The Week Ahead – Fed Trick or Tariff Treat

We have a deal. Now every year we'll renegotiate the deal, but I think the deal will go on for a long time. Long beyond the year. We'll negotiate at the end of the year. Hello and welcome to the Week Ahead on Nomura Podcasts. My name is Yubin Paraqueles, Chief Southeast Asia Economist at Nomura, and today is Friday, the 31st of October. We've had another eventful month, and as we closed October with Halloween, we're also having a bit of a trick-or-treat moment for markets. On the one hand, President Trump's trip to Asia resulted in some trade deals, including with China, broadly in line with market expectations, but nonetheless we'll welcome news. That was President Trump there, and that clipped making some comments about the deal onboard Air Force One, on the way back to the US shore, the FM meeting President Xi in Korea. On the other hand, the hawkish twist by the Fed was a surprise, with Chair Powell saying that December cut is far from a forgotten conclusion. That led to a strengthening of the US dollar and a rise in US Treasury yields. Overall, it seems the Fed has been the bigger driver, hampering a more risk-on tone in markets, despite the highly anticipated meeting between Presidents Trump and Xi actually taking place. In this episode, we discuss the implications. Jeremy Schwartz, from the US Economic Steam in New York, explains why we change our view and no longer expect a cut by the Fed in December, but still see three cuts next year. He also provides some quick thoughts on Trump's trade deals in Asia. From China's perspective, Jing Wang, from our Economic Steam in Hong Kong, discusses the implications of the trade truce with the US and argues this helps China's growth outlook, but only at the margin. In Europe, we have a few central banks on deck and George Buckley, our Chief Economist for the Euro Area in the UK, discusses this out-of-consensus call that the Bank of England will deliver a cut, while we see the RICS Bank and the Nordic Bank keeping their policy rates unchanged. Finally, my co-host Andrew Teisters in Sydney and I will compare notes on why we also expect the Reserve Bank of Australia and the Bank of Nicaragua and Malaysia to also stay on hold. Let's dive in. [Music] A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it. Policy is not on a preset course. Okay, let's kick off with the US. Hi, Jeremy, welcome back to the podcast and thanks for being here. Hey, you've been great to be back. Yeah, starting with the Fed, I suppose. It seems we got a hawkish 25 basis point cut with Powell saying that December is not a foregone conclusion, as you heard there from the clip earlier. So what do you think underpin this shift in tone and what do you expect now for December? Sure. So I think there are probably two things driving Powell's shift here. One, reflecting committee dynamics on the FOMC. So it seemed there was some substantial hawkish pushback at this meeting and maybe some horse trading from Powell in order to get some support and limit the hawkish descents to just one from Kansas City President Schmidt. So reclaiming some optionality does make sense given not all officials are on board with the December cut. We do think Powell went a bit further than that though. He didn't just give the usual lip service to saying it was a meeting by meeting decision or saying they'd be data dependent. He really aggressively pushed back on December cut pricing. And at times it seemed as if he thinks the new base case now is that December pause is more likely or he needs the data to convince him that they should go in December. That seemed to be partly driven by some easing concerns about the labor market. And even though there hasn't been a lot of data, Powell did name check a lot of private sector and state level indicators which have shown the labor market not re accelerating, but at least remaining stable and not deteriorating. Now, given Powell had talked about a risk management rationale for cuts in September, it was notable for us that he said that it would be a different logic going forward. So we actually did change our Fed call on the back of this. We think a December pause is now the most likely outcome. And, you know, ultimately, while the data are likely to be a bit dovish in the near term, we think they will come short of really rekindling those fears of a deterioration, which drove some of the dovishness just a few weeks ago. Okay. Well, understood. Yeah, it sounds very explicit from Powell. So you've changed the view for December. What about for next year? Are we still looking at three cuts? Yeah, we're continuing to expect three cuts next year at the March, June and September meeting. Two of those will be under a new Fed chair, Powell's replacement, who is likely to begin at the June meeting. You know, we do think the Q1 cut is probably a close call. We are forecasting some reacceleration and growth. We think headwinds from trade and immigration are beginning to ease. And then you've often had these Q1 spikes in inflation over the past few years, which we think can add to some of the speed up scare. That said, Powell did frame a near term pause as being about skipping a meeting. All the hawks have been more vocal recently. We shouldn't forget that there are dovish officials who will likely try to force the issue and kind of hasten that easing cycle towards neutral. Okay. Yeah, understood. Shifting a little bit to another topic. Any signs that the government shutdown is getting close to an end game here? We are now into a full month of that shutdown. Sure. I would say there hasn't been much progress on negotiation so far, partly because Trump has been busy in Asia negotiating trade deals. And he would likely have to give his blessing to any ultimate deal where Republicans made concessions. That said, we do think the stakes are increasing now, so you are going to get the expiration of SNAP or food stamp benefits. That's going to impact tens of millions of individuals in the US who do rely on those cash benefits. And in addition to that, you're also getting the start of the Affordable Care Act's insurance enrollment period, where people are going to start feeling the pinch from the expiration of the subsidies, which is what Democrats are demanding in negotiations. So it's not clear which side will ultimately feel more pressure, but the overall pressure and I'd say the pain points are beginning to come more into focus after close to a month now where it seems like the biggest casualty has been economic data releases. Yeah, that's right. And you mentioned Trump's visit in Asia will be remiss if we don't talk about that. Yeah, quick thoughts on the deals that he struck, particularly with China, and any implications to particularly your assumption on the effective tariff which you recently lowered a few weeks ago, I think. So I'd say even before the re-escalation with China, we expected tariff rates would be coming down. It seemed like the administration was looking for opportunities to increase exemptions. The new announcements of tariffs on sector level goods were coming in a little bit more dovish than we had expected. I'd say the recent trade deals that have been announced really fall in line with that pattern. I think it supports our expectation that the tariff rate does settle down in the kind of low to mid teens rather than the high teens as we had previously expected. You know, on China, it's close to a status quo outcome, you know, both sides de-escalated from the flare a couple of weeks ago. But I'd say China also gained some additional concessions with this reduction of the fentanyl tariffs from 20% down to 10%. That's going to make China a little bit more competitive with the rest of East Asia. And while they still have a higher overall tariff rate, it's not so out of line with what the administration has implemented for the region. You know, I'd say the South Korea deal is also interesting. That's the first major trade deal that has implemented this PTAP, the list of exemptions for aircraft parts, as well as generic drugs and goods that are not produced in the U.S. That's something the administration drafted up a couple of months ago. It's one of the signals that we had seen that it did seem like the administration was looking to blunt the economic and inflationary impact of tariffs. And we do expect that to become a little bit more widespread as some of these deals in the region are finalized. Yeah, great. Thanks. Interesting. Yeah, we were positively surprised with that deal in South Korea towards the closing of our day yesterday. Yeah, brilliant. We covered a lot of topics here. Thanks again, Jeremy. Yeah, thanks. Great to be back. Alright, next up is China, and I'm very delighted to be joined by Jing Wang from our team in Hong Kong. Thanks very much, Jing, for your time today. No, there's a lot of attention on the trade developments after Trump's meeting with President Xi. We must be keeping you busy. First of all, could you just give us a roundup of the main items that were agreed on by both leaders? And was everything in line with your expectations or were there some surprises? Yeah, sure. Glad to be back, Yuven. So we got a relatively big package agreement from the US-China, and compared to market consensus, I would say some of them might have already largely been expected by markets. For example, this fentanyl 10% reduction and also resumption of soybean purchases. But for other topics, including this suspension on the export controls and the poor fees, I'm also sure that are widely expected by eye markets. So it looks like both sides have made quite a few concessions to ease the tensions, and that's in line with our view that both sides are still reliant on each other. So this truth only lasted for one year, and during this one year time, I'm sure both sides will make much greater efforts to reduce their reliance on one another. So we think this US-China relation is entering a new norm, which is a cycle for this re-escalation, negotiation, and de-escalation, and many fundamental issues between two countries remain unsolved. Okay, got it. And then from China's perspective, what is the implication on the growth outlook? Does this agreement help even at the margin? Yeah, I think so. So on the margin, it will benefit China's export sector, especially those direct exports to the US simply because of the tariff reduction. But on the other hand, we all know there are many transshipment ongoing, so with this 10% tariff reduction, we estimate the average US tariff on China will be lowered to around 30%, which is not substantially different from this tariff on this major transshipment hops, including this 19%, 20% for most Asian economies. So in that regard, I would say this transshipment activity will be discouraged. So if you put these two things together, I would say the net impact on China's export sector should not be quite significant. Yeah, but then on the other hand, you still have the other headwinds from domestic sources like property markets, I guess, or property sector. That's right. Okay, yeah, and definitely agree on the view on transshipment, the work that we've done for Southeast Asian countries, what really matters for transshipment activity is the tariff differential with China. So if you're saying the effective tariff there is now around 30%, and Asian is 19% to 20%, maybe there's much less incentive for rerouting to avoid the tariffs. Finally, Jing, I guess we have the October trade numbers next week. What do you expect from there? Yeah, so actually we are expecting quite a sizable slowdown in export growth to 3% a year in October from 8.3% in September. Probably it's because of this high base from last year because the front-loading of exports to the US already started in Q4 last year. At the same time, we are also seeing the sequential momentum for the export growth is getting weaker as well. We just gathered this official manufacturing PMI for October, and we are seeing this new export orders showing a notable decline as well. So you put these two things together, we just think the export growth will report a relatively big slowdown in October. Okay, great. That's fantastic. Thanks very much, Jing. Thank you, Yubin. Now, for Asia, we also have a couple of central bank decisions in the week ahead. We have the RBA on Tuesday, and then BNM on Thursday. And I'm very happy that Andrew Tyser, of course, a co-host of this podcast, could join me today to compare notes on our expectations. Hey, Andrew, thanks for joining today. And again, great call on your out-of-consensus forecast on CPI yesterday. On the back of that, what do you expect from the RBA versus what markets are now thinking? Sure. Thanks, Yubin. And yeah, great to be with you. Thanks for the invite. Look for the RBA next week. We're very confident they will not be changing the cash rate that will stay at 3.6%. The market now strongly agrees with us following that high Q3 CPI data we had down here this week. The RBA has got a dual mandate, maximum sustainable employment and low and stable inflation. And the key data are actually pulling it in different directions at the moment. The latest unemployment reading was high, but the CPI data was high too. But all up, we think it's going to give more attention to the quarterly CPI data than to one monthly jump in the unemployment rate. That suggests a hold rather than a cut. I think the global backdrop is very interesting here too and could be influencing its thinking. We saw high and sticky services inflation down here. And we've seen that in a number of countries, not just Australia. And we've seen some of the other big developed market central banks tilt in a less hawkish direction this week too. The Bank of Canada indicated they might be done and Fed Chair Powell suggested the December rate cut was far from a done deal too. So I think if we add those global factors into the mix, we can be very confident the RBA will be keeping the cash rate on hold. Okay, got it. Yeah, that's interesting. For Malaysia, actually, we also have a pretty high conviction as well that they keep the policy rate unchanged at 275. We think they will reiterate their assessment that the current monetary stance is appropriate and fairly supportive of the economy. We've been actually bullish on the Malaysia's economic performance and we think that being born out with the latest Q3 advanced estimate, which is stronger than consensus expected. And yeah, we continue to expect the policy statement to have a neutral tone and also signaling that they remain data dependent. And on that front, we actually don't have any cuts at all by BNM next year. This is the final meeting of the year, despite our US teams view that the Fed will still cut next year as you heard earlier in the podcast by Jeremy. So Andrew, what do you think is the tone of RBA and beyond this week is the RBA potentially also done easing? Look, the key thing I'd suggest here is that the RBA is going to sound quite uncertain and very, very cautious, particularly with that key data pulling it in different directions. The other thing that's going on for the RBA is they're not entirely confident of where Nairu is that neutral unemployment rate and they're also not sure about the neutral cash rate as well. And I think in that environment, they're going to let future data inform them with regard to what they should do and inform them really about whether policy is actually restrictive as they currently suggest. Are they done? Look, almost, almost. They could be. We still have a low conviction call for a final 25 basis point rate cut, not till next February. That's based in part on their view that they think policy is still a bit restrictive, well ashore, but if that's their starting point, I think they could be willing to ease if future data allows or if global developments deteriorate badly. So yeah, all up. We've still got one final 25 basis point cut from the RBA next February, but I must admit it's not a high conviction call at this point. Yeah, I'll just jump in as well. For the rest of Asia, a couple of other things in the calendar. I think the Q3 GDP numbers that are out in the Philippines and Indonesia will be important for markets to watch. We think these numbers will show a slowdown reflecting really some idiosyncratic factors, the ongoing corruption controversy of infrastructure project in the Philippines have led to a decline in government spending. And so that's going to be a dragon growth in Indonesia. Household spending has been or rather household sentiment has been remaining pretty weak, but also government spending is not really improved. And yeah, because of these growth concerns, the BI and BSP are the two other center banks where we have still some rate cuts to go 50 basis points in our forecast with the risk that they could do more later, especially with with BSP. We have a bunch of CPI numbers in Korea, Taiwan, Philippines and Thailand. We expect a bit of a mixed bag, but still pretty benign readings. I will point out Thailand in particular, we think they could register another deflation print and again supports our view that the beauty could still cut rates in the next few months. And finally, Andrew, anything else that you're also watching? Also, maybe perhaps some thoughts on these headlines from the meeting between President Trump and Xi and how important that is for Australia? Yep, sure. Look, I was going to mention two things quickly and that meeting between Trump and Xi was one of them. So yeah, look, as we record, we've seen some relatively positive, encouraging headlines on the screens. I guess like everyone else, we're just waiting to see any sort of official statement or some harder words and language that might come out around that. That is important for Australia. Australia is a medium-sized open economy. What happens to China and Asia matters for Australia. And people look at the Australian dollar as something of a risk barometer. So if these headlines continue in the positive direction, that should be a positive bullet point for the Aussie. The other thing I just mentioned really quickly is down in New Zealand, we'll get quarterly unemployment data next week. The central bank down there, the RBNZ is forecasting unemployment to rise by a tenth to five point three. We have a bit of a contrarian upbeat view on New Zealand. We see signs that the economy is turning around, following pretty aggressive easing. And we list the RBNZ as one of those central banks that are done with the cutting cycle. That's quite a non-consensus view at this point. Yeah, that is interesting. Okay, let's end it here. Thanks, Andrew. Yup, my pleasure. Thank you. Okay, now let's swing over to London. And have here with me George. Thanks for coming back to the podcast with the few central banks in your region on tap. Yeah, thanks, Yubin. We have indeed got a number this upcoming week. We've got the Bank of England, we've got the Rix Bank and the Norse Bank. Yup, that's a theme of this podcast. So let's start with the Bank of England. I saw your preview. You are expecting a hawkish cut by the Bank of England. We are. And, you know, this is not a consensus view. It is not a market view. Markets are only pricing in six basis points for this. You know, we've held this view for a while that they continue cutting quarterly throughout 2025 and also into the very start of 2026. The Bank of England has repeatedly told us that interest rates are restrictive and also that they expect to continue to cut interest rates. I haven't said exactly when, but that they will continue to do so at a gradual and careful pace. I don't think there's anything in the data that should detract from that because in particular we've had a weaker labor market report across the board, whether it be activity or wages, and also a weaker inflation report. Now, the only wrinkle here is that they have said that they would like to see an accumulation of evidence. That's their own words for a cut to be delivered. And I think one of the risks to our view is that there will be a bigger accumulation of evidence at the December meeting because we get two lots of CPI data, two lots of labor market data, two PMIs and importantly one budget. All of those could be really important. And it's one of the biggest risks to our view is that they could go in December. I think if they don't go in November, December will become very much live priced for a move. Okay, kind of interesting. And if they deliver as you expect, do you still have more cuts by the Bank of England thereafter? We do. We have one more in February. And of course, as they start to wind down their cuts and get towards what they think is a neutral level of interest rates, there is a risk again that that cut might be delayed. But at the moment, we've got one cut in November, one cut in February for an end point, a terminal rate of 350, which we think is not very far away from neutral. Okay, got it. And the reason I ask is that seems to be a theme. And, you know, I have a discussion with Andrew as well on this, that there's a few central banks that might be looking towards or getting close to the end of the easy cycle. And the ECB seems to have been hawkish as well this week. Any thoughts on that? That's obviously supportive of your view that they are done cutting. Yeah, and of course, they were reasonably optimistic about the growth outlook in that opening paragraph of the comments that they made this week. I think what's interesting is if you look at what central banks think is neutral, and then you were to plot where current interest rates are relative to that, the ECB and the depot rate, it's exactly in line with what they think is the centre point of neutral interest rates of that range. And there's not many developed markets, central banks, which you can say that for the Bank of England, the Fed still above neutral, the Bank of Japan still below what they think is neutral. So the ECB is one of the very few where they've got back to neutral. And when you've got inflation at target or close to target, when you've got growth, which is running broadly at trend, and you've got interest rates at neutral, there really is no reason for them to move interest rate. And they'd probably take a shock. And of course, shocks are unforecastable in terms of directionality. It's probably going to take a shock to shift them away from the current 2% level. Yeah, and that doesn't include our forecast for the Fed. We've got the Fed still cutting next year, as Jeremy discussed earlier in the podcast next year. It doesn't influence the ECB's thinking, I suppose. And that's a piece that we wrote this week, in fact. We also asked clients about whether they thought that a rate cut or continued rate cuts, admittedly not this year, but three next year by the Federal Reserve will push the ECB into doing the same. 50% of our clients said no, they didn't think that was the case. Admittedly, 40% thought that a combination of one or two rate cuts could be delivered by the ECB in response. But it's an interesting discussion point. Yeah, fascinating. And finally, George, yeah, we still have Riksbank and Nordiskbank to cover their up next week as well. What do you expect from them? So both of them were expecting no change. We're expecting the Riksbank to leave policy rates on hold at 175. You know, if anything, that's possibly, it's probably in the neutral range, but maybe slightly below what might be a sort of central view of neutral. Another cut doesn't seem very likely after the guidance that the Riksbank has provided to the markets. And we're also expecting Nordiskbank to leave policy unchanged at 4%. We had a cut of 25 basis points in September. We think it's just too soon for the policy rate to be cut again. Okay, got it. So it looks like Bank of England will follow suit from the Fed. The rest will be on hold. Yeah, excellent, as always. Thanks, George. Thank you, Yvan. Feel free to write a review and share this podcast to anyone you think might be interested. You can check out the more connects dot com for more of our research and updates. Have a great week ahead. In a complex and unpredictable world, where a sunset in one market means a sunrise in another, one investment bank always looks beyond the horizon to help our clients release the potential of tomorrow today. Nomura, connecting markets east and west. Disclaimer. This content has been prepared by Nomura solely for information purposes. 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