• The October jobs report will be the highlight; growth remains robust in Q4; October ISM manufacturing PMI will also be important; data continue to show the U.S. economy is in a sweet spot; Peru reports October CPI data
  
• The U.K. bond market continues to sell off sharply after Wednesday’s budget; Switzerland reported soft October CPI data
  
• Japan’s DPP has staked out a dovish position; Caixin reported firm October manufacturing PMI; Korea reported soft October trade data

The dollar is firm ahead of the jobs report. DXY is trading higher near 104.153 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. Sterling is stabilizing and trading modestly higher near $1.2910 after the budget related sell-off (see below) took it down to $1.2845 yesterday. USD/JPY is trading higher near 152.75 while the euro is trading lower near $1.0860 on the broad dollar gains today. The Swiss franc is the worst performing major after softer than expected CPI data (see below). The strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Data this week have 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, though the jobs report could be hard to read given possible hurricane-related distortions. Stay tuned.

AMERICAS

The October jobs report will be the highlight. Bloomberg consensus for NFP is 100k vs. 254k in September, while its whisper number stands at 140k. 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%. That said, we believe the higher than expected ADP reading of 233k warns of upside risks to NFP.

This will be the last major data point ahead of next week’s FOMC meeting. A 25 bp cut is 95% priced in by Fed Funds futures but only 80% by the swaps market. Looking ahead to December, a 25 bp cut is about 70% priced in by Fed Funds futures but only about 40% by the swaps market. Obviously, much will depend on the data but we look for a 25 bp cut next week but remain skeptical that the Fed will cut again in December. Stay tuned.

Growth remains robust in Q4. The Atlanta Fed GDPNow model's initial estimate for Q4 GDP came in at 2.7% SAAR yesterday and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.5% 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 above trend as we move into 2025.

October ISM manufacturing PMI will also be important. Headline is expected at 47.6 vs. 47.2 in September. Keep an eye on employment and prices paid, which are both expected to rise to 45.0 and 50.0, respectively. Yesterday, Chicago PMI came in at 41.6 vs. 47.0 expected and 46.6 in September. However, this series has not been tracking well with the national PMI readings for the past couple of years and so offers little insight. Perhaps more importantly, the S&P Global U.S. manufacturing PMI rose to a 2-month high of 47.8 vs. 47.3 in September.

Data continue to show the U.S. economy is in a sweet spot. September nominal personal spending came in a tick higher than expected at 0.5% m/m vs. a revised 0.3% (was 0.2%) in August, real spending came in a tick higher than expected at 0.4% m/m vs. a revised 0.2% (was 0.1%) in August, and personal income rose the expected 0.3% m/m vs. 0.2% in August. In y/y terms, nominal spending was unchanged at 5.3%, real spending picked up a tick to 3.1%, and income slowed two ticks to 5.5%. This comes after retail sales control group picked up two ticks to 4.0% in September, the strongest since June. As long as jobs are being created, consumption is likely to remain fairly robust.

Elsewhere, PCE readings showed disinflation continuing. Headline PCE came in as expected at 2.1% y/y vs. a revised 2.3% (was 2.2%) in August, the lowest since February 2021 and nearing the Fed’s 2% target. However, core PCE remains stubbornly elevated as it came in a tick higher than expected at 2.7% y/y, same as August. Looking ahead to October, the Cleveland Fed Nowcast model sees headline and core inflation at 2.2% and 2.7%, respectively.

Weekly claims suggest the labor market remains in solid shape. Initial claims came in at 216k vs. 230k expected and a revised 228k (was 227k) the previous week. This is the lowest since mid-May. After spiking to 260k in early October, initial claims have normalized quite quickly and suggests little lasting damage to the labor market from the hurricanes.

On the flipside, wage pressures are limited. Q3 Employment Cost Index came in a tick lower than expected at 0.8% q/q, while the y/y rate came in at 3.9% and was the lowest since Q4 2021. This is the Fed’s favorite wage data because it’s more comprehensive and controls for changes in the composition of employment.

Peru reports October CPI data. Headline is expected at 2.13% y/y vs. 1.78% in September. If so, it would be the first acceleration since June but would remain near the center of the 1-3% target range. At the last meeting October 10, the central bank delivered a hawkish surprise and kept rates steady at 5.25% vs. an expected 25 bp cut to 5.0%. It warned that inflation would rise in Q4 due to base effects but would remain in the target range. Recently, the bank’s chief economist Armas said the bank will continue cutting rates gradually and that decisions would be based on core inflation, inflation expectations, and economic growth. Next meeting is November 7 and while a 25 bp cut to 5.0% is expected, the decision will ultimately depend on how core inflation comes in today.

EUROPE/MIDDLE EAST/AFRICA

The U.K. bond market continues to sell off sharply after Wednesday’s budget. Yields on 10-year gilt surged as much as 33 bp to a one-year high of 4.53% before falling back slightly. We believe the move higher in yields largely reflects an upward adjustment to U.K. rate expectations. Of note, 10-year inflation-adjusted gilt yields jumped by roughly 25 bp to a high near 0.96% as the projected loosening in fiscal policy limits the Bank of England’s scope to cut interest rates.

Concerns over the U.K.’s government plan to boost borrowing are also contributing to higher gilt yields. The U.K. Office for Budget Responsibility said “overall borrowing between 2024-25 and 2028-29 is higher than the March forecast by GBP142.2 bln, an average of GBP28.4 bln a year. This represents one of the largest fiscal loosenings of any fiscal event in recent decades.” Still, the IMF endorsement of the Chancellor’s Budget should ease worries over fiscal profligacy. The IMF noted “we support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue.”

Normally, an upward reassessment to BOE rate expectations should be positive for GBP. However, the higher for longer BOE policy stance risks derailing the modest recovery in U.K. economic activity that would in turn undermine GBP and limit upside for U.K. bond yields. Moreover, the U.K. runs a relatively large current account deficit (-3.2% of GDP in Q2). This means GBP will need to keep trading at a deep discount to fundamental equilibrium (BBH-PPP estimates GBP equilibrium at $1.5300) to attract foreign investors to absorb the additional gilt issuance planned in the coming years. Bottom line: While this is not a policy mistake that is in any way comparable to the Truss/Kwarteng disaster of 2022, markets are left worrying about an added slug of fiscal stimulus being announced right at the start of a cautious BOE easing cycle.

Switzerland reported soft October CPI data. Headline came in two ticks lower than expected at 0.6% y/y vs. 0.8% in September, while core came in two ticks lower than expected at 0.8% y/y vs. 1.0% in September. Inflation is tracking below the Swiss National Bank’s Q4 forecast of 1.0% y/y, reinforcing the case for a 50 bp rate cut in December. The market is currently pricing in 50% odds of such a jumbo move then. Overall, a total of 75 bp of easing is priced in over the next six months that would see the policy rate bottom near 0.25%. However, the market is starting to price in the possibility of another 25 bp cut that would take the policy rate to zero.

ASIA

Japan’s Democratic Party for the People has staked out a dovish position. DPP leader Tamaki said the Bank of Japan shouldn’t hike rates again before March next year, noting that the bank needs to see the results of next year’s spring wage deals before hiking again. Tamaki added that the BOJ should not make policy decisions based on the exchange rate. After winning 28 seats in last weekend’s elections, the DPP is the fourth largest party in parliament and could have outsized influence on policy if it is brought into a governing coalition. Recall that the LDP and Komeito together won 215 seats while main opposition Constitutional Democratic Party of Japan won 148 seats and the Japan Innovation Party won 38 seats. 233 seats are needed to hold a majority but complicating matters is the fact that the DPP has in the past ruled out joining any LDP coalition. Stay tuned.

Caixin reported firm October manufacturing PMI. It came in at 50.3 vs. 49.7 expected and 49.3 in September. Caixin reports October services and composite PMIs next Tuesday, with services expected to rise two ticks to 50.5. If so, the composite would likely rise a few ticks from 50.3 in September. Still, the readings would remain indicative of sluggish economic growth. Chinese policymakers are expected to unveil the details of their fiscal stimulus pledge following the National People’s Congress Standing Committee meeting scheduled for November 4-8.

Korea reported soft October trade data. Exports rose 4.6% y/y vs. 7.0% expected and 7.5% in September, while imports rose 1.7% y/y vs. 2.2% expected and actual in September. Recent soft readings are especially disappointing given the low base effects from last year. Regional growth and activity may see some modest improvement in Q4 from China stimulus, but Bank of Korea is likely to remain in easing mode to help boost domestic activity. The market is pricing in 50 bp of total easing over the next 12 months.