• Some Fed officials are starting to push back against the dovish narrative; financial conditions should loosen; the U.S. economy remains fairly robust; BOC releases the summary of its deliberations
  
• ECB officials are pushing back against the dovish narrative; ECB reported higher inflation expectations in September; Italy and eurozone reported soft September retail sales data; Poland is expected to cut rates 25 bp to 5.5%
  
• Reports suggest China policymakers have asked insurer Ping An to help rescue Country Garden

The dollar continues to claw back recent losses. DXY is trading higher for the third straight day near 105.715 and has retraced nearly half of this month’s drop. Key retracement levels come in near 106 and 106.25. The euro is trading lower near $1.0675 and key retracement levels come in near $1.0635 and $1.0610. Sterling is trading lower near $1.2260 and clean break below $1.2225 would set up a test of the November 1 low near $1.2095. USD/JPY is trading higher near 150.75 and clean break above that level would set up a test of the October 31 high near 151.70. With the dollar clawing back recent losses, it seems the markets finally realized they were getting carried away with the dovish Fed narrative. The U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates. The Fed hawks are pushing back against the dovish narrative (see below) and eventually, the Fed doves (and the market) will have to capitulate.

AMERICAS

Some Fed officials are starting to push back against the dovish narrative. Yesterday, Logan said “We’ve seen some welcome progress with respect to inflation, but inflation still remains too high. For me, the core question is whether financial conditions that we’re seeing today are sufficiently restrictive to return inflation to 2% in both a timely and sustainable way.” Bowman said “I continue to expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way.” Kashkari said that “ultimately the economy will tell us how much is needed” to get inflation back to the 2% target. Still, WIRP suggests only 10% odds of a hike December 13, rising modestly to 15% January 31. More importantly, the first cut is fully priced in for June 12. We continue to believe that this is dovish rate path is very unlikely given how persistent price pressures have been. Cook, Powell, Williams, Barr, and Jefferson all speak today.

Financial conditions should loosen. The Chicago Fed’s measure had been tightening very modestly since mid-September. However, through last Friday, the 10-year yield had fallen nearly 45 bp from the late October peak while the S&P 500 had risen over 6% from the late October low. These moves should lead to looser financial conditions when last week’s readings are reported today. Therein lies the problem. By allowing markets to get carried away with the dovish narrative, the Fed is actually encouraging looser financial conditions that will ultimately work against its efforts to slow the economy and slow inflation.

We believe the U.S. economy remains fairly robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 2.1% SAAR vs. 1.24% previously. Next model update comes today after the wholesale trade sales and inventories data. The New York Fed's Nowcast model is now tracking Q4 growth at 2.4% SAAR and will be updated Friday. It's early days but if Q4 growth comes in above 2%, it will be the sixth straight quarter of above trend growth.

Bank of Canada releases the summary of its deliberations. At that October 25 meeting, the bank delivered a dovish hold and markets took notice. Similar to the Fed, WIRP suggests 5% odds of a hike December 6, rising modestly to top out near 15% January 24. A rate cut is largely priced in for June 5. Here too, we believe the market take on the BOC remains too dovish.

Brazil central bank is sounding quite hawkish. President Campos Neto said “We have enough visibility for the next two meetings.” He added that “The end-of-cycle rate, regardless of what it will be, needs to be restrictive in the current landscape.” This implies 50 bp cuts at the December 13 and January 31 meetings, with risks of downshifting to 25 bp cuts at the March 20 meeting and beyond. Minutes from the November 1 meeting were also hawkish as the bank noted “The Committee believes that there has been significant disinflationary progress, in line with what the Committee had anticipated, but there is still a long way to go to anchor expectations and return inflation to the target.”

EUROPE/MIDDLE EAST/AFRICA

ECB officials are pushing back against the dovish ECB narrative. Chief Economist Lane said the ECB “shouldn’t take a lot of comfort” from the recent drop in inflation, noting that it remains quite high and won’t return to target until 2025. Kazaks said the ECB “cannot exclude the possibility that further rate increases might be necessary, but we simply don’t know.” Makhlouf said “It’s far too early in my view to start talking about when we’ll start reducing or cutting rates. It’s also too early to declare that we’ve reached the top of the ladder.” Wunsch said “Getting to 2% in 2025 is still a long way, so let’s not get excited. Of course, if we would have bad news on the upside, we would have to do more, but that has become less likely again, unless we have a shock on the energy front.” Lastly, Nagel said that “Given the visible economic slowdown, the ‘last mile’ before we reach our inflation target may well be the hardest.” De Cos and Vujcic also speak later today.

ECB reported higher inflation expectations in September. 1-year expectations rose to 4.0% vs. 3.5% in August, while 3-year expectations were steady at 2.5%. This is the second straight acceleration in 1-year expectations to the highest since April. While the ECB can take some solace in the unchanged 3-year expectations, it remains above the 2% target and so the ECB will be watching these trends very closely. Of note, ECB tightening expectations remain subdued. WIRP suggests no odds of a hike December 14. After that, only cuts are priced and the first one is over 75% priced in for April 11. This is why ECB officials are pushing back so hard against rate cut expectations.

Italy and eurozone reported soft September retail sales data. Italy came in at -0.3% m/m vs. 0.1% expected and -0.4% in August, while the eurozone came in at -0.3% m/m vs. -0.2% expected and a revised -0.7% (was -1.2%) in August. Both y/y rates worsened from August and it’s only going to get worse.

National Bank of Poland is expected to cut rates 25 bp to 5.5%. However, nearly a quarter of the 39 analysts polled by Bloomberg look for no change. Minutes from the October 4 meeting will be released Friday. At that meeting, the bank slowed its pace of easing to 25 bp after the previous 75 bp cut September 6 led to significant zloty weakness. Since then, both headline and core inflation have fallen significantly. As a result of the increased cautiousness on the part of the central bank, the swaps market is pricing in only 75 bp of total easing over the next six months. In turn, this has helped the zloty gain nearly 4% vs. the euro since the October 4 meeting.

ASIA

Reports suggest China policymakers have asked insurer Ping An to help rescue Country Garden. The State Council has reportedly instructed the local government of Guangdong to take a controlling stake in Country Garden. Both companies are based in Guangdong but Ping An said “We categorically deny this story. It is untrue.” Sources also report that Ping An had already sold all of its existing 5% stake in Country Garden, which means it no longer has financial stake in a rescue. Color us skeptical, as it seems very unlikely that a bailout of such magnitude and importance would be left to a local government. Instead, we would expect heavy support and involvement at the sovereign level. Something needs to be done but it won’t be led by the Guangdong government.