• Data highlight will be September PCE; personal income and spending will be reported at the same time; we got our first official reading for Q3 GDP and it was a good one; yet Fed tightening expectations remain subdued
  
• ECB kept rates steady, as expected; Lagarde’s press conference was fairly downbeat; the ECB did not discuss adjusting PEPP or MRR; Spain gave us an early glimpse of key eurozone data
  
• October Tokyo CPI ran hot; the data come ahead of the BOJ meeting next week; Philippine central bank Governor Remolona seemed to downplay the risk of further hikes; Indonesia is feeling the heat too

The dollar is treading water ahead of PCE data. DXY is trading flat near 106.564 after three straight up days. Clean break of 106.589 sets up a test of the October 3 high near 107.348. The euro is trading flat near $1.0560. Clean break of $1.0540 sets up a test of the October 3 low near$1.0450. Sterling is leading this move, trading lower near $1.2120 and on track to test the October 4 low near $1.2035. USD/JPY traded at a new cycle high near 150.80 yesterday but lack of follow-through sees it trading near 150 currently. Recent price action supports our belief that the recent dollar weakness was corrective in nature. Looking beyond the recent noise related to dovish Fed comments and some well-publicized investor calls in USTs, 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 even as the rest of the world slips into recession. Recent data confirm that the U.S. economy is still running hot and needs further tightening.

AMERICAS

Data highlight will be September PCE. Consensus sees headline at 3.4% y/y vs. 3.5% in August and core at 3.7% y/y vs. 3.9% in August. Keep an eye on super core, which stood at 4.4% y/y in August. Of note, the Cleveland Fed’s Nowcast model estimates headline at 3.46% y/y and core at 3.70%. For October, it shows headline at 3.17% y/y and core at 3.66% y/y.

Personal income and spending will be reported at the same time. They are expected at 0.4% m/m and 0.5% m/m, respectively, vs. 0.4% in August. Real personal spending is expected at 0.3% m/m vs. 0.1% in August. After retail sales came in stronger than expected in September, we see upside risks for personal spending. Final October University of Michigan consumer sentiment will also be reported.

We got our first official reading for Q3 GDP and it was a good one. Growth came in at 4.9% SAAR vs. 4.5% expected and 2.1% in Q2. This was the strongest since Q4 2021 and marks the fifth straight quarter of above trend growth. The Atlanta Fed GDPNow had Q3 growth at 5.4% SAAR while the New York Fed Nowcast had it at 2.55% SAAR. The New York Fed had stopped publishing its Nowcast during the pandemic and only recently started publishing it again after some retooling. Well, it was off by almost 2.5 percentage points and so it needs some further tweaking. For now, at least, the Atlanta Fed's model comes out on top. It will publish its first estimate for Q4 today, while the New York Fed currently has Q4 growth at 2.27% SAAR.

Looking at the components, personal consumption came in as expected at 4.0% SAAR vs. 0.8% in Q2. It was the biggest contributor to Q3 growth at 2.69 ppt, followed by inventories at 1.32 ppt and government consumption at 0.79 ppt. Net exports subtracted -0.08 ppt while fixed investment contributed only 0.15 ppt. Final sales contributed a whopping 3.50 ppt to growth and we think this momentum will carry over into Q4.

Yet Fed tightening expectations remain subdued. WIRP suggests no odds of a hike November 1, rising to 20% December 13 and topping out near 33% January 31. These odds are way too low. A rate cut is not fully priced in until July 31.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank kept rates steady, as expected. The bank said that incoming information broadly confirmed its previous assessment. It added that incoming data will determine the level and duration of restrictive policy and stressed that tight policy must be maintained for a sufficiently long time. The bank noted that most underlying inflation measures have continued to ease. Overall, nothing surprising but perhaps a tad on the dovish side. Updated macro forecasts won’t come until the December 14 meeting. Of note, WIRP suggests odds of another hike top out at a mere 5% December 14. After that, there are nearly 75% odds of a rate cut April 11 and fully priced in for June 6.

President Lagarde’s press conference was fairly downbeat. She said the economy remains weak and is likely to remain weak for the rest of the year due to subdued demand and tighter financing conditions. Lagarde stressed that rate cuts were not discussed at this meeting, adding that now is not the time for forward guidance. She said more tightening is in the pipeline for the real economy and that this would continue to unfold through Q4 and Q1. This is very similar thinking as the Fed doves, who believe enough has already been done.

Lagarde said that the ECB did not discuss adjusting PEPP or MRR at this meeting. This was quite surprising and should be taken as rather dovish. The hawks have been pushing for both of these to be adjusted sooner rather than later, which would tend to remove excess liquidity from the system. Most observers do not expect any changes until 2024 and it's clear that the ECB is in no hurry to tighten liquidity conditions further. As things stand, the expiration of outstanding TLTROs has already led to a significant drop in the ECB’s balance sheet and active QT would accelerate the shrinkage at a time when the doves are concerned about the economic slowdown already under way. Reports suggest ECB policymakers agreed to debate an early end to PEPP reinvestments early next year.

Spain gave us an early glimpse of key eurozone data. Preliminary Q3 GDP data and September retail sales were reported. Growth came in a tick higher than expected at 0.3% q/q vs. a revised 0.4% (was 0.5%) in Q2, while the y/y rate also came in a tick higher than expected at 1.8% vs. a revised 2.0% (was 2.2%) in Q2. Spain has been outperforming within the eurozone but is not immune to the slowdown. Spain also reported retail sales at 6.5% y/y vs. a revised 7.1% (was 7.2%) in August.

The rest of the major eurozone countries report early next week. Germany reports Monday and is expected at -0.2% q/q, followed by Italy (-0.1% q/q expected) and France (0.1% q/q expected) Tuesday. Eurozone-wide GDP will also be reported Tuesday and is expected at -0.1% q/q. Of note, ECB GC’s Muller said “When describing the euro area’s economic situation, it’s more accurate to speak of stagnation and a sluggish recovery, not a deep economic crisis.” While he may be proven correct, the jury is still out and we believe the risks are firmly to the downside.

ASIA

October Tokyo CPI ran hot. Headline came in at 3.3% y/y vs. 2.8% expected and actual in September, while core (ex-fresh food) came in at 2.7% y/y vs. 2.5% expected and actual in September. Headline accelerated for the first time since April to the highest since that month, while core accelerated for the first time since June. Core ex-energy came in at 3.8% y/y vs. 3.7% expected and a revised 3.9% (was 3.8%) in September, and was the lowest since June. Overall, the data do not bode well for the national readings. In turn, this will make it harder for the BOJ to maintain accommodative policy.

The data come ahead of the Bank of Japan meeting next week. No change in policy is expected but updated macro forecasts will be released. Reports suggest the BOJ will likely revise its core inflation forecasts upward at its October 30-31 policy meeting. The FY23 forecast will likely be closer to 3.0% vs. 2.5% seen in July, while the FY24 forecast will likely be 2.0% or more vs. 1.9% seen in July. The forecasts for FY24 and FY25 will be very important, as anything much above 2% would suggest the bank will likely start removing accommodation in early 2024. We look for an end to Yield Curve Control in either December or January, followed by liftoff in either March or April. Of note, WIRP suggests liftoff is 75% priced in for March 19.

Philippines central bank Governor Remolona seemed to downplay the risk of further hikes. One day after the bank surprised markets with a 25 bp intra-meeting hike and warned of “follow through policy action,” Remolona said “There’s a good chance we won’t hike, there’s a good chance we’ll pause, and there’s a chance we might hike, but 50 (bp) is a bit of a stretch.” Next scheduled policy meeting is November 16. While Remolona admitted that further tightening will be considered then, we believe future decisions will really be driven by the peso.

Indonesia is feeling the heat too. After surprising the markets with a 25 bp hike at its October 19 meeting, central bank official was asked about an intra-meeting move and responded “As a possibility, it is always there even if it is very small. But so far, the policy response delivered during the latest Board of Governors’ meeting is sufficient.” Next scheduled policy meeting is November 23. Here too, any future decisions will be driven by the rupiah as nearly every EM central bank is grappling with potential inflation pass-through from a weaker currency.