The dollar is trading with a softer bias this morning after Federal Reserve Governor Waller suggested that he would support cutting rates at the central bank’s next meeting, helping put pressure on the front end of the US yield curve. The Canadian dollar and Mexican peso are inching higher as traders double down on bets that Donald Trump’s recent tariff threats will come to naught, the Japanese yen is climbing on a narrowing in rate differentials, and the pound is trying to build the momentum to break back into the high 1.20’s against the greenback.

“At present, I lean toward supporting a cut to the policy rate at our December meeting,” Waller said in a speech given at a conference on the Fed’s policy framework review. “That said, if the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant”. But because recent inflation data indicate that “progress may be stalling,” “one could argue that there is a case for skipping a rate cut at the next meeting.”

Waller’s comments came after data showed manufacturing activity contracting for an eighth consecutive month in November, albeit at a slower rate compared to the previous month. Although every component of the Institute for Supply Management’s manufacturing purchasing manager index improved – including the critically-important new orders subindex – the overall index remained below the 50 threshold that separates contraction from expansion. A separate release – S&P Global’s manufacturing purchasing manager index – showed the rate of decline in new orders slowing.

In a clear sign that he believes the Fed’s current rate settings are contributing to this dynamic, Waller said “Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts if needed”. “In the spring of 2022, when the FOMC (Federal Open Market Committee) began raising interest rates, production by more interest rate–sensitive manufacturers, such as business equipment, grew at about the same rate as production by less rate-sensitive manufacturers. But starting around the middle of 2023, when the policy rate hit its peak, those stories diverged, and production by interest-sensitive manufacturing declined, while other manufacturing rose, driving a sizable gap between the two types of industries. This divergence is an indication to me that, even after the Committee cut rates 75 basis points, restrictive policy is working the way it is intended to, affecting production in sectors where rates matter. It is also a reminder that there is still some distance to go in reducing the policy rate to neutral. As that occurs, I expect the gap between the two types of industries will narrow”.

Across the pond, the euro is trading sideways as traders brace for a toppling of the French government in tomorrow’s parliamentary session. Prime Minister Michel Barnier’s attempt to pass a more disciplined budget looks set to fail after Marine Le Pen’s far-right National Rally party – which in a very French twist, supports increasing government spending – along with its allies on the opposite end of the political spectrum, filed censure motions yesterday, meaning that a no-confidence vote could come by tomorrow.

The spread between ten-year French and German government bonds is trading at the widest levels since the euro crisis, but yields across the bloc are heading lower as odds firm on a more accommodative approach from the European Central Bank in early 2025. Economic challenges are worsening, with political dysfunction in France and Germany adding to a persistently-weak growth backdrop to damage sentiment among consumers, businesses, and investors. Economic surprise indices – which measure the extent to which data releases under- or overshoot market forecasts – are showing the common currency area underperforming the US to the deepest degree since Russia’s invasion of Ukraine. We expect brighter days ahead, but the slog to get there could be long and arduous.

Still ahead today: The US Job Openings and Labor Turnover survey is expected to show the number of vacant positions holding steady in October after September’s unexpected drop, and the quits rate – which serves as a proxy for worker confidence – should stay close to 1.9 percent, underlining continued tightness in labour markets. Federal Reserve Governor Adriana Kugler, San Francisco president Mary Daly, and Chicago’s Austan Goolsbee will make appearances.