Dollar Flat as Key Data Week Begins

September 30, 2024

Win Thin

This will be a big week in terms of U.S. data; September Chicago PMI will be the data highlight; U.S. growth remains robust; Brazil reports August consolidated budget data; Colombia is expected to cut rates 50 bp to 10.25%
Eurozone September CPI data continue to roll out; the ECB doves are gaining the upper hand; U.K. reported August money supply data
Japan will go to the polls soon; Japan reported weak August real sector data; New Zealand September ANZ business confidence came in firm; China reported September PMIs; China announced more measures to stabilize the housing sector

The dollar is mixed at the start of a key data week. DXY is trading flat near 100.360 as markets await fresh clues on Fed policy. However, risk on sentiment continues to build as China announced more support measures (see below). The yen and Swiss franc are underperforming, with USD/JPY trading higher near 142.80 and EUR/CHF trading higher near .94486. The euro is trading higher near $1.1190 despite lower CPI readings that support an ECB cut in October (see below), while sterling is trading higher near $1.3390. Market easing expectations for the Fed are starting to adjust 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. Perhaps this week’s data will support our view.

AMERICAS

This will be a big week in terms of U.S. data. While we will get two jobs reports before the November 6-7 FOMC meeting, the September jobs data this Friday will set the near-term tone for markets. While the market is currently putting 40% odds of a 50 bp cut then, we believe recent Fed comments suggest that most favor a gradual easing path. The market is now pricing in only 175 bp of total tightening over the next 12 months, down from 200 bp last week. Ahead of the weekend, St. Louis Fed President Musalem said that “For me, it’s about easing off the brake at this stage. It’s about making policy gradually less restrictive.” We expect Fed comments this week to remain cautious. Bowman and Powell speak today.

September Chicago PMI will be the data highlight. Headline is expected to fall a tick to 46.0. However, this series has correlated badly with the national PMIs over the past year or so and so offers limited insight. Dallas Fed reports its September manufacturing survey today (-10.3 expected) and its services survey tomorrow. ISM manufacturing PMI will also be reported tomorrow and ISM services PMI will be reported Thursday.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.1% SAAR and will be updated tomorrow 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.

Brazil reports August consolidated budget data. A primary deficit of -BRL21.5 bln is expected vs. -BRL21.3 bln in July. Central government budget data will be reported Thursday and a primary deficit of -BRL22.6 bln is expected vs. -BRL9.3 bln in July. Loose fiscal policy has forced the central bank to take a more hawkish stance. After the initial 25 bp hike to 10.75% in September, the market is now pricing in three straight 50 bp hikes in November, December, and January and sees a terminal rate of 13% over the next 12 months.

Colombia central bank is expected to cut rates 50 bp to 10.25%. However, 7 of the 27 analysts polled by Bloomberg look for a larger 75 bp cut. At the last policy meeting July 31, the bank cut rates 50 bp to 10.75% by a 5-2 vote, with the two dissents in favor of a larger 75 bp cut. Since then, inflation has continued to fall to 6.12% y/y in August, the lowest since December 2021. The swaps market is pricing in 375 bp of total easing over the next 12 months that would see the policy rate bottom near 7.0%. Minutes will be released Thursday.

EUROPE/MIDDLE EAST/AFRICA

Eurozone September CPI data continue to roll out. Italy’s EU Harmonised inflation came in as expected at 0.8% y/y vs. 1.2% in August. Germany reports later today and is expected at 1.8% y/y vs. 2.0% in August. Eurozone then reports CPI data tomorrow and we see downside risks. Headline is expected to fall three ticks to 1.9% while core is expected to fall a tick to 2.7% y/y. If so, headline would be the lowest since June 2021 and below the 2% target. Last week, France’s EU Harmonised inflation came in at 1.5% y/y vs. 1.9% expected and 2.2% in August, while Spain’s came in at 1.7% y/y vs. 1.9% expected and 2.4% in August. Spain is one of the only eurozone countries to report core inflation and it came in at 2.4% y/y vs. 2.8% expected and 2.7% in August.

The ECB doves are gaining the upper hand. With economic data softening, market odds for an October cut have risen to 75% and two cuts by year-end are fully priced in. Lagarde speaks today and it will be interesting to see if her tone has softened from the September meeting. Even the hawks are starting to acknowledge the worsening economic outlook and that will only intensify this week.

U.K. reported August money supply data. The readings were mixed and so do not move the dial on BOE easing expectations. M4 money supply growth slowed to 1.7% y/y vs. 2.1% in July and is consistent with soft economic activity. However, the pick-up net mortgage approvals point to a continued recovery in housing market activity. Net mortgage approvals for house purchase rose from 62,500 in July to 64,900 in August, the highest level since August 2022 (72,000).

The Bank of England is widely expected to cut rates 25 bp at the November 7 meeting. There are some BOE officials speaking this week. MPC member Greene speaks today. Chief Economist Pill speaks tomorrow and Friday. Both Greene and Pill dissented in favor of steady rates August 1, when the bank began the easing cycle with a 25 bp cut to 5.0%. Mann and Haskel also dissented then but Haskel was replaced by Taylor for the 8-1 decision September 19 to hold rates steady. Then, only Dhingra dissented in favor of a 25 bp cut.

ASIA

Japan will go to the polls soon. Incoming Prime Minster Shigeru Ishiba said he intends to call a general election for October 27, adding “It is important that the new government be judged by the people as soon as possible.” Ishiba is expected to be confirmed by parliament tomorrow. Meanwhile, a shakeup in Japan’s cabinet is in the works as Ishiba brings in his own team. Reports suggest Katsunobu Kato replace Shunichi Suzuki as Finance Minister. Elsewhere, reports suggest former Defense Minister Takeshi Iwaya is being considered to be the next Foreign Minister.

Japan reported weak August real sector data. IP came in at -4.9% y/y vs. -1.5% expected and 2.9% in July, sales came in at 2.8% y/y vs. 2.6% expected and a revised 2.7% (was 2.6%), and housing starts came in at -5.1% y/y vs. -3.5% expected and -0.2% in July. These readings confirm the recent softening in the economy.

New Zealand September ANZ business confidence came in firm. The forward-looking business confidence index rose 10 points to a 10-year high of 60.9, while the own activity outlook rose 8 points to a 10-year high of 45.3. Reported past activity, which has the best correlation to GDP, remains very weak at -18.5 vs. -23 in August. For the next October 9 RBNZ meeting, the swaps market has fully priced-in a 25 bp cut and sees 58% odds of a 50 bp rate reduction.

China reported September PMIs. Official manufacturing PMI came in at 49.8 vs. 49.4 expected and 49.1 in August, non-manufacturing came in at 50.0 vs. 50.4 and 50.3 in August, and the composite rose three ticks to 50.4. Elsewhere, Caixin manufacturing PMI came in at 49.3 vs. 50.5 expected and 50.4 in August, services came in at 50.3 vs. 51.6 expected and actual in August, and the composite fell to 50.3 vs. 51.2 in August. Caixin had been outperforming the official readings but the two have finally come back into line, with both series pointing to continued weakness in the economy.

Policymakers announced more measures to stabilize the housing sector. Shanghai and Shenzen will allow more home purchases in suburban areas by a greater number of people while Guangzhou will stop reviewing homebuyer eligibility and will no longer limit the number of homes owned. All three will also lower minimum down payment ratios for first and second homes to 15% and 20%, respectively. Lastly, homeowners will be able to renegotiate with their lenders and refinance mortgages effective November 1. All these moves have boosted sentiment but when all is said and done, they are unlikely to address the oversupply of housing and will have little impact as long as the huge debt overhang remains in place.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.