• The two-day FOMC meeting ends today and another 75 bp hike is expected; ADP reports its private sector jobs estimate; October ISM manufacturing PMI was better than expected; Brazil President Bolsonaro finally spoke to the nation yesterday
  
• BOE QT began yesterday without a hitch; BOE is expected to hike rates 75 bp to 3.0% tomorrow; final eurozone October PMI manufacturing readings came in soft; Germany reported September trade and October unemployment data; ECB officials remain hawkish; exit polls suggest the Likud party and its allies won a solid majority in the Israeli Knesset
  
• Minutes from the September BOJ meeting tilted dovish; markets are repricing RBA tightening expectations; New Zealand reported firm Q3 labor market data; Korea reported October CPI
  

The dollar is soft ahead of the FOMC decision. Of note, the dollar has tended to weaken on FOMC decision days. Before today, DXY has fallen on 4 of the past 5 decision days and 6 of the past 8. True to form, DXY is down for the second straight day and is trading near 111.23. The euro is trading near $0.99. The $0.9855 level in euro held yesterday but we think it eventually breaks, which would set up a test of the October 21 low near $0.9705. Sterling is trading near $1.15 ahead of the BOE decision tomorrow. The yen is leading this move in the foreign currencies today and is trading just below 147. We believe any dips in USD/JPY should be viewed as a buying opportunity. The combination of ongoing risk off impulses and continual repricing of Fed tightening risks is likely to see the dollar continue to recover after this recent correction. Much will depend on the Fed and how the U.S. data come in this week but so far, the signs remain positive for the greenback.

AMERICAS

The two-day FOMC meeting ends today and another 75 bp hike is expected. There won’t be updated macro forecasts and Dot Plots until the December 13-14 meeting, when WIRP suggests a 50 bp hike is fully priced in with nearly 45% odds of a larger 75 bp move. Between these two meetings, we will see two more sets of jobs, inflation, and retail sales reports and so the December meeting will be fully data dependent. His press conference will be closely watched but we expect Chair Powell to maintain the hawkish tone that he has consistently held since Jackson Hole in late August. We do not think he will give the markets what they are looking for, which is some hint of a pivot. After today, Fed officials will go forth to spread the message. Collins is first up and speaks Friday. The swaps market is now pricing in one in four odds of a peak policy rate near 5.25%.

ADP reports its private sector jobs estimate. It is expected at 185k vs. 208k in September. It’s still not clear if ADP’s revamping has made its model any better but of course we will still try to infer something from the number for the jobs report Friday. NFP consensus is currently at 196k vs. 263k in September, the unemployment rate is expected to rise a tick to 3.6%, and average hourly earnings are expected at 4.7% y/y vs. 5.0% in September. We know that the labor market is a lagging indicator but the Fed is counting on seeing some weakness in order to help fight inflation. So far, it hasn’t been cooperating. Besides the continued low unemployment rate, JOLTS data yesterday also showed resilience in the labor market with job openings rising to 10.717 mln vs. 9.75 mln expected and a revised 10.28 mln (was 10.053 mln) in August.

October ISM manufacturing PMI was better than expected. Headline came in at 50.2 vs. 50.0 expected and 50.9 in September. However, the details were solid. Employment rose to 50.0 vs. 48.7 in September, production rose to 52.3 vs. 50.6 in September, and new orders rose to 49.2 vs. 47.1 in September. On the other hand, supplier deliveries fell to 46.8 vs. 52.4 in September, the lowest since March 2009 while backlog of orders fell to 45.3 vs. 50.9 in September, the lowest since June 2020. The lower these two numbers are, the lower the strains in the supply chains. This is obviously a good sign for inflation going forward, as is the prices paid component falling to 46.6 vs. 51.7 in September, the lowest since May 2020. Yet this is not enough to sway the Fed whatsoever. It will certainly welcome healing on the supply side but the Fed found out the hard way that it can't count on the supply side to lower inflation and so it will keep working to suppress the demand side. Lastly, October auto sales came in stronger than expected at a 14.9 mln annual rate, the highest since January and suggesting retail sales will remain firm. Bottom line: the U.S. economy still outperforming the rest of the world and the Fed is on track to continue tightening aggressively.

Brazil President Bolsonaro finally spoke to the nation yesterday. He said "I’ve always been labeled as antidemocratic but unlike my accusers, I always played by the rules. As president and citizen, I will continue to fulfil all the requirements of our constitution." He called for a suspension of protests while noting that "The current demonstrations are the result of outrage and a sense of injustice at the way the electoral process was conducted. Peaceful demonstrations will always be welcome." He thanked his supporters for the 58 mln votes he received. While Bolsonaro did not formally concede to Lula in his two minute speech, his cabinet chef Ciro Nogueira said afterwards that Bolsonaro had authorized him to initiate the transition process in accordance with the law. If all goes as planned, Lula will begin his third term on January 1.

EUROPE/MIDDLE EAST/AFRICA

Bank of England Quantitative Tightening (QT) began yesterday without a hitch. It successfully sold GBP750 mln of short-dated gilts in its first QT auction. Demand was strong as bids totaled GBP2.44 bln for a bid-to-cover ratio of 3.26. The BOE plans to reduce its gilt holdings by GBP80 bln over the next year through a combination of redemptions (GBP35 bln) and outright sales (GBP45 bln). By way of comparison, the Fed is shrinking its balance sheet purely from redemptions while the ECB is still reinvesting all redemptions.

Bank of England is expected to hike rates 75 bp to 3.0% tomorrow. At the last policy meeting September 22, the bank hiked rates 75 bp to 2.5% but the MPC was unusually split, with 5 voting for 50 bp, 3 for 75 bp, and 1 for 25 bp. It said then that it still sees inflation peaking at just under 11% next month but remaining above 10% in the following months. Updated forecasts will be released at this week’s meeting and while there is still some fiscal uncertainty, the bank may be able to incorporate a rough framework of the fiscal plan to be unveiled next month by Chancellor Hunt. Looking ahead, the swaps market is pricing in 250 bp of tightening over the next 12 months that would see the policy rate peak near 4.75%, down sharply from 6.25% right after the mini-budget in late September.

Final eurozone October PMI manufacturing readings came in soft. Headline fell two ticks from the preliminary to 46.4. Germany was revised down to 45.1 vs. 45.7 preliminary, while France was revised down to 47.2 vs. 47.4 preliminary. Italy and Spain reported for the first time and came in weaker than expected at 46.5 and 44.7, respectively, both down significantly from September. Services and composite will be reported Friday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 47.4 and 48.1, respectively, both down a couple of ticks from September. After today’s manufacturing PMIs, there are clear downside risks to these readings as well.

Germany reported September trade and October unemployment data. Exports came in at -0.5% m/m vs. 0.5% expected and a revised 2.9% (was 1.6%) in August, while imports came in at -2.3% m/m vs. -0.6% expected and a revised 4.9% (was 3.4%) in August. Unemployment rose 8.0k vs. 12.5k expected but the unemployment rate remained steady at 5.5%. September factory orders will be reported Friday and are expected at -0.5% m/m vs. -2.4% in August. Germany remains the weak link in the eurozone but the rest are already following it into recession. France has held up surprisingly well but is also weakening.

ECB officials remain hawkish. Nagel said that “we still have a long way to go. Inflation is persistent. If we want to overcome it, monetary policy will have to be even tougher.” De Cos concurred, noting the bank “must bring interest rates to levels that allow inflation to return to our medium-term target of 2%, and we haven’t yet reached the end.” Of note, Nagel said he wants Quantitative Tightening (QT) to begin at the start of next year, while de Cos was a little more cautious and said QT would need to be done “very carefully and very gradually.” WIRP suggests another 75 bp is about 50% priced in for the December 15 ECB meeting, while the swaps market is pricing in a peak policy rate near 3.75%. With a big chunk of the eurozone already tipping into recession, can the ECB hike as aggressively as anticipated? Stay tuned.

Exit polls suggest the Likud party and its allies won a solid majority in the Israeli Knesset. If so , Benjamin Netanyahu would become Prime Minister again. Exit polls published by the main Israeli TV stations found that the Likud-led bloc may win as many as 65 seats in the 120-member Knesset. In Israeli politics, one should consider this a landslide victory. These results could change by the time the official results are published this Friday, and will depend in part on whether one of the small Arab parties is able to cross the 3.25% voter threshold needed to enter the Knesset.

ASIA

Minutes from the September 21-22 Bank of Japan meeting tilted dovish. A few board members expect inflation to decelerate in FY2023 and so the bank should maintain its easy policy. One board member said while the weak yen has led to higher prices of imported goods and food in the short run, it also had a positive effect on domestic activity in the medium and long run. A few members noted that the labor market needed to tighten in order for wages to rise in a manner that is consistent with the bank’s 2% inflation goal. One member said sharp FX moves were not desirable . No mention was made of FX intervention, which came later that day. After the BOJ’s dovish hold, USD/JPY rose to trade near 146 before the BOJ intervened. Next policy meeting is December 19-20 and another dovish hold is expected then.

Markets are repricing RBA tightening expectations. Macbeth said "If it were done when 'tis done, then 'twere well it were done quickly." The RBA downshifted to 25 bp hikes but the swaps market now pricing in a terminal rate of 4.60% vs. 4.35% right after yesterday’s decision. At 25 bp clips, we won't get to 4.60% until the August 1 meeting. That suggests that the market thinks the RBA is making a mistake by downsizing since it will likely have to go on longer and higher to get inflation down. This is of course a moving target but the early signs aren't good. Sometimes, a case can be made for gradualism but we don't think that holds now when most central banks are way behind the curve. We'd prefer the front-loaded approach to get things out of the way rather than a slow and painful approach.

New Zealand reported firm Q3 labor market data. The unemployment rate was steady at 3.3% despite the stronger than expected 1.3% q/q gain in employment, as the participation rate rose to 71.7% vs. 71.0% expected and a revised 70.9% (was 70.8%) in Q2. Average hourly earnings came in at 2.6 q/q vs. 1.7% expected and 2.3% in Q2. At the last policy meeting October 5, the RBNZ hiked rates 50 bp to 3.5% and noted that “The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation is too high and labor resources are scarce.” The bank acknowledged that it discussed a 75 bp move before settling on 50 bp. This maintains the more hawkish tone established at the August 17 meeting. Updated macro forecasts will come at the next meeting November 23, where WIRP suggests a 75 bp hike to 4.25% is about 80% priced in. The swaps market is pricing in 175 bp of tightening over the next 6 months that would see the policy rate peak near 5.25%, which is well above the bank’s current expected rate path. We expect a hawkish shift in the rate path next month that moves the bank closer to market pricing.

Korea reported October CPI. Headline came in as expected at 5.7% y/y vs. 5.6% in September while core came in at 4.8% y/y vs. 4.5% expected and actual in September. This was the first acceleration in headline since July and moves further above the 2% target. At the last policy meeting October 12, the Bank of Korea hiked rates 50 bp to 3.0%, as expected. There were two dissents in favor of a smaller 25 bp move. The bank noted that “The Board sees continued rate hikes as warranted, as inflation is expected to remain high, substantially above the target level, although domestic economic activity has slowed.” Governor Rhee added that the bank expects rates to be around 3.5% at the end of this tightening cycle. Next policy meeting is November 24 and another 50 bp hike seems likely. Of note, the swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 3.5%.