• U.S. Treasury boosted its estimate for its borrowing needs for the three months through December; the two-day FOMC meeting begins today and ends tomorrow with an expected 75 bp hike; we get some labor market data ahead of Friday’s jobs report; key October survey data will continue to roll out; Brazil President Bolsonaro still has not conceded the race
  
• BOE Quantitative Tightening (QT) begins today; ECB President Lagarde is trying to sound hawkish without being too specific; Israel goes to polls today for the fifth time in four years
  
• Energy prices in Japan may increase; RBA hiked rates 25 bp to 2.85%, as expected; Chinese equity markets jumped on rumors that Covid Zero rules may be loosened; Korea reported October trade data
  

The dollar is consolidating as the FOMC meeting gets under way. Some risk on sentiment is being driven by reports that China is mulling exit scenarios from Covid Zero, which we think unlikely (see below). DXY is down for the first time after three straight days and is trading just below 111. The yen is leading this move in the foreign currencies today and is trading just above 147. We believe any dips in USD/JPY should be viewed as a buying opportunity. The euro saw support below $0.99 but remains heavy and is struggling to move above $0.9950. Sterling has also bounce ahead of the BOE decision and is trading near $1.1535. 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 are positive for the greenback.

AMERICAS

The U.S. Treasury boosted its estimate for its borrowing needs for the three months through December to $550 bln. This is $150 bln higher than what it estimated back in August for this quarter. The Treasury left its cash balance estimate for the end of December steady at $700 bln vs. $625 bln currently. Looking ahead to the following three months through March, the Treasury anticipates borrowing a slightly larger $578 bln and assumes a cash balance of $500 bln at the end of that period. Of note, the Treasury said its cash balance estimates assume that Congress will boost the federal debt ceiling but gave no estimate on when it anticipates the ceiling will actually constrain its operations. Tomorrow, the Treasury will announce plans for its quarterly refunding operation of longer-term securities.

The two-day FOMC meeting begins today and ends tomorrow with an expected 75 bp hike. 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 and nearly 35% 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. The press conference will be closely watched but we expect Chair Powell to maintain the hawkish tone that been 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 the decision, Fed officials will go forth to spread the message. Collins is first up and speaks Friday. The swaps market is still pricing in a peak policy rate near 5.0%.

We get some labor market data ahead of Friday’s jobs report. September JOLTS job openings will be reported today and expected at 9.75 mln vs. 10.053 mln in August. One big unknown is whether firms will lay off a significant number of workers when the slowdown hits when there are nearly 10 mln jobs waiting to be filled. It is a big piece of the Fed puzzle as it is counting on labor market weakness to push wages lower. October Challenger job cuts and weekly jobless claims will be reported Thursday. September construction spending (-0.6% m/m expected) and October vehicle sales (14.50 mln annual pace expected) will also be reported today.

Key October survey data will continue to roll out. ISM manufacturing PMI will be reported today and is expected at 50.0 vs. 50.9 in September. Keep an eye on prices paid and employment, which stood at 51.7 and 48.7 in September, respectively. ISM services PMI will be reported Thursday and is expected at 55.4 vs. 56.7 in September. Here too, keep an eye on prices paid and employment, which stood at 68.7 and 53.0 in September, respectively. Yesterday, Chicago PMI came in at 45.2 vs. 47.0 expected and 45.7 in September, while the Dallas Fed manufacturing survey came in at -19.4 vs. -17.4 expected and -17.2 in September.

Brazil President Bolsonaro still has not conceded the race. As a result of this vacuum, pro-Bolsonaro protests have spread across the country. Some estimate that over 300 federal highways have been partially or fully blocked, while access to the Sao Paolo international airport has been affected. Reports suggest Bolsonaro will speak to the nation sometime today. Meanwhile, President-elect Lula has invited other parties to join his government and said centrist Vice President Alckmin would likely coordinate the transition. So far, Lula is making all the right moves but investors would breathe a sigh of relief if and when Bolsonaro finally concedes.

EUROPE/MIDDLE EAST/AFRICA

Bank of England Quantitative Tightening (QT) begins today. Longer-dated gilts will be excluded in order to minimize odds of another gilt crash. The bank is widely expected to hike rates 75 bp to 3.0% Thursday but look for some clues as to when this exclusion of longer-date gilts might end. 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 by Chancellor Hunt. Looking ahead, the swaps market is pricing in 250-275 bp of tightening over the next 12 months that would see the policy rate peak between 4.75-5.0%, down sharply from 6.25% right after the mini-budget in late September. Elsewhere, U.K. final October manufacturing PMI came in at 46.2 vs. 45.8 preliminary. Final services and composite PMIs will be reported Thursday.

ECB President Lagarde is trying to sound hawkish without being specific. Lagarde said rates must move higher in order to bring inflation down to the 2% target but did not say what terminal rate she has in mind. She noted “The destination is clear, and we haven’t reached it yet.” WIRP suggests another 75 bp is about 50% priced in for December 15, while the swaps market is pricing in a peak policy rate between 3.5-3.75%. With a big chunk of the eurozone already tipping into recession, can the ECB hike as aggressively as the market anticipates? Elsewhere, Visco argued for a more cautious approach, noting “The high uncertainty requires us to proceed gradually, carefully assessing the adequacy of the monetary stance on the basis of the evidence that will gradually become available.” He added that “The danger that the deterioration of the economic outlook will turn out to be worse than expected, making an excessively rapid step in the normalization of interest rates disproportionate, shouldn’t be underestimated.”

Israel goes to polls today for the fifth time in four years. All four votes so far have resulted in unstable governments, as the populace is basically split down the middle between pro- and anti-Netanyahu sentiment. The latest polls suggest this time will be no different. Much will depend on which of the smaller parties meet the 3.25% threshold needed to hold seats in the Knesset. This is the first election since 2009 that Netanyahu is running as the opposition. Can Netanyahu’s Likud Party and its allies win an outright majority even as Netanyahu remains under investigation for bribery and fraud? Stay tuned.

ASIA

Energy prices in Japan may increase. Reports suggest Tokyo Electric Power Company (Tepco) may seek government approval to hike power rates for the first time since September 2012. Other regional power companies are reportedly considering similar requests. This couldn’t come at a worse time for policymakers but it can’t be too surprising since price caps have prevented the power companies from passing on the higher costs of power generation. Something has to eventually give but for now, policymakers are just trying to buy time until the economy is on more solid footing. Stay tuned.

Reserve Bank of Australia hiked rates 25 bp to 2.85%, as expected. Governor Lowe said “The board is resolute in its determination to return inflation to the 2-3% target range. We will do what is necessary to achieve that.” He stressed that “If we need to step up to larger increases again to secure the return of inflation to target, we will do that. Similarly, if the situation requires us to hold steady for a while, we will do that.” Lastly, Lowe said “The board judged that it is appropriate to move at a slower pace while we assessed the data, the economic outlook and the impact of the rate rises to date. The board’s base case remains that interest rates will need to go higher still to bring inflation back to target.” WIRP suggests another 25 bp hike December 6 is largely priced in. Of note, the swaps market still sees the policy rate peaking near 4.35%. What this suggests is that the tightening cycle will take longer but will still end up at the same terminal rate.

Some updated macro forecasts were revealed. The full set will be released Friday with the bank’s Statement on Monetary Policy. Inflation is seen at 8.0% this year vs. 7.75% previously, 4.75% next year vs. 4.5% previously, and a little above 3% vs. 3% previously. Growth is seen at 3% this year vs. 3.25% previously and 1.5% next year vs. 1.75% previously. 2024 growth remains steady at 1.5%. Lastly, unemployment is seen rising to ”a little above” 4.0% in 2024 vs. 4.0% previously.

Chinese equity markets jumped on rumors that Covid Zero rules may be loosened. Unverified social media posts claimed that a committee was being formed to assess various scenarios on how to exit the controversial Covid Zero policy. Stocks later came off a bit after Foreign Ministry spokesman Zhao Lijian said he’s “not aware” of such a committee being formed. Given that President Xi just doubled down on the policy, it seems too soon to be contemplating any exit scenarios and so we downplay these reports as wishful thinking. Indeed, fresh lockdowns were imposed late last week in Wuhan, Guangzhou, Beijing, and Shanghai, underscoring President Xi’s unwavering commitment to this policy. Elsewhere, Caixin reported October China manufacturing PMI. It came in at 49.2 vs. 48.5 expected and 48.1 in September. Caixin reports its services and composite PMI readings Thursday, with services expected at 49.0 vs. 49.3 in September. The recovery will remain uneven as China continues its Covid Zero policy for the foreseeable future.

Korea reported October trade data. Exports came in at -5.7% y/y vs. -2.1% expected and 2.7% in September, while imports came in at 9.9% y/y vs. 6.6% expected and 18.6% in September. As a result, the deficit came in at a whopping -$6.7 bln vs. -$3.5 bln expected and continues a long string of deficits. The current account posted a rare deficit in August but this is likely to be repeated in light of the trade data. That said, the IMF is still forecasting a current account surplus equal to around 3% of GDP this year vs. nearly 5% in 2021.