• The fundamental dollar uptrend remains intact; the Fed made it clear it is in no hurry to cut rates; growth remains solid in Q4
  
• ECB is on track to deliver more rate cuts; Norway reported October CPI data
  
• BOJ released its summary of opinions for the October 30-31 meeting; Japan reported September current account data; China October credit data came in weak

The dollar is trading firm at the start of an eventful week. DXY is trading at a new cycle high near 105.505 and remains on track to test the June high near 106.130. The yen is underperforming, with USD/JPY trading higher near 153.75. Sterling is trading lower near $1.2890 while the euro is trading at a new cycle low near $1.0665 and is on track to test the April low near $1.06. AUD is outperforming but we look for catchup weakness after China reported weak credit data. We look for the dollar rally to continue. While the election results have turbo-charged this move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Recent data have showed that the labor market remains firm and supportive of continued robust consumption that is fueling above-trend growth. Despite the 25 bp cut last week, we believe the Fed will continue to take a cautious tone going forward, especially in light of what we view as heightened inflation risks in a second Trump term. Market pricing has already adjusted (see below), which is giving the dollar a huge lift.

AMERICAS

The fundamental dollar uptrend remains intact. Looking beyond the Trump Trade, the U.S. economy is in a sweet spot and outperforming other advanced economies. Moreover, the prospect for looser fiscal policy under a Trump administration and limited Fed easing room point to a stronger dollar. There are no policy-relevant economic data releases today. The U.S. October CPI (Wednesday) and retail sales (Friday) reports are this week’s data highlights. There are also plenty of Fed speakers throughout the week including Chair Powell Thursday.

The Fed made it clear it is in no hurry to cut rates. As a result, the Fed Funds futures market is pricing in only 70% odds of a follow-up cut in December and less than 50% odds in the swaps market. Those odds will evolve in the coming weeks. Before the next FOMC meeting December 17-18, we get one more jobs report and two more CPI, PPI, and retail sales reports. Fed officials are likely to reinforce the cautious tone this week. Of note, the market is now pricing in only 75 bp of total easing over the next 12 months, which is a new low for this cycle.

Growth remains solid in Q4. The Atlanta Fed GDPNow model's estimate for Q4 GDP stands at 2.5% SAAR and will be updated Friday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.1% SAAR and will also be updated Friday, while its initial forecast for Q1 2025 will come at the end of November. Bottom line: the US economy continues to grow at or above trend as we move into 2025.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank is on track to deliver more rate cuts. Governing Council member Holzmann said “there’s nothing at the moment that would speak against it [a December rate cut], but that doesn’t mean that it will automatically happen.” Markets have fully priced in a 25 bp rate cut then, as well as nearly 20% odds of a larger 50 bp move. Over the next 12 months, the market anticipates the policy rate to bottom between 1.75 and 2.00%. The bank releases the account of its October meeting Thursday. At that meeting, the bank cut rates 25 bp for the second straight meeting but stuck to its data-dependent guidance reiterating it “is not pre-committing to a particular rate path.”

Norway reported October CPI data. Headline came in two ticks higher than expected at 2.6% y/y vs. 3.0% in September, while underlying came in as expected at 2.7% y/y vs. 3.1% in September. Despite the upside miss, headline matches the 2024 lows. Inflation is tracking below the Norges Bank’s forecast, but the bank is in no rush to loosen policy, in part because of the depreciation in the krone. The first 25 bp rate cut is not fully priced in until March, which is in line with the Norges Bank’s policy guidance. The swaps market is pricing in about 100 bp of easing over the next 12 months, which would take the policy rate down to 3.5%. The Norges Bank anticipates the policy to reach 3.5% a little later in Q1 2026.

ASIA

Bank of Japan released its summary of opinions for the October 30-31 meeting. At that meeting, the bank delivered the widely expected hold and the board appears to be somewhat split. One board member said that "It is important for the bank to communicate effectively its core message that 'if the outlook for economic activity and prices will be realized, the bank will continue to raise the policy interest rate accordingly.'" However, another member said that because of ongoing uncertainty, "it is therefore necessary for the bank to take time and exercise caution when raising the policy interest rate." There has been a slight upward shift in market expectations. Odds of a December hike have risen to 45%, while the odds of a January hike have risen marginally to around 80%. However, the next hike still doesn’t become fully priced in until May, which is not any different from before the meeting. Only 40 bp of total tightening is seen over the next 12 months.

Japan reported September current account data. The adjusted surplus came in at JPY1.272 trln vs. JPY2.951 trln expected and a revised JPY3.146 trln (was JPY3.017 trln) in August. However, the investment flows will be of more interest. The September data show that Japan investors were net buyers of U.S. bonds (JPY1.306 trln) for the third straight month and at a record amount. Japan investors turned net sellers (-JPY44.2 bln) of Australian bonds after three straight months of buying and also turned net sellers of Canadian bonds (-JPY1044.8 mln) after three straight months of buying. Investors stayed net buyers of Italian bonds (JPY267.6 bln) for the second straight month. Overall, Japan investors stayed total net buyers of foreign bonds (JPY2.684 trln) for the second straight month. With the uptrend in Japan yields interrupted by the BOJ’s dovish pivot, it seems likely that Japan investors will continue chasing higher yields abroad.

China October credit data came in weak. New loans came in at CNY500 bln vs. CNY1.594 trln in September, while aggregate financing came in at CNY1.396 trln vs. CNY3.763 trln in September. Of note, government bond sales accounted for over three quarters of all new financing. The readings are particularly disappointing given the monetary stimulus injected last month. Perhaps there is a bit of a lag and November data will show some impact, but so far, the measures announced and implemented have been disappointing. No wonder iron ore prices are back testing $100.