• Fed speakers this week have been mixed; there is a full slate today; financial conditions continue to loosen; weekly jobless claims will be closely watched; Mexico is expected to cut rates 25 bp to 10.5%
  
• French bonds trade wide of Spain; ECB easing expectations continue to intensify; Germany reported October Gfk consumer confidence; eurozone reported August money supply data; SNB cut rates 25 bp to 1.0%, as expected
  
• BOJ released minutes of the July 30-31 meeting; RBA released its semi-annual Financial Stability Review; China’s Politburo pledged stronger fiscal and monetary support to meet its annual economic goals

The dollar is treading water as markets await fresh drivers. DXY is trading flat near 100.872 as support near 100 continues to hold. Risk on impulses from China continue after the Politburo pledged fiscal stimulus (see below), with the Antipodeans outperforming today. The euro is trading higher near $1.1155 despite rising French bond yields (see below), while sterling is trading higher near $1.3380. EUR/CHF is trading lower near .94576 after the SNB cut rates 25 bp (see below), while USD/JPY is trading lower near 144.40. Despite the Fed’s efforts to push back in the Dot Plots and Powell’s press conference, market easing expectations remain too dovish. Yet the U.S. data remain firm and so we continue to believe that the market is once again overreacting and wrong in pricing in 200 bp of further easing over the next 12 months. Yet we cannot stand in the way of this move and so until market pricing changes, the dollar is likely to remain vulnerable. The divergence story favoring the U.S. was supported by today’s dovish 25 bp cut from the SNB that follows a similar move by the Riksbank yesterday.

AMERICAS

Fed speakers this week have been mixed. Yesterday, Kugler said that “I strongly supported last week’s decision and, if progress on inflation continues as I expect, I will support additional cuts in the federal funds rate going forward.” She added that “The labor market remains resilient, but the FOMC now needs to balance its focus so we can continue making progress on disinflation while avoiding unnecessary pain and weakness in the economy as disinflation continues in the right trajectory.” Others such as Bowman and Kashkari have sounded more cautious about easing.

There is a full slate of speakers today. Collins, Kugler, Bowman, Powell, Williams, Barr, Cook (twice), and Kashkari all speak today. They run the gamut from hawks to doves and so the comments are likely to be all over the place. We advise looking through the comments in favor of studying the data. As long as the economic data hold up, it will be hard for the Fed to justify an aggressive easing cycle. That said, the market is still pricing in 75 bp of easing by year-end and 200 bp total over the next 12 months.

Financial conditions continue to loosen. The Chicago Fed’s measure for last week loosened for the 6th straight week and were the loosest since mid-November 2021, months before the Fed started hiking rates. With U.S. yields flat, equity markets up, and the dollar down, condition are likely to continue loosening this week. So regardless of how the debate at the Fed develops for the November and December meetings, the market continues to do the heavy lifting for the Fed.

Weekly jobless claims will be closely watched. That’s because continuing claims will be for the BLS survey week containing the 12th of the month and are expected at 1.828 mln vs. 1.829 mln last week. Initial claims are expected at 223k vs. 219k last week. If so, the 4-week moving average would fall to 225k vs. 228k last week and would be the lowest since late May. Despite all the worries about the labor market, the data suggest it remains relatively robust.

We get another Q2 GDP revision. Growth is expected to fall a tick to 2.9% SAAR. Of course, this is old news as markets are already looking ahead to Q3 and Q4. The New York Fed’s Nowcast model is tracking Q3 growth at 3.0% SAAR and Q4 growth at 2.7% SAAR. Both estimates will be updated tomorrow. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.9% SAAR and will also be updated tomorrow after the data. The Fed's updated macro forecasts may be a tad too optimistic but we agree with the directional message; that is, we see a soft landing as the U.S. avoids recession.

Regional Fed surveys for September will continue rolling out. Kansas City Fed manufacturing is expected at -5 vs. -3 in August. This will be followed by its services reading tomorrow, which stood at 5 in August. Dallas Fed closes things out early next week.

Banco de Mexico is expected to cut rates 25 bp to 10.5%. A few of the analysts polled by Bloomberg look for a larger 50 bp cut but we think that’s unlikely given the split 3-2 vote to cut in August, with the dissents in favor of no cut. Inflation is easing, albeit slowly, and should support a cautious easing cycle ahead. The market is pricing in 75 bp of easing over the next three months and 250 bp of total easing over next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Markets continue to give a thumbs down to the new French cabinet. French bond yields have spiked and France’s 10-year spread to Germany has risen to 81 bp. It is now trading above Spain (at 80 bp) for the first time since 2007 and remains well above Portugal (at 57 bp). The new cabinet announced last weekend is a mix of conservatives and centrists, with opposition parties already threatening no confidence votes that could topple the government. Even if Macron’s government survives, its ability to pass a budget will be severely constrained. This is yet another headwind for the euro.

The other headwind is intensifying ECB easing expectations. Odds of an October cut have risen to around 66% vs. 25% at the end of last week. The battle between the hawks and the doves will continue to play out. After the hawks seized control the narrative after the September 12 decision, the doves have been gaining ground as the economic outlook has since deteriorated significantly. Lagarde, Guindos, and Schnabel speak later today.

Germany reported October Gfk consumer confidence. Headline came in at -21.2 vs. -22.5 expected and a revised -21.9 (was -22.0) in September. However, with the economic outlook darkening, we do not expect this improvement to be long-lived.

Eurozone reported firm August money supply data. Broad monetary growth (M3) rose at an 18-month high of 2.9% y/y vs. 2.5% expected and 2.3% in July. The details show bank lending to households grew 0.6% y/y, up from 0.5% in July, and growth in loans to firms edged up to 0.8% y/y vs. 0.5% in July. Overall, credit dynamics are improving but remain weak by historical standards.

Swiss National Bank cut rates 25 bp to 1.0%, as expected. There were risks of a larger 50 bp move but the SNB stuck with the current pace of easing. However, the bank warned that “further cuts in the SNB policy rate may become necessary in the coming quarters to ensure price stability over the medium term.” Moreover, the SNB’s new inflation forecasts are significantly lower than June’s, suggesting the bar for additional easing is very low. The market is fully pricing in 25 bp cuts at the December and March meetings, with nearly 45% odds of a third cut in June 2025 that would take the policy rate down to 0.25%. EUR/CHF should continue to rise on the dovish SNB message as well as ongoing global risk on market sentiment. Of note, this meeting was the last one chaired by outgoing SNB President Thomas Jordan. Martin Schlegel takes the helm on October 1.

ASIA

Bank of Japan released minutes of the July 30-31 meeting. At that meeting, it delivered a hawkish surprise as it voted 7-2 to hike the policy rate 15 bp to 0.25% vs. no change expected. In addition, the bank said it would reduce its monthly bond-buying to JPY3 trln vs. JPY6 trln previously. According to the minutes, one board member felt that the bank needed to raise rates in a timely and gradual manner, while another felt that adjusting policy didn’t imply monetary tightening. One said the neutral rate is at least 1%, while another said that the bank must proceed with more policy adjustments if inflation is in line with its forecasts.

However, the BOJ policy stance has changed since the July BOJ meeting. Indeed, the BOJ subsequently delivered a dovish hold at last week’s meeting. Governor Ueda and other members have warned that the bank was in no rush to remove policy accommodation in part, because financial markets are still unstable. The swaps market is only pricing in 20 bp of total tightening over the next 12 months which is a major headwind for the yen.

The RBA released its semi-annual Financial Stability Review. The bank pointed out that financial stability risks from the increase in housing loan arrears, company insolvencies, and commercial real estate (CRE) vacancy rates remain contained. Meanwhile, the quantity and quality of Australia bank capital has continued to improve and bank liquidity has been resilient.

China’s Politburo pledged stronger fiscal and monetary support to meet its annual economic goals. The Politburo vowed to further stabilize the property sector, strengthen employment support for college graduates, improve the consumption structure, and improve policies to boost the country’s birthrate. The announcement comes on the heels of this week’s pump-priming measures by the PBOC aimed at shoring up the country’s beleaguered property market and supporting the stock market. While the measures are likely to boost market sentiment temporarily, they do not address the huge debt overhang that is likely to weigh on growth over the medium-term.