• ADP ran hot; September PCE data will be important; Chicago PMI will also be reported; weekly jobless claims bear watching; we got our first read of Q3 GDP; Canada highlight will be August GDP
  
• Eurozone CPI data for October ran a little hot; ECB officials have been trying to manage market easing expectations; U.K. Chancellor Reeves presented the autumn budget
  
• BOJ delivered the widely expected hold; there has not been much of a shift in BOJ expectations; Japan reported soft data; Australia reported retail sales data; New Zealand business confidence continues to climb; China reported official October PMIs

The dollar continues to consolidate ahead. DXY is trading slightly lower near 103.932 after making a new high for this move Monday near 104.573. It remains on track to test the July 30 high near 104.799. The yen is the top performing major, with USD/JPY trading lower near 152.50 after the BOJ decision (see below). The euro is trading higher near $1.0870 after higher than expected CPI data (see below) while sterling is trading higher near $1.2990 after of the autumn budget (see below). The strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Yesterday’s ADP and GDP data showed that the labor market remains firm and supportive of continued robust consumption that is fueling above-trend growth. Today’s batch of data should reinforce this message.

AMERICAS

ADP private sector jobs estimate ran hot. Headline came in at 233k vs. 111k expected and a revised 159k (was 143k) in September. We all know that ADP and NFP don't always line up but this is a very strong number that warns of upside risks to the jobs data Friday. Bloomberg consensus for NFP is 101k vs. 254k in September, while its whisper number stands at 130k. Both would be well below the average monthly gain of 203k over the prior twelve months. However, the jobs report will be hard to interpret as it will be affected by the two recent hurricanes as well as the strike at Boeing. Fed Governor Waller said he expects these factors to reduce employment growth by more than 100,000 in October, and there may also be an effect on the unemployment rate, which is expected to remain steady at 4.1%.

September PCE data will be important. Headline is expected to fall a tick to 2.1% y/y, while core is expected to fall a tick to 2.6% y/y. Of note, this lines up exactly with the Cleveland’s Fed’s Nowcast model. Looking ahead, that model sees headline and core both rising a tick in October to 2.2% and 2.7%, respectively. There are no Fed speakers this week due to the media blackout ahead of the November 7-8 FOMC meeting. However, pre-blackout comments suggest many Fed officials remain cautious about the inflation outlook.

Personal income and spending will also be reported at the same time. Income is expected at 0.3% m/m vs. 0.2% in August, while spending is expected at 0.4% m/m vs. 0.2% in August. Real spending is expected at 0.3% m/m vs. 0.1% in August. Of note, the control group in retail sales data used for GDP calculations surged 0.7% m/m in September after rising 0.4% in August. As long as jobs are being created, consumption is likely to remain fairly robust, as yesterday’s GDP data showed. Consumer confidence and consumption are simply not behaving like we are slipping into recession.

October Challenger layoffs and Q3 Employment Cost Index will be reported. ECI is expected to rise 0.9% q/q, same as in Q2. This is the Fed’s favorite wage data because it’s more comprehensive and controls for changes in the composition of employment. On an annual basis, ECI wages and salaries eased from a high of 5.3% in Q2 2022 to 4.2% in Q2 and will likely remain sticky above 4% in Q3 as average hourly earnings and the Atlanta Fed wage growth tracker both increased in September by 0.1 ppt to 4.0% y/y and 4.7% y/y, respectively.

Chicago PMI will also be reported. Headline is expected at 47.0 vs. 46.6 in September and comes ahead of October ISM manufacturing PMI tomorrow. However, Chicago PMI series has not been tracking well with the national PMI readings for the past couple of years and so offers very little insight. More importantly, the S&P Global U.S. manufacturing PMI rose to a 2-month high of 47.8 vs. 47.3 in September.

Weekly jobless claims bear watching. After spiking to 260k in early October, initial claims normalized quite quickly after the hurricanes and are expected at 230k vs. 227k previously. This suggests that the impact on NFP may be limited, which the strong ADP reading would seem to support. Continuing claims are expected at 1.880 mln vs. 1.897 mln previously.

We got our first read of Q3 GDP. Growth came in a tick lower than expected at 2.8% SAAR vs. 3.0% in Q2 but lined up exactly with the Atlanta Fed's final GDPNow estimate. Personal consumption came in at 3.7% SAAR vs. 3.3% expected and 2.8% in Q2, while private domestic demand rose 3.2% SAAR vs. 2.7% in Q2. Personal consumption contributed 2.46 ppt to headline growth, fixed investment 0.24 ppt, government consumption 0.85 ppt, while net exports subtracted -0.56 ppt and inventories -0.17 ppt. Elsewhere, the GDP deflator came in a tick lower than expected at 1.8% vs. 2.5% in Q2, while core PCE came in a tick higher than expected at 2.2% vs. 2.8% in Q2. Bottom line: consumption remains strong while disinflation continues and so the U.S. economy remains in a sweet spot.

The Atlanta Fed’s GDPNow model will produce its initial Q4 growth forecast today. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.5% SAAR and will be updated tomorrow, while its initial forecast for Q1 2025 will come at the end of November.

Canada highlight will be August GDP. Consensus sees real GDP flat m/m in August vs. 0.2% in July, which is consistent with Statistics Canada estimates for real GDP to be essentially unchanged in August. In y/y terms, GDP growth is expected to remain steady at 1.5%. Soggy economic activity, slower inflation, and growing slack in the labor market leave plenty of room for the Bank of Canada to keep cutting the policy rate. The market is pricing in about 50% odds of a follow-up 50 bp cut in December.

Colombia central bank is expected to cut rates 50 bp to 9.75%. However, nearly a quarter of the 28 analysts polled by Bloomberg look for a larger 75 bp cut. With the peso under pressure, we think a super-jumbo cut would be too risky. At the last meeting September 30, the central bank cut rates 50 bp to 10.25% and noted that “Today’s decision will continue to support the recovery of economic growth and maintains the necessary prudence given the risks that remain over the behavior of inflation.” The vote was 4-3, with the three dissents in favor of a larger 75 bp cut. This was more dovish than the 5-2 vote to cut 50 bp July 31. The market is pricing in 225 bp of total easing over the next 12 months that would see the policy rate bottom near 8.0%.

EUROPE/MIDDLE EAST/AFRICA

Eurozone CPI data for October ran a little hot. Headline came in a tick higher than expected at 2.0% y/y vs. 1.7% in September, while core came in a tick higher than expected and was steady at 2.7% y/y. Services inflation was steady at 3.9% y/y. Earlier, France’s EU Harmonised inflation picked up a tick as expected to 1.5% y/y, while Italy’s picked up a tick more than expected to 1.0% y/y vs. 0.7% in September. Yesterday, Spain’s EU Harmonised inflation picked up a tick as expected to 1.8% y/y, while Germany’s picked up to 2.4% y/y vs. 2.1% expected and 1.8% in September.

European Central Bank officials have been trying to manage market easing expectations. ECB President Christine Lagarde cautioned again in an interview overnight that “inflation in the services sector - which is highly dependent on wages - is still at 3.9%. So, prudence is warranted.” Nevertheless, the ECB has room to keep easing and that should limit EUR/USD relief rallies. The disinflationary trend is intact, and the growth outlook is unimpressive. The market is pricing in less than 20% odds of a jumbo 50 bp cut in December vs. 40% at the start of this week. Panetta, Escriva, and Knot speak today.

U.K. Chancellor Reeves presented the autumn budget. The U.K. government plans to sell more gilts to fund an increase in investment spending. 2024/2025 gilt issuance will increase by GBP19.2 bln to GBP296.9 bln vs. GBP239.1 bln the previous fiscal year, which was roughly in line with consensus. Meanwhile, the U.K. fiscal stance is unlikely to force the Bank of England to ease more aggressively than is currently priced in. The fiscal drag (as measured by the change in the cyclically adjusted primary budget deficit) for fiscal years 2025 to 2027 is only a touch higher than implied in the Spring Budget. For the current fiscal year (2024-2025), however, the fiscal stance is now forecast to shift from a drag to a tailwind to growth. While a 25 bp cut next week is still priced in, the odds of a December cut have fallen to less than 20% vs. 60% at the start of this week.

ASIA

The Bank of Japan delivered the widely expected hold. The bank reiterated its cautious tightening bias that if the “outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.” However, Governor Ueda suggested that the bar for the BOJ to resuming normalizing policy is low. Ueda acknowledge that markets have slowly regained stability and risks related to the U.S. economy is lower than before. Previously, Ueda warned of ongoing financial instability in the market. Macro forecasts were largely unchanged, though the BOJ cut its core inflation forecast for FY25 two ticks to 1.9%, which is below the 2% inflation target.

There has not been much of a shift in market expectations. Odds of a December hike have risen marginally to 33%, while the odds of a January hike have risen marginally to around 66%. The next hike doesn’t become priced in until May, which is not any different from before the meeting.

Japan reported weak September retail sales, IP, and housing starts. Sales came in at 0.5% y/y vs. 2.1% expected and 3.1% in August, IP came in at -2.8% y/y vs. -3.2% expected and -4.9% in August, and starts came in at -0.6% y/y vs. -4.3% expected and -5.1% in August. Given the shocking drop in the October composite PMI to 49.4, we expect the hard data to show further weakness in the coming months.

Australia reported retail sales data. September sales came in two ticks lower than expected at 0.1% m/m vs. 0.7% in August, while Q3 real sales came in as expected at 0.5% q/q vs. a revised -0.4% (was -0.3%) in Q2. Going forward, the CBA Household Spending Indicator points to subdued spending growth. The market sees just 15% odds of a 25 bp cut by December, while a rate cut in February is less than 50% priced-in.

October ANZ business confidence for New Zealand continues to climb. Business confidence and activity outlook indexes both rose to new ten-year highs of 65.7 and 45.9, respectively. Reported past activity, which has the best correlation to GDP, improved 8 points to a five-month high of -11. Nevertheless, the RBNZ has plenty of room to continue easing as policy is too tight, heightening the risk a deeper economic downturn. At 4.75%, the RBNZ policy rate is still well above the RBNZ estimate for the nominal neutral rate range of 2-4%. The market has fully priced in a 50 bp policy rate cut in November and sees 25% odds of a larger 75 bp move.

China reported official October PMIs. Manufacturing rose two ticks more than expected to 50.1 vs. 49.8 in September, while non-manufacturing came in tick lower than expected at 50.2 vs. 50.0 in September. As a result, the composite PMI rose four ticks to 50.8. Caixin reports its manufacturing PMI tomorrow and is expected to rise four ticks to 49.7. It reports it services PMI next Tuesday and is expected to rise two ticks to 50.5. Markets are still awaiting further details of China’s stimulus measures. Vice Finance Minister Liao said over the weekend that any details of China’s fiscal policy would only come after the conclusion of the National People’s Congress Standing Committee meeting scheduled for November 4-8.