US
Brent crude oil prices briefly plunged by 7% to near a one month low at $96.55 a barrel, before recovering to $100. Report that crude flows through the Strait of Hormuz have essentially returned to prewar levels while crude oil shipments from the Middle East region are sometimes higher than prewar levels should keep crude oil prices in check.
The global bond market selloff deepened. The upward trend in longer term bond yields is driven by a tighter expected policy path and rising real term premia – the compensation that investors require to hold longer-term bonds – with long-run inflation expectations still well anchored.
The BIS points out the rise in real term premia is likely influenced by possible crowding-out effects due to the increasing bond issuance of large tech firms and concerns over sovereign debt sustainability. France’s plans to raise bond issuance to a record amount next year highlight the broader challenge for heavily indebted governments as higher debt servicing costs add to fiscal pressure.
USD is up across the board, with the DXY index making new cyclical highs. Resilient US economic activity, improving labor demand, and sticky inflation back the nearly 100bps of Fed funds rate hikes priced over the next twelve months.
US Q2 real GDP (third and final estimate) was revised 0.7ppt higher to 2.2% SAAR, reflecting upward revisions to domestic demand activity. Real final sales to private domestic purchasers increased 4.6% SAAR in Q2 (revised up 0.4ppt from the previous estimate), the biggest rise since Q1 2023.
The US growth outlook remains encouraging. The Atlanta Fed GDPNow model estimates annualized real GDP growth of 3.7% in Q3 supported by robust consumer spending. Real personal consumption rose 0.6% m/m in August vs. 0.1% in July. We get a fresh update of the Atlanta Fed GDPNow model today that will incorporate the September ISM manufacturing print and August construction spending data.
ADP showed the economy added +90k private sector jobs in September vs. +36k in August. Of note, the correlation between monthly change in ADP private payrolls and nonfarm payrolls (NFP) is weak. Over the full sample since 2010, the correlation is 0.26, and year-to date it’s virtually zero. Revelio Labs employment has a greater correlation with the NFP survey (0.74) and is due today (1:30pm London, 8:30am New York).
US PCE inflation unexpectedly slowed in August and was revised lower in July. But that’s largely because of annual revisions and changes to how several components are calculated. Inflation remains uncomfortably high above the Fed’s 2% target. Headline PCE was 3.4% y/y vs. 3.4% in July (revised down from 3.7%) and core PCE remained at 3.0% y/y vs. 3.0% in July (revised down from 3.3%).
USD gains are tracking widening US-G6 interest rate differentials. Tightening by other major central banks limits policy divergence with the Fed. However, US economic growth outperformance and strong foreign appetite for US securities can keep USD risks skewed to the upside.
JAPAN
USD/JPY surged to its 200-day moving average at 158.49 on broad USD strength. We expect USD/JPY to hold within a 155.00-160.00 range in the near term.
Japan’s Q3 Tankan survey and the BOJ’s September meeting Summary of Opinions suggests the bar for the BOJ to speed up its tightening cycle remains high. The Tankan all industries business conditions index improved to a 35-year high of 21 vs.18 in Q2, though businesses expect it to ease to 15 in Q4 and inflation expectations were broadly steady.
Meanwhile, the Summary of Opinions was hawkish on direction but generally cautious on the pace. The Cabinet Office urging BOJ policymakers “to examine carefully the cumulative effects of past policy interest rate hikes” adds resistance to a faster hiking cycle.
