• The market continues to overestimate Fed easing; the Fed push back has begun; S&P Global preliminary September PMIs were solid; Conference Board September consumer confidence will be today’s data highlight; Brazil central bank releases its minutes; Mexico reports mid-September CPI
  
• Germany reported a weak September IFO survey; ECB easing expectations have picked up after soft data this week; Hungary is expected to cut rates 25 bp to 6.5%.
  
• Governor Ueda continued to indicate the BOJ is in no rush to remove policy accommodation; Japan reported softer preliminary September PMIs; RBA kept rates steady at 4.35%, as expected; PBOC announced a package of stimulus measures and also took steps to support China’s stock market

The dollar recovery is taking a breather. DXY is trading lower for the first time since last Wednesday near 100.809. The growth-sensitive majors and EM FX are outperforming after China announced a package of stimulus and market support measures (see below). The yen is underperforming as Japan returned from holiday, with USD/JPY trading higher near 144. The euro is trading higher near $1.1135 despite the weak German IFO survey (see below), while sterling is along for the ride and trading higher near $1.3370. 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 dead wrong in pricing in 175-200 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 confirmed by the September PMI readings (see below).

AMERICAS

The market continues to overestimate Fed easing. The Fed has tried its best to rein in dovish expectations but the market is still pricing in 75 bp of easing by year-end and 175-200 bp total over the next 12 months. This is pricing in a hard landing and does not reflect what we see shaping up to be a soft landing. We expect Fed officials to push back against the market in the coming days and weeks.

Indeed, the Fed push back has begun. Kashkari wrote that “After 50 bp, we’re still in a net tight position so I was comfortable taking a larger first step. As we go forward, I expect, on balance, we will probably take smaller steps unless the data changes materially.” He added that 25 bp cuts at the November and December meetings are a “reasonable starting point,” which puts him right at the median Dot Plot for this year. Bowman speaks today. As the only dissent in favor of a 25 bp cut last week, her comments will lean hawkish. Ahead of the weekend, Bowman said she feared that a jumbo cut sends a “premature victory” message to the markets. We concur.

Other Fed officials were less hawkish. Bostic said “My residual concern about inflation might have led me to settle on a relatively small first move last week - say, 25 bp. But such a move would belie growing uncertainty about the trajectory of the labor market.” Elsewhere, Goolsbee said “As we’ve gained confidence that we are on the path back to 2%, it’s appropriate to increase our focus on the other side of the Fed’s mandate — to think about risks to employment. That likely means many more rate cuts over the next year.”

S&P Global preliminary September PMIs were solid. Manufacturing came in at 47.0 vs. 48.6 expected and 47.9 in August, services came in at 55.4 vs. 55.2 expected and 55.7 in August, and the composite came in at 54.4 vs. 54.3 expected and 54.6 in August. ISM PMIs will be reported next week.

The divergence story should continue to favor the dollar. The composite PMIs for the eurozone and Australia are already below 50. China official PMIs will be reported next Monday and the composite is likely to fall from an already weak 50.1 in August. Japan and the U.K. both showed some weakening in its composite PMI but are holding up relatively well compared to Europe and the Antipodeans. The U.S. sits at the top of the heap.

Conference Board September consumer confidence will be today’s data highlight. Headline is expected at 104.0 vs. 103.3 in August. If so, it would be the highest since February but would still remain roughly within the same narrow range that’s held throughout the past two years. Positive real wage growth, rising house prices, and encouraging labor demand suggest household spending will remain an important tailwind to GDP growth. University of Michigan reports final September consumer sentiment Friday.

August Chicago Fed National Activity Index was firm. Headline came in at 0.12 vs. -0.20 expected and a revised -0.42 (was -0.34) in July. However, the 3-month moving average still fell to -0.17 vs. -0.13 in July. While this was the lowest since March, this average is still well above the -0.7 threshold that typically signals recession.

Regional Fed surveys for September will continue rolling out. Philly Fed non-manufacturing and Richmond Fed manufacturing (-12 expected) and services will be reported today. Kansas City Fed manufacturing will be reported Thursday, followed by its services reading Friday. Dallas Fed will close things out next week.

Brazil central bank releases its minutes. At last week’s meeting, it started the tightening cycle with a 25 bp hike to 10.75% and said that the risks to the inflation outlook are tilted to the upside and requires more restrictive monetary policy. It releases its quarterly inflation report Thursday. In between, Brazil reports mid-September IPCA inflation tomorrow. Next COPOM meeting is November 6 and the market is pricing in a 50 bp hike to 11.25%. Looking ahead, the market is pricing in 225 bp of total tightening over the next 12 months that would see the policy rate peak near 13.0%.

Mexico reports mid-September CPI. Headline is expected at 4.71% y/y vs. 4.83% previously, while core is expected at 3.96% y/y vs. 4.01% previously. If so, headline would be the lowest since May while core would be the lowest since early 2021. Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 10.5%. A few of the analysts polled Bloomberg look for a larger 50 bp cut but we think that’s unlikely given the split 3-2 vote to cut in August. 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

Germany reported a weak September IFO survey. Headline came in at 85.4 vs. 86.0 expected and 86.6 in August, driven by larger than expected drops in both current assessment and expectations to 84.4 and 86.3, respectively. This was the lowest headline reading since February. IFO President Fuest noted that “The key weakness is really manufacturing, which is so important. We see this weakness across the board really - machinery, the chemical industry, electrical equipment and the car industry. Companies are telling us we are lacking orders. Now, on top of that, we have weaknesses in the service sector.” October Gfk consumer confidence will be reported Thursday and is expected at -22.5 vs. -22.0 in September. August retail sales were also reported at 1.8% y/y s. a revised -4.3% (was -3.9%) in July, and the strength was surprising given the ongoing drop in sentiment indicators.

ECB easing expectations have picked up after soft data this week. As the economic outlook darkens, the doves are regaining control of the narrative as market odds for an October cut have risen to over 55% vs. 25% at the end of last week. The battle between the hawks and the doves will continue to play out even as the growth outlook looks set to worsen. Muller said today that while he isn’t “totally” ruling out an October cut, “It’s early to express a clear position on the interest-rate decision in October. It will be easier to decide in December because then we’ll again have a full picture with an updated outlook.” Escriva and Nagel speak later today.

National Bank of Hungary is expected to cut rates 25 bp to 6.5%. At the last meeting August 27, the bank kept rates steady at 6.75% as expected but said that “There may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception.” Deputy Governor Virag added that he continues to see 1-2 more rate cuts this year. The market is pricing in 125 bp of total easing over the next 12 months.

ASIA

Bank of Japan Governor Ueda continued to indicate the BOJ is in no rush to remove policy accommodation. Ueda reiterated plans to tighten policy further if the economic outlook comes in as forecasts, but added that “In making policy decisions, the bank will need to carefully assess factors such as developments in financial and capital markets at home and abroad, and the situation in overseas economies underlying these developments. We have enough time to do so.” Some analysts have been calling for a December hike but we think it will be a 2025 story. Furthermore, the market is only pricing in 15-20 bp of total tightening over the next 12 months.

Japan reported softer preliminary September PMIs. Manufacturing fell two ticks to 49.6, services rose two ticks to 53.9, and the composite fell four ticks to 52.5. With signs of slowdown emerging in the hard data, we believe that the composite PMI will continue to fall in the months ahead from the cycle high of 52.9 in August.

Reserve Bank of Australia kept rates steady at 4.35%, as expected. The bank stuck to its neutral guidance that “the Board is not ruling anything in or out” and cautioned again “that it will be some time yet before inflation is sustainably in the target range” and stressed “the need to remain vigilant to upside risks to inflation.” However, Governor Bullock toned down the hawkish rhetoric and confirmed during her post-meeting press conference that the Board “didn’t explicitly consider a rate hike this time.” We expect the RBA to join the global easing cycle later this year because underlying economic activity is weak and points to lower inflation pressures. The market sees 55% odds of a 25 bp cut by December. Updated macro forecasts won’t come until the November 5 meeting.

August CPI data tomorrow will be important. Headline is expected at 2.7% y/y vs. 3.5% in July. If so, it would be the lowest since August 2021 and back within the 2-3% target range. The reading would reflect the government’s cost-of-living subsidy measures (electricity rebates and increases to rent assistance) and lower gas prices. CPI trimmed mean inflation stood at 3.8% y/y in July and has fallen two straight months.

The People's Bank of China announced a package of stimulus measures and signaled more easing may be in the pipeline. The PBOC will cut the policy-relevant 7-day reverse repurchase rate 20 bp to 1.50% and slash commercial bank reserve requirement ratio by 50 bp,. It also announced a broad set of policies to shore up China’s beleaguered property market, including reducing the down payment ratio on second homes to 15% from 25%, lowering rates for existing mortgages, and increasing central bank support for buying unsold homes.

The PBOC also took steps to support China’s stock market. The bank plans to set up swap and relending facilities that would allow securities firms, funds. and insurance companies to tap liquidity from the central bank to buy stocks. Reports also suggest policymakers may create a market stabilization fund. While these measures may boost market sentiment temporarily, policymakers are still not addressing the root causes. In order to escape the debt-deflation loop, Chinese policymakers first need to address the huge debt overhang before scaling up fiscal measures to boost consumption growth. China's consumption-to-GDP ratio is very low at round 30%, in large part due to high household savings.