The dollar index (DXY00) on Friday edged to a new 2-year high but then fell back and ended the day down -0.72%. 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 -4 bp. In addition, Friday’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 faced a shutdown at midnight Friday if Congress does pass a stop-gap spending bill.
Friday’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.
Friday’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.
Friday’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 9% for a -25 bp rate cut at the January 28-29 FOMC meeting.
EUR/USD (^EURUSD) Friday rose by +0.78%. The euro posted 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 13% chance for a -50 bp rate cut at that meeting.
USD/JPY (^USDJPY) fell by -0.88%. 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.
BOJ Governor Ueda on Thursday suggested the BOJ may wait longer before raising interest rate when he said, "The overall picture on wages should be clearer by March or April, and it may take time to assess the full impact of the Trump administration's policies."
February gold (GCG25) on Friday closed up +37.00 (+1.42%), and March silver (SIH25) closed up +0.547 (+1.86%). Precious metals recovered some of Thursday’s sharp sell-off due to Friday’s dovish US PCE price report and lower T-note yields. Also, precious metals have continued safe-haven support from geopolitical risks after the recent collapse of the Syrian government and the escalation of hostilities in the Ukraine-Russia conflict.
