- FOMC minutes will be the highlight; Fed officials remain cautious; financial conditions remain loose and growth remains robust; Brazil and Mexico report September inflation data
- The ECB doves are setting up an extended easing cycle; Israel is expected to keep rates steady at 4.5%
- Japan reported weak September machine tool orders; RBNZ cut rates 50 bp to 4.75%, as expected; China will hold a briefing on fiscal policy this Saturday; India kept rates steady at 6.5%, as expected
The dollar recovery continues. DXY is trading higher near 102.606 and has not fallen since September 27. USD/JPY is trading higher near 148.60 as weak machine tool orders support BOJ caution (see below). The euro is trading lower near $1.0965 as the ECB doves set up an extended easing cycle (see below), while sterling is trading lower near $1.3090. NZD is the worst performing major after RBNZ cut rates 50 bp (see below). We believe the recent U.S. data and Fed comments continue to support a very gradual easing cycle (see below). Market easing expectations for the Fed have adjusted after the strong jobs data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher.
AMERICAS
FOMC minutes will be the highlight. At the September 17-18 meeting, the Fed delivered an unexpected 50 bp cut. Only Governor Bowman dissented in favor of a smaller 25 bp cut, which means virtually the entire FOMC was on board with Powell. That said, Fed official comments since the decision have largely tilted more cautious and so the minutes may reveal that other Fed officials were resistant to a 50 bp before being convinced to vote with the majority.
Fed easing expectations continue to adjust. The market has priced out any more jumbo cuts and now sees 25 bp cuts in both November and December. We will get one more jobs report before the November 6-7 FOMC meeting but let’s face it, all indications are that the U.S. economy remains quite robust and not in need of aggressive easing. For now, gradualism has won the debate but despite this most recent batch of strong data, the markets are still pricing in around 125 bp of total easing over the next 12 months. This needs to adjust further.
Indeed, Fed officials remain cautious. Governor Collins said that “A careful, data-based approach to policy normalization will be appropriate as we balance two-sided risks and remain highly attentive to both parts of our Congressional mandate - price stability and maximum employment.” Jefferson said that he will assess the incoming economic data as well as the balance of risks “when considering additional adjustments to the federal funds target range.” He added that he will make policy decisions on a meeting-by-meeting basis. Bostic, Logan, Goolsbee, Jefferson, Collins, and Daly speak today and are likely to mirror these comments.
Financial conditions remain loose. The Chicago Fed’s weekly measure has loosened seven straight weeks through September 27 and are the loosest since January 2022. Data for the week ended last Friday will be reported.
U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.2% SAAR, up from 2.5% previously. It will be updated again today after the August wholesale inventories and trade sales data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 3.1% SAAR and Q4 growth at 2.8% SAAR and will be updated Friday. Momentum in the economy remains strong and so little slowdown is expected as we go into 2025.
Brazil reports September IPCA inflation. Headline is expected at 4.44% y/y vs. 4.24% in August. If so, it would reverse the August drop and move back near the top of the 1.5-4.5% target range. At the last meeting September 18, COPOM hiked rates 25 bp to 10.75% and struck a rather hawkish tone. Next COPOM meeting is November 6 and a 50 bp hike to 11.25% is expected. Looking ahead, the swaps market is pricing in 225 bp of total tightening over the next 12 months that would see the policy rate peak near 13.0%.
Mexico reports September CPI data. Headline is expected at 4.61% y/y vs. 4.99% in August, while core is expected at 3.94% y/y vs. 4.00% in August. If so, headline would be the lowest since March and would move closer to the 2-4% target range. Banco de Mexico minutes will be released tomorrow. At the September 26 meeting, the bank cut rates 25 bp to 10.5% and signaled further easing will be discussed. Next meeting is November 14 and another 25 bp cut to 10.25% is expected. Looking ahead, the swaps market is pricing in 175 bp of total easing over the next 12 months.
EUROPE/MIDDLE EAST/AFRICA
The ECB doves are setting up an extended easing cycle. Governing Council member Stournaras said that “even if we have one cut of 25 bp now and another one in December, we will be back to just 3 per cent - still in highly restrictive territory.” He stressed that “there is a likely case for further easing of policy in 2025.” GC member Kazaks said “If inflation in the next year really returns to a sustainable 2%, interest rates have to be on a neutral level. We’ll find it step by step as we lower rates.” Regarding next week’s decision, GC member Villeroy said that “A cut is very probable, and furthermore it won’t be the last, but the following pace will simply depend on the evolution of the fight against inflation.” The market is pricing in about 150 bp of total cuts over the next 12 months that would see the policy rate bottom near 2.0%, which is close to estimates of r*. After today, the media blackout for the October 16-17 meeting begins and we get no more ECB speakers until President Lagarde’s post-decision press conference next Thursday.
Bank of Israel is expected to keep rates steady at 4.5%. At the last meeting August 28, the bank kept rates at 4.5%. Deputy Governor Abir noted “I would be very surprised if the conditions are in place for an interest rate cut before the end of the year. The surprise has been how long the war has been going on. This has slowed growth but has also had an impact on inflation, and it’s one of the reasons it is now once again out of our target range.” The swaps market is pricing in steady rates over the next 12 months followed by 50 bp of easing over the subsequent 12 months.
ASIA
Japan reported weak September machine tool orders. Total orders came in at -6.5% y/y vs. -3.5% in August. This was the second straight month of contraction, which is all the more disappointing given low base effects from last year. Weakness in domestic orders has been more pronounced this year but had been offset by strong foreign orders. However, that is no longer the case as both domestic and foreign orders are coming in weak at -7.0% and -6.2%, respectively. The data are yet another warning sign for the BOJ.
Reserve Bank of New Zealand cut rates 50 bp to 4.75%, as expected. The bank noted that “The Committee agreed that the economic environment provided scope to further ease the level of monetary policy restrictiveness,” and added that noted that “economic activity in New Zealand is subdued, in part due to restrictive monetary policy.” Indeed, the OCR is above the RBNZ’s estimate for the nominal neutral rate range of 2 and 4%. The RBNZ Summary Record of Meeting showed that “the Committee discussed the respective benefits of a 25 bp vs. a 50 bp cut in the OCR. They agreed that a 50 bp cut at this time is most consistent with the Committee’s mandate.” Lastly, the RBNZ said that future changes to the OCR will depend on the bank’s “evolving assessment of the economy.” There was no press conference nor updated macroeconomic projections for this meeting. The market is pricing in another 50 bp cut to 4.25% at the next meeting November 27. Looking ahead, the market sees 200 bp of total easing over the next 12 months.
China policymakers will hold a briefing on fiscal policy this Saturday. Finance Minister Lan Fo’an will reportedly unveil fiscal measures to boost growth and will take questions from the press. MSCI China is down around -10% over the past two days as markets await fresh support measures. We acknowledge that the increased liquidity will boost asset markets, but the markets will always be left asking for more and more as these measures are unlikely to significantly impact the real economy. Indeed, we believe that fiscal stimulus funded by more debt will only worsen the huge debt overhang that is the root problem in China.
Reserve Bank of India kept rates steady at 6.5%, as expected. However, it was a dovish hold as the bank voted to move its stance to “neutral” from “withdrawal of accommodation” previously. Governor Das warned that “It is with a lot of effort that the inflation horse has been brought to the stable. We have to be very careful about opening the gate as the horse may simply bolt again.” However, it’s clear that the bank is setting the table for a rate cut that could come at the next meeting December 6. The swaps market is pricing in around 40% odds of a rate cut over the next three months. Looking ahead, the market sees 50-75 bp of total easing over the next 12 months.