.5% in August. All this strength appears consistent with our view that easing was premature and likely to be limited, like in 1998.
We also saw hawkish news in the benchmark revisions to the UK’s quarterly national accounts data for Q3. The ONS cut business investment to bumble around pre-pandemic levels, but this was offset by higher consumption, and households still managed to raise the saving ratio to double its 2019 levels. Income rose on household assets, similar to increasing gross savings. All shifts are consistent with the intertemporal demand substitution channel of monetary policy. Deferred demand should support the hysteresis of high neutral rates (see UK Consumers Prep to Preserve Excesses ).
Meanwhile, on the dovish end of the spectrum, headline EA inflation disappointed consensus expectations by dropping another 0.4pp to 1.77% amid lower energy prices and stagnant industrial goods prices. Although the outcome was within 1bps of our forecast, it has been grinding lower in recent weeks. The likely rebound above 2% looks increasingly small and fleeting. The expected rebound restrained the ECB, so its diminishment amid disappointing demand makes an October rate cut likely in addition to the December move (see EA: Disinflating Towards an October Cut ).
Headlines also focussed on rising geopolitical risks in the Middle East, which are hard to hedge. We note that the UAE’s neutrality makes it a safe harbour, and we see Dubai’s property as an investible hedge, with price inflation correlated to the geopolitical risk level because it attracts sticky capital inflows. Natural leverage through off-plan payment schedules lowers the capital intensity of this diversifying asset, which we are happy to discuss (see Hedge Geopolitical Risk in the UAE ).
Europe is currently more constrained by political than geopolitical instability, with France and Germany hampering its ability to act. Alastair Newton sees a second Trump term as the most visible "grey rhino" that could force significant change. Trump’s aggressive trade policy and executive actions could shake Europe from its complacent fatalism, pressuring Europe to respond to disrupted global alliances. Post-election aid for Ukraine also appears doomed, with Trump either likely to halt it or Harris facing gridlock. A lack of assistance would probably force a temporary and uneasy end to the conflict soon (see Europe: Impression, Soleil Couchant? ).