• Fed Chair Powell seems to favor a gradual easing path; August JOLTS data will be the highlight; ISM manufacturing PMI will also be important; the U.S. Vice Presidential debate will be held this evening; S&P Global reports Canada September manufacturing PMI; Peru reports September CPI data
  
• Eurozone reported soft September CPI data; the ECB doves clearly have the upper hand; final eurozone manufacturing PMIs were reported; U.K. inflation pressures are easing rapidly; Switzerland reported September PMIs; Riksbank minutes were released
  
• BOJ released its summary of opinions for the September meeting; Japan Q3 Tankan report was solid; Japan also reported mixed August labor market data; Australia reported firm August retail sales data; Korea reported soft September trade data

The dollar is firm as monetary policy divergences are back in the spotlight. DXY is trading at the highest since September 23 near 101.090. A less dovish Powell and a more dovish Lagarde have pushed the euro lower to $1.1090. Soft eurozone CPI data helped cement an October ECB cut (see below). USD/JPY is trading higher for the second straight day near 143.75, while sterling is trading lower near $1.3325. Powell’s comments yesterday have helped market easing expectations for the Fed to adjust further but still remain too dovish as the U.S. data remain firm. Yet we cannot stand in the way of this move and so until market pricing changes, the dollar is likely to remain vulnerable. It will take a lot more data to convince the markets, but perhaps this week’s batch will further the process.

AMERICAS

Fed Chair Powell seems to favor a gradual easing path. In his speech yesterday, Powell said that “if the economy evolves broadly as expected, policy will move over time toward a more neutral stance.” In his Q&A, Powell stressed that “This is not a committee that feels like it’s in a hurry to cut rates quickly. Ultimately we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.” This was definitely a less dovish tone than many were expecting. Powell said nothing really new and yet he underscored that the Fed is not about to slash rates quickly unless the data really soften. Odds of a 50 bp cut n November have fallen to 40% vs. 60% last week.

Other Fed officials spoke. Bowman remained cautious and noted that core inflation is still “uncomfortably above” the 2% target. Bostic was also cautious, noting that “If the story is that inflation is continuing its drop and the labor market is staying strong, I think we have the luxury of being a bit more patient.” Goolsbee remains the outlier, as he repeated his view that rates have to come down a lot over the next 12 months. We expect most Fed officials this week to remain cautious but the Fed’s rate path will ultimately be set by the economic data. Bostic, Cook, Barkin, and Collins speak today.

August JOLTS data will be the highlight. Openings are expected to remain steady at 7.673 mln, which is the lowest level since January 2021. Keep an eye on the job openings rate, which fell 0.2 ppt in July to 4.6% and is dangerously close to the 4.5% threshold that typically signals a significant rise in the unemployment rate. The details were mixed in July, as the layoff rate rose 0.1 ppt to 1.1% while the hiring rate increased 0.2 ppt to 3.5%. A further pick-up in the layoff rate would be a concern and would validate aggressive Fed easing expectations.

September ISM manufacturing PMI will also be important. Headline is expected at 47.5 vs. 47.2 in August. Keep an eye on prices paid, which is expected to fall half a point to 53.5. Services will be reported Thursday and headline is expected to rise two ticks to 51.7. Yesterday, Chicago PMI came in at 46.1 vs. 46.0 expected and 46.1 in August. While this was the second straight increase to the highest since June, this series has correlated badly with the national PMIs and so offers limited insight.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.1% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 3.0% SAAR and Q4 growth at 2.8% SAAR and will be updated Friday.

The U.S. Vice Presidential debate will be held this evening. Governor Tim Walz and Senator JD Vance meet for the first and only debate that begins at 9 PM ET. While the Vice Presidential debate typically doesn’t move the needle much, this one may take on greater significance as there are no more Presidential debates scheduled ahead of the November election. The race remains close, with betting market and polls giving Vice President Harris a slight edge over former President Trump. Check out our US election special report here.

S&P Global reports Canada September manufacturing PMI. Its services and composite PMIs will be reported Thursday. Ivey PMI will be reported Friday. All four of these PMIs were below 50 in August and we see little scope for improvement near-term. Overall, soggy economic activity, slower inflation, and growing slack in the labor market argue for a 50 bp Bank of Canada rate cut at the next meeting October 23. The swaps market pricing over 50% odds of such a cut.

Peru reports September CPI data. Headline is expected at 2.09% y/y vs. 2.03% in August. 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 September 12, the central bank cut rates 25 bp to 5.25% for the second straight meeting after keeping rates on hold in June and July. It said that the cut did not imply further cuts ahead but noted that it expected headline to remain within the target range and core to continue slowing. Next meeting is October 10 and another 25 bp cut to 5.0% seems likely.

EUROPE/MIDDLE EAST/AFRICA

Eurozone reported soft September CPI data. Headline fell four ticks to 1.8% and core fell one tick to 2.7% y/y, both as expected. Headline was the lowest since April 2021 and below the 2% target for the first time since June 2021. Services inflation fell a tick to 4.0% y/y and remains sticky. However, we do not think this will prevent the ECB from cutting rates October 17. The market seems to agree and sees nearly 95% odds of a cut then, up from 25% right after the September ECB decision. Looking ahead, the market is now pricing in six straight cuts through June 2025 and nearly 85% odds of a seventh in Q3 2025.

The ECB doves clearly have the upper hand. ECB President Lagarde said yesterday that “the latest developments strengthen our confidence that inflation will return to target in a timely manner. We will take that into account in our next monetary policy meeting in October.” Today, Rehn said “We have received further confirmation from recent statistical data that inflation is slowing down. This means, at least in my eyes, that there have been more grounds for lowering rates at our October meeting. The recent weakening of the euro area’s growth prospects tilts the scales in the same direction.” Guindos, Nagel, and Schnabel also speak today.

Final eurozone manufacturing PMIs were reported. Headline rose two ticks from the preliminary to 45.0. Looking at the country breakdown, Germany rose three ticks from the preliminary to 40.6 and France rose six ticks to 44.6. Italy and Spain reported for the first time and their manufacturing PMIs came in at 48.3 and 53.0, respectively. Services and composite PMIs will be reported Thursday. Here too, Italy and Spain report for the first time and Italy’s composite PMI is expected to fall half a point to 50.3. Eventually, these two should be dragged down into recession, joining Germany and France.

U.K. inflation pressures are easing rapidly. The U.K. BRC shop price index fell -0.6% y/y in September, the lowest since August 2021. Nevertheless, the pick-up in U.K. economic activity suggests the threshold for an aggressive BOE easing cycle is high. To wit, MPC member Greene stuck to her cautious stance yesterday, warning that “If we have consumption recovering more strongly than we expect, they might start feeling like they have pricing power once again and they might start passing through higher costs to end users in higher prices.” Chief Economist Pill speaks later today. We continue to believe that monetary policy divergences between the ECB and BOE favor a lower EUR/GBP.

Switzerland reported September PMIs. Manufacturing came in at 49.9 vs. 48.0 expected and 49.0 in August, while services came in at 49.8 vs. 52.9 in August. With the economy softening and inflation pressures remaining low, the market is fully pricing in 25 bp cuts at the December and March meetings, followed by nearly 70% odds of a final cut at the June meeting. New Swiss National Bank chief Schlegel speaks later today.

Riksbank minutes were released. There was no material new information to be gleaned from the minutes. The decision to cut the policy rate 25 bp to 3.25% and to lower the policy rate path to imply further easing - including the possibility of a 50 bp cut at one of the two remaining meetings this year - was unanimous. The market is pricing in nearly 60% odds of a 50 bp cut in November, along with nearly 175 bp of total easing over the next 12 months that would see the policy rate bottom near 1.50%, which is much lower than the Riksbank’s projection of 2.25%.

ASIA

Bank of Japan released its summary of opinions for the September meeting. At that meeting, the BOJ unanimously voted to keep rates steady at 0.25%. However, a couple of members stuck with a hawkish stance. One member warned that “if economic activity and prices remain on track, the Bank can follow a path in which it raises the policy interest rate gradually so that the rate will be 1.0 percent in the second half of fiscal 2025 at the earliest.” Another member said, “if it is confirmed that there will be no major downward revisions to its outlook, it is desirable for the Bank to raise the policy interest rate without taking too much time.” However, with the economy showing signs of softening, we believe the BOJ doves have the upper hand right now. The swaps market is pricing in just 25 bp of total tightening over the next 12 months and continues to weigh on JPY. Noguchi speaks Thursday.

Japan Q3 Tankan report was solid. Large manufacturing index came in a point higher than expected and was steady at 13, large manufacturing outlook came in two points higher than expected and was steady at 14, large non-manufacturing came in two points higher than expected at 34 vs. 33 in Q2, and large non-manufacturing outlook came in two points lower than expected at 28 vs. 27 in Q2. While the readings indicate continued modest recovery in the economy, there was a warning sign as large all industry capex came in at 10.6% vs. 11.9% expected and 11.1% in Q2.

Japan also reported mixed August labor market data. Unemployment fell a tick more than expected to 2.5% vs. 2.7% in July, but the job-to-applicant ratio fell a tick to 1.23. The labor market has remained fairly resilient despite some softening in the economy. However, wage growth slowed sharply in July after the spring wage negotiations ended and supports the case for BOJ cautiousness. August cash earning data due out next Tuesday will be watched closely.

Australia reported firm August retail sales data. Sales came in at 0.7% m/m vs. 0.4% expected and a revised 0.1% (was flat) in July. According to the ABS, “this year was the warmest August on record since 1910, which saw more spending on items typically purchased in spring. This included summer clothing, liquor, outdoor dining, hardware, gardening items, camping goods and outdoor equipment.” We expect the RBA to cut the cash rate target by year-end as underlying economic activity is weak and points to lower inflation pressures. The market is pricing in nearly 75% odds of a 25 bp cut by December. The ABS’s August experimental estimate of household spending, which tracks consumption of both goods and services, will be reported Friday and is expected at 0.5% m/m vs. 0.8% in July.

Korea reported soft September trade data. Exports came in at 7.5% y/y vs. 6.6% expected and 11.2% in August, while imports came in at 2.2% y/y vs. 5.0% expected and 6.0% in August. The readings are disappointing in light of low base effects from last year. While the strong yen has boosted Korea’s relative competitiveness, sluggish global growth seems to be taking a toll on exports.