• Fed officials remain cautious; U.S. growth remains robust; September NFIB small business optimism improved slightly; Chile reports September CPI data
  
• The ECB hawks are capitulating; Germany reported firm August IP; U.K. BRC reported firm September sales; Sweden reported September CPI data
  
• Japan reported soft August cash earnings data; Japan August current account data showed large capital outflows; RBA released dovish minutes; markets were disappointed that China did not announce further stimulus measures

The dollar recovery is taking a breather. With little in the way of fresh drivers until U.S. inflation data later this week, DXY is consolidating and trading lower for the first time since September 27 near 102.382. USD/JPY is trading lower near 148 despite soft wage data that supports BOJ caution (see below). The euro is trading flat near $1.0985, while sterling is trading slightly higher near $1.3095. We believe the recent U.S. data and Fed comments continue to support a very gradual easing cycle (see below). Market easing expectations for the Fed have adjusted after the strong jobs data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher.

AMERICAS

Fed officials remain cautious. Musalem said “Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late. I believe that further gradual reductions in the policy rate will likely be appropriate over time.” He added that he penciled in a rate path that was slightly higher than the median, which suggests he saw only one more 25 bp cut vs. the median two. Kugler said she “strongly supported” the 50 bp cut last month but stressed that the Fed remains data-dependent going forward. Bostic, Collins, and Jefferson speak later today. Virtually all Fed officials have moved into the gradual camp. After the jobs data, even uber-dove Goolsbee finally stopped calling for “a lot more easing” over the next year.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.5% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 3.1% SAAR and Q4 growth at 2.8% SAAR and will be updated Friday. Momentum in the economy remains strong and so little slowdown is likely as we go into 2025.

September NFIB small business optimism improved slightly. Headline came in at 91.5 vs. 92.0 expected and 91.2 in August and was the second straight monthly gain. August trade data will be reported later today.

Chile reports September CPI data. Headline is expected at 4.4% y/y vs. 4.7% in August. If so, it would be the first deceleration since August but would remain above the 2-4% target range. At the last meeting September 3, the central bank cut rates 25 bp to 5.5% and warned that both bank credit and consumer spending were weak. The bank added that if the economy meets its forecasts, “the reduction of the key rate toward its neutral level will be somewhat faster than expected in June.” Next meeting is October 17 and another 25 bp cut to 5.25% is expected. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 4.25%..

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank hawks are capitulating. With regards to next week’s decision, Nagel said “I want to wait until the actual meeting, but I am certainly open to considering the possibility of taking another interest rate step.” He added that “The inflation trend certainly is a bit of good news.” Nagel speaks again later today. The economic outlook has clearly deteriorated significantly even as price pressures have weakened sharply. As such, an October 17 cut is almost fully priced in along with four more cuts through mid-2025. Odds of a sixth cut in Q3 stand around 66%. The doves have the upper hand now and are unlikely to relinquish it.

Germany reported firm August IP. IP came in at 2.9% m/m vs. 0.8% expected and a revised -2.9% (was -2.4%) in July, while the y/y rate came in at -2.7% vs. -3.8% expected and a revised -5.6% (was -5.3%) in July. Yesterday, August factory orders came in at -5.8% m/m vs. -2.0% expected and a revised 3.9% (was 2.9%) in July, while the y/y rate came in at -3.9% y/y vs. -1.6% expected and a revised 4.6% (was 3.7%) in July. Germany reports a slew of data this week. Trade data will be reported tomorrow, retail sales will be reported Thursday, and current account data will be reported Friday. The data should confirm that Germany continues to slide into recession, with reports emerging that the government now forecasts a -0.2% contraction this year after -0.3% last year.

U.K. BRC reported firm September sales. Sales came in at 1.7% y/y vs. 0.8% expected and actual in August. This was the fastest pace since March and was driven by a recovery in non-food sales, notably clothing. The data bode well for official retail sales data due out October 18. While a November cut remains fully priced in, the odds of a follow-up December cut remains around 50% as the BOE is expected to maintain its cautious easing stance.

Sweden reported September CPI data. Headline fell three ticks as expected to 1.6% y/y, CPIF fell a tick as expected to 1.1% y/y, and CPIF ex-energy came in a tick higher than expected at 2.0% y/y vs. 2.2% in August. CPIF was the lowest since December 2020 and further below the 2% target. Next meeting is November 7 and the market sees 50% odds of a 50 bp cut. Looking ahead, the market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 2.0%, which is lower than the Riksbank’s 2.25% projection. Unless inflation cools more than expected, there is room for interest rate expectations to converge further towards the Riksbank’s forecast.

ASIA

Japan reported soft August cash earnings data. Nominal earnings came in a tick higher than expected at 3.0% y/y vs. 3.4% in July, while real earnings came in a tick lower than expected at -0.6% y/y vs. 0.3% in August and was the first negative reading since May. Scheduled earnings came in tick lower than expected at 2.9% y/y vs. 3.0% in July. Japan’s modest wage improvement so far is unlikely to change the BOJ’s more cautious approach to remove policy accommodation, as most board members view financial markets as still unstable even as signs of softness spread in the economy.

Japan also reported August current account data. The adjusted surplus came in at JPY3.017 trln vs. JPY2.419 trln expected and JPY2.803 bln in July. However, the investment flows will be of more interest. The August data show that Japan investors were net buyers of U.S. bonds (JPY5.593 trln) for the second straight month and at a record amount. Japan investors stayed net buyers (JPY78.9 bln) of Australian bonds for the third straight month and also stayed net buyers of Canadian bonds (JPY42.8 mln) for the third straight month. Investors became net buyers of Italian bonds (JPY27.3 bln) after two straight months of net selling. Overall, Japan investors became a total net buyer of foreign bonds (JPY7.450 trln) and was the most since September 2007. With the uptrend in Japan yields interrupted by the BOJ’s dovish pivot, it’s likely that Japan investors will continue chasing higher yields abroad.

Reserve Bank of Australia released its minutes. At the September 24 meeting, the RBA left the cash rate target unchanged at 4.35% and stuck to its neutral guidance. However, the minutes points to a dovish shift as the bank scrapped the August meeting minutes guidance that “it was unlikely that the cash rate target would be reduced in the short term.” Of note, RBA Deputy Governor Hauser later rejected the “dovish” description of the September minutes by noting that the bank’s job of bringing down inflation is “not done yet.” That said, we expect the RBA to join the global easing cycle later this year as underlying economic activity is weak and indicative of lower inflation pressures. The market sees around 50% odds of a 25 bp cut by December.

Markets were disappointed that China did not announce further stimulus measures. After returning from holiday, the National Development and Reform Commission said policymakers would speed up spending and reiterated plans to boost investment and increase direct support for low-income groups and recent college graduates. Officials added that China will continue to issue ultra-long sovereign bonds next year to support major projects and will also bring forward to this year CNY100 bln of investment in key strategic areas that were planned for next year. NDRC Chair Zheng Shanjie stressed that “We are fully confident in achieving the annual economic and social development targets.” We acknowledge that the increased liquidity will boost asset markets, but the markets will be left asking for more and more as these measures are unlikely to significantly impact the real economy. Indeed, we believe that relying on more debt to boost growth will only worsen the huge debt overhang that is the root problem in China.

Taiwan reported mixed September trade data. Exports came in at 4.5% y/y vs. 10.9% expected and 16.8% in August, while imports came in at 17.3% y/y vs. 12.4% expected and a revised 11.7% (was 11.8%) in August. The weakness in export growth is particularly disappointing given the low base effects from last year. Elsewhere, the improvement in export orders has stalled out, suggesting that shipments will continue to slow in the coming months. As a regional bellwether, this does not bode well for the Asian outlook.