• Fed Chair Powell downplayed the need for aggressive easing; October retail sales will be the highlight; growth remains solid in Q4; jobless claims suggest the labor market remains firm; October PPI ran a little hot; Mexico cut rates 25 bp to 10.25%, as expected
  
• ECB released the account of its October meeting; U.K. reported Q3 GDP and September real sector data; Israel reports October CPI data
  
• Japan reported Q3 GDP data; China reported mixed economic activity data for October

The dollar is consolidating ahead of retail sales data. DXY is trading lower for the first time since last Thursday near 106.43 after making a new cycle high yesterday above 107. It remains on track to test the October 2023 high near 107.348. The euro is trading higher near $1.0575 after trading below $1.05 yesterday. Clean break below the November 2023 low near $1.0515 sets up a test of the October 2023 low near $1.0450. USD/JPY traded at a new cycle high earlier near 156.75 before falling back to trade around 155.45 currently. Trading in this pair is likely to remain choppy as markets perceive higher intervention risks above 155. Lastly, sterling is trading higher near $1.2685 but remains on track to test the June low near $1.2615. While we’ve already come a long way, we look for this dollar rally to continue after this consolidation. 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. Despite the 25 bp cut last week, Powell (see below) and 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 for the Fed has already adjusted, which is giving the dollar a huge lift.

AMERICAS

Fed Chair Powell downplayed the need for aggressive easing. Specifically, Powell reiterated that “The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.” He added that “I think in this situation, what it calls for is us to be careful, move carefully, and as we sort of reach the range or get near the plausible range of neutral levels, it may be the case that we slow the pace of what we’re doing just to increase the chances that we get this right.” Other Fed officials are staying on message. Kugler said “If any risks arise that stall progress or reaccelerate inflation, it would be appropriate to pause our policy rate cuts. But if the labor market slows down suddenly, it would be appropriate to continue to gradually reduce the policy rate.” She stressed that “All I’m saying here is we need to keep paying attention to both sides of our mandate.”

The market has responded. Odds of a December cut have fallen to 60% in the Fed Funds futures market and 45% in the OIS market. After today’s retail sales data, we will have one more each of the jobs, CPI, PPI, and retail sales reports to digest ahead of the December 17-18 meeting. Looking ahead, the swaps market is pricing in a terminal rate slightly north of 3.75%, which is about a full percentage point above the Fed’s expected long-term rate of 2.875% in the September Dot Plots. This debate will be ongoing well into 2025. Goolsbee (twice), Collins (twice), Williams, and Barkin speak today.

October retail sales will be the highlight. Headline is expected to slow a tick to 0.3% m/m while ex-autos is expected to slow two ticks to 0.3% m/m. The so-called control group used for GDP calculations is expected to slow four ticks to 0.3% m/m. Overall, consumer spending is supported by positive real wage growth, a healthy labor market, and strong household balance sheets. November Empire manufacturing survey, October business inventories, and industrial production will also be reported today.

Growth remains solid in Q4. The Atlanta Fed GDPNow model's estimate for Q4 GDP stands at 2.5% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.1% SAAR and will also be updated today, 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.

Jobless claims suggest the labor market remains firm. Initial claims fell to 217k last week vs. 220k expected and 221k previously. This is the lowest reading since mid-May and dragged the 4-week moving average down to 221k, also the lowest since mid-May. Continuing claims fell as expected to 1.873 mln vs. a revised 1.884 mln (was 1.892 mln) previously. Of note, next week's initial claims reading will be for the BLS survey week containing the 12th of the month. There is no Bloomberg consensus yet for NFP but its whisper number stands at 150k.

October PPI ran a little hot. Headline came in a tick higher than expected at 2.4% y/y vs. a revised 1.9% (was 1.8%) in September, while core came in a tick higher than expected at 3.1% y/y vs. a revised 2.9% (was 2.8%) in September. Of note, PPI services ex-trade, transportation, and warehousing picked up two ticks to 4.6% y/y, the highest since June. This measure feeds into the core PCE calculations and so this reading poses an upside risk to PCE inflation. This is yet another reason for the Fed to remain cautious about cutting rates.

Banco de Mexico cut rates 25 bp to 10.25%, as expected. The decision was unanimous and the bank noted that “Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments. It will consider the prospects of global shocks continuing to fade and the effects of the weakness in economic activity.” The bank seemed to downplay peso weakness by attributing recent volatility to the U.S. elections. What’s left unsaid is that volatility and peso weakness has persisted and is likely to feed into inflation. As a result of the dovish cut, the market now sees the policy rate bottoming at 8.5% vs. 9.0% at the start of this week. We do not think Banco de Mexico can cut this much if the peso remains under pressure.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank released the account of its October meeting. 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.” The key takeaway from the account is that risk management considerations was a key factor supporting the decision to cut rates as “acting now could provide insurance against downside risks that could lead to an undershooting of the target further ahead and would support a soft landing. Furthermore, the point was made that a decision to cut interest rates now was a response to the materialisation of the downside risks identified in the past, rather than to prevailing or new risks.” This risk management framework suggests the bar is low for the ECB to crank up its easing cycle as the disinflationary trend remains intact and the growth outlook is deteriorating. The swaps market is pricing in 150 bp of ECB easing over the 12 months that would see the policy rate bottom near 1.75%. Panetta, Lane, and Cipollone speak today.

U.K. reported Q3 GDP and September real sector data. GDP grew a tick less than expected at 0.1% q/q vs. 0.5% in Q2, while the y/y rate came in as expected at 1.0%. Domestic demand was surprisingly strong and supports the case for a gradual BOE easing cycle. Household spending rose 0.5% q/q vs. 0.2% expected and actual in Q2, which added 0.28 ppt to Q3 growth. The largest contributions to consumer spending growth were from higher spending on housing, miscellaneous, and clothing and footwear. Gross fixed capital formation surged 1.1% q/q vs. flat expected and 0.6% in Q2, driven by a 1.2% q/q rise in business investment. Elsewhere, net trade added 0.46 ppt to growth, largely because of a slump in imports.

U.K. domestic demand was surprisingly strong and supports the case for a gradual BOE easing cycle. However, the September data came in weak, with IP falling -0.5% m/m, services flat m/m, and GDP falling -0.1% m/m. This suggests a loss of momentum in the economy going into Q4 and bears watching. The market is pricing in only 15% odds of a follow-up 25 bp cut in December, while the OIS curve still sees the policy rate bottoming at 4.0% vs. 4.75% currently. Mann and Bailey speak today and are both likely to tilt hawkish.

Israel reports October CPI data. Headline is expected to remain steady at 3.5% y/y. At the last meeting October 9, Bank of Israel left rates steady at 4.5%. It was a hawkish hold as Governor Yaron said “The current interest-rate level is sufficiently restrictive. However, we are data dependent and if it rises more than expected we may definitely raise interest rates.” Furthermore, the bank’s research department saw the policy rate still at 4.5% in Q3 2025 vs. 4.25% in Q2 2025 seen at the July 8 meeting. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.

ASIA

Japan reported Q3 GDP data. Real GDP grew 0.2% q/q as expected vs. a revised 0.5% (was 0.7%) in Q2. Looking at the components, private demand contributed 0.5 ppt to growth vs. 0.4 ppt in Q2, fixed investment subtracted -0.1 ppt vs. 0.4 ppt in Q2, public demand contributed 0.1 ppt vs. 0.2 ppt in Q2, net exports subtracted -0.4 ppt vs. -0.1 ppt in Q2, and inventories contributed 0.1 ppt vs. -0.1 ppt in Q2. Private consumption was the biggest growth tailwind, underpinned in part by a one-off cut in income and residential taxes. Typhoons and an earthquake warning may have also boosted demand for emergency food and other supplies. Net exports were the biggest drag and reflects a worsening global growth outlook. With the economy slowing, no wonder Prime Minister Ishiba is planning to inject more fiscal stimulus. On the other hand, the data should also keep the Bank of Japan on its cautious tightening path, as only 45 bp of total tightening is seen over the next 12 months.

China reported mixed economic activity data for October. Retail sales came in at 4.8% y/y vs. 3.8% expected and 3.2% in September, but industrial production came in at 5.3% y/y vs. 5.6% expected and 5.4% in September. Elsewhere, FAI ex-rural came in a tick lower than expected at 3.4% YTD, while property investment slowed to -10.3% YTD vs. -9.9% expected. Lastly, the property slump remains an ongoing drag on consumer spending. New home prices fell -0.51% m/m vs. -0.71% in September and used home prices dropped -0.48% m/m vs. -0.93% in September.