• Last Friday’s jobs report knee-capped Fed easing expectations; monetary policy divergences are alive and well; Colombia reports September CPI data
  
• Germany reported weak August factory orders; the ECB can no longer deny the undeniable
  
• Japan Prime Minister Ishiba has reportedly instructed his cabinet to draw up a package of economic measures

The dollar is firm as markets reprice the Fed easing path. DXY is trading flat near 102.553 after five straight up days as the jobs report has led to a violent repricing in the rates market (see below). USD/JPY is trading lower near 148.55 after jawboning and reports of an economic package from the new government (see below). Weak German factory orders helped pushed the euro lower to $1.0965, while sterling is trading lower near $1.3065. We believe the data and Fed comments continue to support a very gradual easing cycle (see below). Market easing expectations for the Fed have adjusted after the jobs data but are still too dovish as the U.S. data remain firm. We needed strong jobs data to convince the markets and that’s what we got and so we expect the dollar recovery to continue on monetary policy divergences (see below).

AMERICAS

Last Friday’s jobs report knee-capped Fed easing expectations. Expectations for aggressive Fed easing have been knee-capped. A 50 bp cut in either November or December has now been completely priced out. Indeed, a 25 bp cut next month is now only 90% priced in. We will get one more jobs report before the November 6-7 FOMC meeting but let’s face it, all indications are that the U.S. economy remains quite robust and not in need of aggressive easing. For now, gradualism has won the debate but despite this most recent batch of strong data, the markets are still pricing in 125 bp of total easing over the next 12 months. This continues to fall but needs to adjust even further. UST yields have risen across the board and the 10-year is trading above 4% for the first time since August.

Monetary policy divergences are alive and well. Besides the less hawkish Fed story, we are clearly getting a more dovish ECB, BOJ, BOE, and SNB. Same goes for the Riksbank, RBNZ, and BOC. Eventually, the holdouts RBA and Norges Bank will have to capitulate. Meanwhile, EM central banks for the most part continue to cut rates aggressively and Bank of Korea is expected to join these ranks this week. Bottom line: these policy divergences should continue to favor the dollar.

There will be plenty of Fed speakers this week. Virtually all are expected to remain firmly in the gradual camp. After what he called “superb” jobs data, even uber-dove Goolsbee finally stopped calling for “a lot more easing” over the next year. Bowman, Kashkari, Bostic, and Musalem speak today.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.5% SAAR and will be updated tomorrow after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 3.1% SAAR and Q4 growth at 2.8% SAAR and will be updated Friday. Momentum in the economy remains strong and so little slowdown is likely as we go into 2025.

Colombia reports September CPI data. Headline is expected at 5.84% y/y vs. 6.12% in August, while core is expected at 6.54% y/y vs. 6.78% in August. If so, headline would be the lowest since December 2021 but still above the 2-4% target range. 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. Next meeting is October 31 and we expect another 50 bp cut to 9.75%. The market is pricing in 300 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.

EUROPE/MIDDLE EAST/AFRICA

Germany reported weak August factory orders. Orders came in at -5.8% m/m vs. -2.0% expected and a revised 3.9% (was 2.9%) in July, while the y/y rate came in at -3.9% y/y vs. -1.6% expected and a revised 4.6% (was 3.7%) in July. Germany reports a slew of data this week. IP will be reported tomorrow, trade data will be reported Wednesday, retail sales will be reported Thursday, and current account data will be reported Friday. All are expected to confirm that Germany continues to slide into recession, with reports emerging that the government now forecasts a -0.2% contraction this year after -0.3% last year.

The European Central Bank can no longer deny the undeniable. Governing Council member Villeroy said overnight that the ECB will “quite probably” cut interest rates at next week’s meeting, which is virtually fully priced in by markets. The French central bank chief added that the ECB has to pay attention to the risk of undershooting its 2% inflation target “due to a weak growth and a restrictive monetary policy for too long.” The comments support market pricing for a total 150 bp of easing over the next 12 months. Cipollone, Lane, Escriva, and Nagel speak today.

ASIA

Japan Prime Minister Ishiba has reportedly instructed his cabinet to draw up a package of economic measures. Reports suggest that the measures will aim to reduce the impact of inflation and to support growth ahead of elections this month and will include cash handouts for low-income households and regional economies. To help fund the package, the government will reportedly submit an additional budget to parliament after the October 27 general election. Elsewhere, new Finance Minister Katsunobu Kato stuck to the government’s well-honed currency script by noting “we will carefully watch the impact of forex moves on the Japanese economy and people’s lives.”