• The government shutdown has been avoided; this means the Fed will see key September inflation data before the November 1 FOMC decision; U.S. yields continue to rise; September ISM manufacturing PMI will be the data highlight
  
• ECB doves have the upper hand; eurozone and U.K. reported final September manufacturing PMIs; U.K. Chancellor Hunt ruled out tax cuts; Riksbank released hawkish minutes
  
• BOJ released the summary of opinions for the September 21-22 meeting; with JGB yields rising, the BOJ announced an extra bond-buying operation on Wednesday; Q3 Tankan survey came in firm; Japan and Australia reported final September manufacturing PMI; China reported mixed September PMI readings over the weekend

The dollar is trading higher as the much-needed correction seems to have run its course. DXY is trading higher near 106.504 after two straight down days and remains on track to test the November 30 high near 107.195. The euro is trading lower near $1.0540 and remains on track to test the November 30 low near $1.0290, while sterling is trading lower near $1.2155 and remains on track to test the March low near $1.1805. USD/JPY is trading at a marginal new high near 149.80 and remains on track to test the October high near 152. Today’s price action supports our view that last week’s dollar weakness was corrective in nature and was most likely driven by quarter end rebalancing. Looking beyond that noise, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended.

AMERICAS

The government shutdown has been avoided. At least, for now. The stopgap spending bill passed at the eleventh hour will keep the government funded until November 17. That gives Congress over a month and a half to reach an actual deal on the budget but as we have seen time and time again, it will most likely go right down to the wire again. Complicating things is the likelihood that Republican rebels will try to remove Speaker McCarthy from his post. While the drama will play out in the coming days and weeks, markets can breathe a sigh of relief that a shutdown did not come to pass.

This means the Fed will see key September inflation data before the November 1 FOMC decision. Odds of a hike then have risen to 33% and move higher to over 50% December 13. Powell, Harker, Williams, and Mester speak today. Powell is one of the leading centrists on the FOMC, while Harker and Williams have emerged as leading doves. Mester is in the hawkish camp. As such, expect their comments today to reflect this.

U.S. yields continue to rise. The 10-year yield traded at a new cycle high near 4.69% last week before shutdown fears interrupted the climb. It is trading near 4.63% today. Elsewhere, the 30-year yield traded at a new cycle high near 4.81% before falling back a bit but is trading near 4.75% today. Due to a perfect storm of bond-negative drivers, one can easily make a case for a 5-handle on long dated U.S. Treasuries. U.S. real yields continue to climb, with the real 10-year trading today at a new cycle high near 2.30%.

September ISM manufacturing PMI will be the data highlight. Headline is expected at 47.9 vs. 47.6 in August. Keep an eye on employment and prices paid, which stood at 48.5 and 48.4 in August, respectively. Services PMI will be reported Wednesday and the headline is expected at 53.5 vs. 54.5 in August. Keep an eye on employment and prices paid, which stood at 54.7 and 58.9 in August, respectively. August construction spending will also be reported today and is expected at 0.5% m/m vs. 0.7% in July. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 4.9% SAAR and the next update will come later today after the data.

EUROPE/MIDDLE EAST/AFRICA

ECB doves have the upper hand. Guindos said “We reckon this level of rates, if maintained over time, will make a substantial contribution to our goal, which is the convergence of inflation toward the 2% target.” Guindos speaks for many at the bank and so tightening expectations remain restrained, even more so after the rather benign September inflation data reported last week. WIRP suggests no odds of a hike October 26, then rising modestly to top out near 15% December 14. The first cut is still seen around mid-2024, but leaning more towards June than July previously.

The eurozone reported final September manufacturing PMIs. Headline manufacturing PMI remained steady from the preliminary at 43.4. Looking at the country breakdown, German fell two ticks from the preliminary to 39.6 while France rose six ticks from the preliminary to 44.2. Italy and Spain reported for the first time and came in at 46.8 and 47.7, respectively, and both were more than a full point higher than expected. Services and composite PMIs will be reported Wednesday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 48.7 and 49.2, respectively.

U.K. Chancellor Hunt ruled out tax cuts. Specifically, Hunt said that the U.K.no fiscal headroom to cut taxes and that reducing the tax burden now would be inflationary. Hunt is spot on but many Tory backbenchers want tax cuts t ahead of general elections next year. Not surprisingly, former Prime Minister Truss is one of those calling for tax cuts despite her disastrous effort to do so a year ago. Hunt is the headline speaker at the Tory party conference that begins today and will clearly set forth a message of fiscal responsibility, at least for now.

We may already have seen the end of the BOE tightening cycle. After last month’s dovish hold by the Bank of England, WIRP suggests only 35% odds of a hike November 2, rising to top out near 80% March 21. This is a far cry from the 6.5% peak policy rate that was priced in over the summer and so removes the sole pillar of support for sterling. The first cut is not expected until Q4 2024. Mann speaks later today. As the leading hawk on the MPC, expect her comments to reflect this.

The U.K. reported final September manufacturing PMI. Headline manufacturing PMI came in a tick higher than preliminary at 44.3. Final services and composite PMIs will be reported Wednesday and construction PMI will be reported Thursday.

Riksbank released hawkish minutes. At the September 21 meeting, the bank hiked rates 25 bp to 4.0% and said rates could be raised further. Minutes showed that Governor Thedeen said “I can envisage further tightening being necessary so that we can be reasonably sure that inflation will continue down to our target of 2%.” Elsewhere, First Deputy Governor Anna Breman said “Our monetary policy strategy must allow for the possibility of setbacks on the way back to sustainably low and stable inflation, in which case a further rise this year and/or next year may be necessary.” Deputy Governors Floden and Jansson both saw risks of higher rates. However, the hawkish message was blunted by an expected rate path that was little changed, with the policy rate seen peaking at 4.10% in Q3 2024 vs. 4.05% in Q2 2024 in the June forecasts. This implies less than 50% odds of one last hike this year. WIRP reflects this and shows only 40% of a hike at the November 23 meeting.

ASIA

Bank of Japan released the summary of opinions for the September 21-22 meeting. That meeting ended with a dovish hold. However, there seems to be some subtle movement towards an eventual pivot. One member said the 2% inflation target was “clearly” in sight and that the bank may be able to judge in Q1 if the target has been met. Another member said that “Japan’s economy is getting closer to achieving the price stability target, although there is somewhat of a distance to go.” Over the weekend, Governor Ueda said there is “still a distance to go” before the bank shifts its current monetary policy stance, adding “Sustainable and stable achievement of the price stability target of 2% has not yet come in sight.” BOJ liftoff expectations have been pushed out, with WIRP suggesting 5% October 31, 20% December 19, 70% January 23, and fully priced in for March 19.

With JGB yields rising, the BOJ announced an extra bond-buying operation on Wednesday. Extra purchases of 5- to 10-year JGBs will be made and follows an unscheduled bond-buying operation last Friday, the third since the last YCC tweak in July. JGP yields continue to climb to levels last seen in 2013 and 2014, driven not only by the expected BOJ pivot but also by firm Japan data and rising global yields.

Q3 Tankan survey came in firm. Large manufacturing index came in at 9 vs. 6 expected and 5 in Q2, while large manufacturing outlook came in at 10 vs. 6 expected and 9 in Q2. Elsewhere, large non-manufacturing index came in at 27 vs. 24 expected and 23 in Q2, while large non-manufacturing outlook came in at 21 vs. 23 expected and 20 in Q2. The Q2 pickup in large manufacturing was a bit surprising and the further pickup in Q3 is even more surprising. All industry Capex came in at 13.6% vs. 13.5% expected and 13.4% in Q2.

Japan reported final September manufacturing PMI. Headline manufacturing PMI fell a tick from the preliminary to 48.5. Final services and composite PMIs will be reported Wednesday.

Australia reported final September manufacturing PMI. Headline manufacturing PMI rose half a point from the preliminary to 48.7. Final services and composite PMIs will be reported Wednesday.

China reported mixed September PMI readings over the weekend. Official PMIs were reported Saturday, as manufacturing came in a tick higher than expected at 50.2 vs. 49.7 in August and non-manufacturing came in a tick higher than expected at 51.7 vs. 51.0 in August. As a result, the composite rose for the second straight month to 52.0. However, Caixin reported its PMI readings Sunday evening, as manufacturing came in at 50.6 vs. 51.2 expected and 51.0 in August and services came in at 50.2 vs. 52.0 expected and 51.8 in August. As a result, the composite fell for the fourth straight month to 50.9. The two series have been diverging lately and we think the Caixin measure is telling the true story. Simply put, we do not think the bounce in the recent data can be sustained when global growth is slowing and domestic stimulus measures have so far been very mild.