• U.S. yields at the long end saw a big reversal yesterday; S&P Global reports preliminary October PMIs; regional Fed manufacturing surveys will continue to roll out; September Chicago Fed NAI is worth discussing; the House will hold a floor vote today to choose the next Speaker; a deal to end the autoworkers strike remains elusive; Mexico reports mid-October CPI data
  
• Eurozone reported soft preliminary October PMIs; Germany reported soft November GfK consumer confidence; ECB reported tighter credit standards in Q3; U.K. reported labor market data, preliminary October PMIs, and October CBI industrial trends survey; Hungary is expected to cut rates 50 bp to 12.5%
  
• Reports suggest the BOJ will consider tweaking YCC at next week’s meeting; Japan and Australia reported soft preliminary October PMIs; RBA Governor Bullock sounded hawkish in her first speech; China’s sovereign wealth fund bought ETFs in an attempt to support the local stock market

The dollar is getting some traction as U.S. yields stabilize. DXY is trading higher near 105.850 after three straight down days. After this period of consolidation is over, we expect a test of the October high near 107.348. The euro is underperforming and trading lower near $1.0630 after weak PMI data (see below), while sterling is trading lower near $1.2225 after soft labor market data (see below). USD/JPY is trading flat near 149.75 despite reports the BOJ may tweak YCC again next week (see below). We believe this current dollar weakness is corrective in nature. Looking beyond the current noise related to dovish Fed comments, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended. Simply put, the U.S. economy continues to grow above trend and all the recent data confirm that the U.S. economy is still running hot and needs further tightening.

AMERICAS

U.S. yields at the long end saw a big reversal yesterday. The 10-year yield traded at a new cycle high yesterday near 45.02% before ending the day near 4.85%, while the 30-year yield traded at a new cycle high yesterday near 5.18% before ending the day near 4.97%. Both are little changed today. We see no reason why yields should fall as the US data keep coming in strong and yet here we are. The Fed’s recent communication effort has added to the volatility in rates markets, in our view. However, when all is said and done, we think the case for higher yields and a stronger dollar remains in place.

S&P Global reports preliminary October PMIs. Headline manufacturing is expected at 49.5 vs. 49.8 in September, services is expected at 49.9 vs. 50.1 in September, and the composite PMI is expected to fall two ticks to 50.0. Of note, the ISM PMI readings have been running higher than S&P Global but they won’t be reported until next week.

Regional Fed manufacturing surveys will continue to roll out. Philadelphia Fed non-manufacturing and Richmond Fed manufacturing (3 expected) and services indices will be reported today. Last week, Empire manufacturing came in at -4.6 vs. -6.0 expected and 1.9 in September, while Philly Fed manufacturing came in at -9.0 vs. -7.0 expected and -13.5 in September.

September Chicago Fed National Activity Index is worth discussing. The headline reading came in at 0.02 vs. -0.14 expected and a revised -0.22 (was -0.16) in August. As a result, the 3-month moving average rose to 0.00 vs. -0.14 in August. This was the highest since October 2022 and moves further away from the -0.7 that signals recession. This series has taken on greater significance given that the 3-month to 10-year curve remains inverted. The continued resilience in the economy is noteworthy and supports our view the Fed still has more work to do in getting to the desired sub-trend growth.

The House of Representatives will hold a floor vote today to choose the next Speaker. After Republicans held a secret ballot to oust Jim Jordan as the nominee by a 112-86 vote, nine alternatives threw their hats into the ring. One dropped out after the candidate forum and so eight will vie for the Speakership. Majority Whip Tom Emmer is thought to be the frontrunner. The longer the House remains without a speaker, the higher the odds that it won’t be able to pass the necessary budget bills to avoid a shutdown when the Continuing Resolution expires November 17.

A deal to end the autoworkers strike remains elusive. After reports emerged last week that a deal with all three major auto companies was close, UAW union members walked off the job yesterday at the Stellantis truck plant in Sterling Heights, Michigan. That plant employs about 6,800 union members and so this brings the total number of workers on strike at Stellantis to 14,750 and to more than 40,000 total across all three auto companies. The UAW said it escalated its strike against Stellantis because “Currently, Stellantis has the worst proposal on the table regarding wage progression, temporary worker pay and conversion to full-time, cost-of-living adjustments (COLA), and more.” Stellantis said it was “outraged” by the strike escalation as the UAW plays hardball. Will the strategy work? Stay tuned.

Mexico reports mid-October CPI data. Headline is expected at 4.37% y/y vs. 4.47% in mid-September while core is expected at 5.49% y/y vs. 5.74% in mid-September. If so, headline would be the lowest since February 2021 and approaching the 2-4% target range. Next Banco de Mexico meeting is November 23 and rates are likely to remain steady at 11.25%. At the last meeting September 28, it kept rates steady and minutes showed that policymakers discussed keeping rates higher than previously expected, with one suggesting that rates may need to be kept steady well into 2024. Indeed, the market is pricing in steady rates over the next six months.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported soft preliminary October PMIs. Headline manufacturing came in at 43.0 vs. 43.7 expected and 43.4 in September, services came in at 47.8 vs. 48.6 expected and 48.7 in September, and the composite PMI came in at 46.5 vs. 47.4 expected and 47.2 in September. This was the lowest composite reading since November 2020. Looking at the country breakdown, the German composite came in at 45.8 vs. 46.6 expected and 46.4 in September while the French composite came in at 45.3 vs. 44.6 expected and 44.1 in September. Italy and Spain won’t be reported until the final PMIs come out in early November.

Germany reported soft November GfK consumer confidence. Headline came in at -28.1 vs. -27.0 expected and a revised -26.7 (was -26.5) in October. This was the third straight monthly drop to the lowest since April. German October IFO business climate will be reported tomorrow. Headline is expected at 86.0 vs. 85.7 in September, as an expected two tick drop in current assessment to 88.5 will be offset by more than a half point rise in expectations to 83.5. However, we see downside risks after today’s German data.

European Central Bank reported tighter credit standards in Q3. Its quarterly lending survey showed that banks continued to toughen internal guidelines and approval criteria for businesses loans, mortgages, and other consumer credit. The ECB noted that “Higher risk perceptions related to the economic outlook and borrower-specific situation, lower risk tolerance and lower liquidity positions of banks contributed to the tightening.” It added that the cumulative net tightening of credit standards since 2022 “has been substantial, which is consistent with the ongoing significant weakening in lending dynamics.” However, it’s not just the supply of credit, as the ECB noted that demand for credit among firms and households continued to fall “strongly” and the decline exceeded expectations.

All of these developments suggest the ECB will keep rates steady Thursday. While there are still a handful of hawkish holdouts, most ECB policymakers have acknowledged that the tightening cycle is over and recent weakness in the data pretty much confirms this. The bank is expected to discuss modifications to reserve requirements as well has how to shrink its PEPP holdings but no decisions are expected until next year. Updated macro forecasts won’t come until the December 14 meeting. Of note, WIRP suggests no odds of a hike this week, rising to top out just above 5% December 14. A rate cut is fully priced in for June 6.

U.K. reported labor market data. Employment fell -82k for the three month period ending in August vs. a revised -133k (was -207k) in the previous period. This was the third straight drop. Of note, the ONS changed the way it calculates the data after delaying the report “to produce the best possible estimates.” Of note, the unemployment rate remained steady at 4.2% under the new methodology, which saw the previous reading revised down a tick from 4.3% originally. ONS official said “This is part of our transformation of the way we measure the labor market where we are introducing an improved Labour Force Survey, asking more people in different ways about their employment status.” With the labor market still weakening, consumption should slow more significantly in the coming months.

U.K. also reported preliminary October PMIs. Headline manufacturing came in at 45.2 vs. 44.7 expected and 44.3 in September, services came in at 49.2 vs. 49.3 expected and actual in September, and the composite PMI came in at 48.6 vs. 48.5 expected and actual in September. This was the first rise in the composite since April but remains stuck near the lows of this cycle.

October CBI industrial trends survey was very weak. Total orders came in at -26 vs. -16 expected and -18 in September, while selling prices came in at 7 vs. 14 in September and overall business optimism came in at -15 vs. 6 in September. CBI distributive trades survey will be reported Thursday. Bank of England tightening expectations remain subdued. WIRP suggests a less than 10% odds of a hike November 2, rising to 30% December 14 and topping out near 40% February 1. A rate cut is not priced in until Q4 2024.

National Bank of Hungary is expected to cut rates 50 bp to 12.5%. However, the market is all over the place. Of the 22 analysts polled by Bloomberg, 3 see no cut, 1 sees a 25 bp cut, 10 see a 50 bp cut, 7 see a 75 bp cut, and 1 sees a 100 bp cut. At the last meeting September 26, the bank cut its 1-day deposit rate 100 bp to match the base rate at 13%. Both rates will be cut in unison going forward. The swaps market is pricing in 150 bp of easing over the next three months followed by another 125 bp over the subsequent three months.

ASIA

Reports suggest the Bank of Japan will consider tweaking Yield Curve Control at next week’s meeting. However, officials are likely to monitor the JGB market until the very last minute before making a decision. Some officials feel it might be better to tweak YCC preemptively rather than wait until the ceiling comes under attack by the market. That said, many officials felt that any decision would have to be made with an abundance of caution since any tweaks could push yields higher. We believe the bank will eliminate YCC altogether either late this year or early next year rather than make another minor tweak. Meanwhile, the bank held an unscheduled bond-buying operation for JPY300 bln ($2 bln) of 5- to 10-year bonds and JPY100 bln of 10-to 25-year bonds. This was the fifth time the central bank has stepped into the market with unscheduled buying since last adjusting YCC in late July.

Japan reported soft preliminary October PMIs. Manufacturing came in steady at 48.5, while services fell sharply to 51.1 vs. 53.8 in September. As a result, the composite PMI fell to 49.9 vs. 52.1 in September, the first reading below 50 since December 2022. September department store sales were also reported.

Australia reported soft preliminary October PMIs. Manufacturing came in at 48.0 vs. 48.7 in September, while services fell sharply to 47.6 vs. 51.8 in September. As a result, the composite PMI fell to 47.3 vs. 51.5 in September, the lowest since January 2022. When the composite rose above 50 in September for the first time since June, we did not think that the improvement would be sustained. However, the steep drop in October was even greater than we expected.

RBA Governor Bullock sounded hawkish in her first speech. She stressed that “The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing.” Bullock added that she is working with Treasurer Jim Chalmers to “modernize and clarify” the RBA’s objectives of low and stable inflation and full employment after the policy review found that the goals of this mandate should be made “more explicit.” She stressed that “These changes won’t, however, fundamentally change the way we formulate monetary policy.” RBA tightening expectations remain subdued. WIRP suggests 25% odds of a hike November 7, rising to 45% December 5, 65% February 6, and then nearly priced in for Q2. A rate cut is not priced in until 2025.

China’s sovereign wealth fund bought ETFs in an attempt to support the local stock market. It bought an undisclosed amount of ETFs and vowed to keep increasing its holdings. This comes just weeks after the fund took larger stakes in the four largest state-owned banks and pledged to buy more. MSCI China is trading at the lowest level since November 2022 near 55.50 while the CSI 300 traded at the lowest level since early 2019 near 3451. Elsewhere, President Xi Jinping made his first known visit to the People’s Bank of China, underscoring policymakers’ increased focus on supporting the economy.