• The U.S. Treasury’s quarterly refunding exercise kicks off today; the U.S. economy so far remains robust in Q4; regional Fed surveys for October wrap up
  
• October eurozone CPI readings have started rolling out; the doves control the ECB narrative now; eurozone Q3 GDP data also started rolling out; SNB announced it will no longer pay interest on some commercial bank reserves
  
• The two-day BOJ meeting began today and ends tomorrow with a decision; updated macro forecasts will be key; Australia reported firm September retail sales data; RBNZ said its financial system remains robust

The dollar is treading water as an eventful week begins. DXY is trading flat for the second straight day near 106.482 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 slightly higher near $1.0580. Clean break of $1.0540 sets up a test of the October 3 low near$1.0450. Sterling is trading flat near $1.2130 and remains on track to test the October 4 low near $1.2035. USD/JPY is trading flat near 149.65 ahead of the BOJ decision tomorrow (see below). If policy is kept steady, look for this pair to trade back above 150. 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

The U.S. Treasury’s quarterly refunding exercise kicks off today. Treasury will release updated borrowing estimates for Q4 and will then follow up with its quarterly refunding announcement Wednesday that specifies the actual auction sizes to be held. Recall that the last quarterly refunding exercise surprised markets with much larger than anticipated borrowing needs. On Monday July 31, Treasury boosted its net borrowing estimate for Q3 to $1 trln vs. $733 bln forecast in May and estimated its Q4 net borrowing at $852 bln. It followed up Wednesday August 2 with larger planned UST longer-dated auction sizes of $103 bln in the quarterly refunding announcement, the first increase in two and a half years. Not coincidentally, that was when UST yields at the long end broke higher. Given how deficits and borrowing costs have risen, we see upside risks to this week’s quarterly refunding.

The U.S. economy so far remains robust in Q4. The Atlanta Fed GDPNow model published its first estimate for Q4 last Friday at 2.3% SAAR vs. 4.9% actual in Q3. Elsewhere, the weekly update to the New York Fed’s Nowcast model saw Q4 growth at 2.79% SAAR vs. 2.27% previously. It’s early days still but if we get another reading above 2% SAAR for Q4, it would be the sixth straight quarter of above trend growth at a time when the Fed is trying to generate below trend growth. It’s very difficult the say that the Fed has done enough tightening.

Regional Fed surveys for October wrap up. Dallas Fed manufacturing survey is expected at -16.0 vs. -18.1 in September. This will be followed by its services survey Tuesday, which stood at -8.6 in September. The manufacturing sector has held up relatively well, and the likely end of the auto strikes should be seen as very positive for this sector.

EUROPE/MIDDLE EAST/AFRICA

October eurozone CPI readings have started rolling out. Spain reported today and its EU Harmonised CPI came in at 3.5% y/y vs. 3.8% expected and 3.3% in September. Spain is one of the few eurozone countries to report core inflation and it came in at 5.2% y/y vs. 5.6% expected and 5.8% in September. Germany reports later today and is expected at 3.3% y/y vs. 4.3% in September. However, state data already reported today suggests slight upside risks to the national reading. France and Italy report tomorrow. France’s EU Harmonised CPI is expected at 4.5% y/y vs. 5.7% in September, while Italy’s is expected at 2.3% y/y vs. 5.6% in September.

Eurozone-wide readings will be reported tomorrow. Headline is expected at 3.1% y/y vs. 4.3% in September, while core is expected at 4.2% y/y vs. 4.5% in September. If so, headline would be the lowest since August 2021 and within sight of the 2% target. Of note, high base effects are a factor in the October drop in y/y inflation but will turn into low base effects in November and December. This could boost the y/y rates going into year-end. However, the data will continue to support steady rates from the ECB.

The doves control the ECB narrative now. While President Lagarde warned of further hikes if needed, the market isn’t buying it. WIRP suggests no odds of a hike December 14 and after that, only rate cuts are priced in, with 80% odds of a cut April 11 and fully priced in for June 6. Simkus said “In my view, if there’s no new staggering data, current restrictive levels are sufficient. There is and there was no need to raise rates at this point. Will we need this in the future? We still have to wait and see. I’m hopeful this won’t be needed.” However, Kazimir warned “Bets on rate cuts happening already in the first half of next year are entirely misplaced. We will have to stay at the peak for the next few quarters.” Guindos speaks later today.

Eurozone Q3 GDP data also started rolling out. Germany reported today and it came in a tick higher than expected at -0.1% q/q vs. a revised 0.1% (was 0.0%) in Q2. It’s hard to get excited about Germany when its GDP has contracted q/q for 3 of the past 5 quarters. Italy and France report tomorrow. Italy is expected at 0.1% q/q vs. -0.4% in Q2, while France is expected at 0.0% q/q vs. 0.5% in Q2. Eurozone also reports tomorrow and is expected at 0.0% q/q vs. 0.1% in Q2. Spain reported last Friday and came in at 0.3% q/q vs. 0.2% expected and a revised 0.4% (was 0.5%) in Q2.

The Swiss National Bank announced it will no longer pay interest on some commercial bank reserves. As of December, the SNB will stop paying interest to banks for funds meeting minimum reserve requirements. Also, the SNB will lower the threshold factor for tiered remuneration of sight deposits, which will reduce the amount of funds that are fully eligible to earn interest from the SNB. However, the SNB stressed that “these adjustments will ensure that monetary policy implementation remains effective and will reduce interest costs for the SNB” and added that the “changes have no impact on the current monetary policy stance.” Some estimate that the moves will save the SNB nearly CHF400 mln of interest payments annually.

ASIA

The two-day Bank of Japan meeting began today and ends tomorrow with a decision. No change in policy is expected. Despite the higher than expected October Tokyo CPI reported last week, we believe the bank will remain cautious right now. Instead, we look for an end to Yield Curve Control either December 19 or January 23, followed by liftoff either March 19 or April 26. Of note, WIRP suggests liftoff is nearly priced in for March 19.

The updated macro forecasts will be key. Reports suggest the Bank of Japan will likely revise its core inflation forecasts upward at this 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.

Australia reported firm September retail sales data. Sale came in at 0.9% m/m vs. 0.3% expected and a revised 0.3% (was 0.2%) in August. The y/y rate came in at 2.0% vs. 1.6% in August and was the first acceleration since January. Private sector credit will be reported tomorrow and is expected at 0.3% m/m vs. 0.4% in August. Q3 real retail sales will be reported Friday and are expected at -0.3% q/q vs. -0.5% in Q2..

RBA tightening expectations remain elevated after the higher than expected CPI data reported last week. WIRP suggests 50% odds of a hike November 7, rising to 75% December 5 and fully priced in for February 6. Odds of a second hike top out near 60% in Q2.

Reserve Bank of New Zealand said its financial system remains robust and well-placed to deal with any potential challenges. This comes just days before the bank publishes its Financial Stability Report Wednesday and so its website article is a good preview. The bank wrote that “The international comparison shows New Zealand’s financial system is faced with similar challenges as other countries but appears robust and in a good position to face potentially looming challenges.” It noted that “Borrowers in countries with a large share of mortgages on shorter fixed terms such as New Zealand and Australia are experiencing substantially higher debt servicing costs, putting strain on household budgets.” However, “Despite most of mortgage debt having already rolled over to higher interest rates, signs of household stress remain muted in New Zealand.” The good news is that the RBNZ’s tightening cycle is over, with WIRP suggesting only 35% odds of another hike.