The dollar index (DXY00) today edged to a new 2-year high but then fell back and is currently down -0.32%. The dollar was undercut by the US PCE deflator report, which was dovish for Fed policy and caused weaker US interest rate differentials with the 10-year T-note yield down -5 bp. In addition, today’s US personal spending and consumer sentiment reports were slightly weaker than expected.
The dollar was also undercut by US political uncertainty as the US government faces a shutdown at midnight tonight if Congress cannot pass a stop-gap spending bill.
Today’s PCE price index report was a bit weaker than expected, which could give the FOMC a bit more leeway to cut interest rates. The Nov PCE price index rose +0.1% m/m and +2.4% y/y, a bit weaker than expectations of +0.2% m/m and +2.5% y/y. The Nov core PCE price index rose +0.1% m/m and +2.8% y/y, a bit weaker than expectations of +0.2% m/m and +2.9% y/y.
Today's headline Nov PCE price index report of +2.4% y/y was up from Oct's +2.3% y/y, while the Nov core price index report of +2.8% y/y was unchanged from October. Both measures remained above the Fed's +2.0% inflation target and their respective 3-3/4 year lows of +2.1% y/y (nominal) and +2.6% y/y (core) posted earlier this year.
Today's Nov personal income report of +0.3% m/m was slightly weaker than the consensus of +0.4%, but Oct was revised slightly higher to +0.7% from +0.6%. Today's Nov personal spending report of +0.4% m/m was slightly weaker than expectations of +0.5%, and Oct was revised slightly lower to +0.3% from +0.4%.
The University of Michigan’s final-Dec US consumer sentiment index was left unrevised at an 8-month high of 74.0, which was a bit weaker than expectations for a +0.2 point upward revision to +74.2. The consumer index has now increased for five straight months.
The markets are discounting the chances at 11% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) today is up +0.30%. The euro posted modest gains after the dollar lost ground on the US PCE inflation report.
The euro also saw some support on the German Nov PPI report of +0.5% m/m and +0.1% y/y, stronger than expectations of +0.3% m/m and -0.3% y/y. Also, the French Nov PPI strengthened to +3.2% m/m and -5.2% y/y from Oct’s +0.9% m/m and -5.7% y/y.
Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at its next meeting on January 30 and a 12% chance for a -50 bp rate cut at that meeting.
USD/JPY (^USDJPY) is down -0.45%. The yen recovered some ground after falling sharply on Thursday when the BOJ kept its overnight call rate unchanged at 0.25%, and BOJ Governor Ueda signaled the BOJ is in no hurry to raise interest rates.
