• U.S. yields have fallen sharply due to a combination of factors; the two-day FOMC meeting ended with a dovish hold; Chair Powell stuck to the dovish script that prevailed before the meeting; U.S. Treasury’s quarterly refunding announcement proved to be positive for bonds; ADP and JOLTS data offered conflicting snapshots of the labor market; October ISM manufacturing PMI was disappointing
  
• BOE decision is due shortly and another dovish hold is expected; BOE will release the results of its October DMP inflation survey; even the ECB hawks have become doves; Final eurozone October manufacturing PMIs came in soft; Norges Bank kept rates steady at 4.25%, as expected; Switzerland reported October CPI; Czech is expected to start the easing cycle with a 25 bp cut to 6.75%
  
• Japan Prime Minister Kishida announced a stimulus package totaling more than JPY17 trln; Australia reported September trade and home loan data; Malaysia kept rates steady at 3.0%, as expected

The dollar is trading lower in the wake of the FOMC decision. DXY is trading lower near 106.167 after two straight up days and a clean break below 106.03 sets up a test of the October 24 low near 105.36. DXY traded as high as 107.113 right after the Fed decision before falling steadily during Chair Powell’s press conference as he repeated the prevailing dovish narrative (see below). The euro is trading higher near $1.0635 and clean break of $1.0625 sets up a test of the October 24 high near $1.07. Sterling is trading higher ahead of the BOE decision (see below) near $1.2190 and clean break of $1.2205 sets up a test of the October 24 high near $1.2290. USD/JPY is trading heavy near 150.35 due to the lack of any follow-through buying after making a new cycle high near 151.70 Tuesday. Looking through this current bout of Fed-related weakness, we believe the dollar’s uptrend remains intact. Despite Powell’s dovish narrative, the U.S. economy continues to grow above trend even as the rest of the world slips into recession. Recent data confirm that the U.S. economy is still running hot and needs further tightening. Eventually, the Fed (and the market) will have to acknowledge this.

AMERICAS

U.S. yields have fallen sharply due to a combination of factors yesterday. First, the quarterly refunding announcement turned out to better than expected in terms of supply. Then we got softer than expected ADP and ISM manufacturing PMI readings. Lastly, we got a hold from the Fed that was mostly hawkish but just dovish enough to keep a lid on future tightening expectations. After trading at a new cycle high near 5.02% last week, the 10-year yield has fallen to 4.72% today. Similarly, after trading at a new cycle high near 5.18% last week, the 30-year yield has fallen to 4.90% today. Even the short end took part; after trading at a new cycle high near 5.26% last month, the 2-year yield has fallen to 4.95% today.

The two-day FOMC meeting ended with a dovish hold. The vote was unanimous. The statement said that tighter financial and credit conditions continue to weigh on the economy and reiterated that will assess the extent of additional policy firming needed. However, it acknowledged that job gains have moderated in early 2023 but remain strong, while economic activity expanded at “a strong pace” in Q3. Updated macro forecasts and Dot Plots won’t come until the December meeting. The statement itself came in pretty much as expected but as always, the press conference was key.

Chair Powell stuck to the dovish script that prevailed before the meeting. Powell said the Fed was attentive to the increase in longer-term yields and that financial conditions have tightened “significantly.” He stressed that its prior hikes would take time to impact the economy and that we are just now seeing the effects of its 2022 hikes. Powell stressed that evidence of growth remaining above potential could warrant a rate hike and acknowledged that the staff did not put recession back into the forecasts. This buys into the soft landing narrative that the Fed doves have been pushing.

Powell gave no forward guidance. While he said the Fed was not confident it had reached the policy stance needed to get inflation back to the 2% target, Powell stress that the Fed is going meeting by meeting and hasn’t made any decision on the next one in December. He rejected the idea that it would be hard to hike again after pausing. Powell stressed that the Fed isn’t thinking about or talking about rate cuts. Instead, he said the Fed is asking itself “should we hike more?” While this was not particularly dovish, the market hears what it wants to hear and took this as a reluctance on the part of the Fed to tighten further.

The dollar peaked right after the Fed decision before falling steadily during Chair Powell’s press conference. Powell had a chance to reestablish a more hawkish narrative and he simply did not rise to the occasion. As a result, the greenback remains under pressure today as Fed expectations remain subdued. The odds of another hike in January fell to 25% vs. 33% before the decision. U.S. yields were already falling and Powell’s press conference pushed rates down further. In turn, this is taking a toll on the dollar. Still, whatever the market thinks the Fed thinks, it will still come down to the data and that makes Friday's jobs data all the more important. We continue to believe that the U.S. economy remains robust enough to require further tightening. Paese speaks today while Barr and Kashkari speak tomorrow.

The U.S. Treasury’s quarterly refunding announcement proved to be positive for bonds. After Treasury lowered its borrowing estimate for Q4 Monday to $776 bln vs. $852 bln seen in late July, it boosted its UST auction sizes to $112 bln vs. $114 bln expected and $103 bln set back in August. Treasury boosted sales at the short end more than the long end, with monthly 2-year note sales increased by $3 bln through January, 3-year by $2 bln, 5-year by $3 bln, 7-year by $1 bln, 10-year by $2 bln, and 30-year by $1 bln. There was no change to 20-year sales. Treasury also downplayed any future increases by noting “As these changes will make substantial progress towards aligning auction sizes with projected borrowing needs, Treasury anticipates that one additional quarter of increases to coupon auction sizes will likely be needed beyond the increases announced today.”

ADP reported lower than expected October private sector jobs. Headline came in at 113k vs. 150 expected and 89k in September. We noted that NFP has outperformed ADP the past two months. Bloomberg consensus sees 180k for NFP vs. 336k in September, while its whisper number stands at 206k. We’re going to go out on a limb here and say there are still upside risks to NFP. Initial claims for the October BLS survey week were the lowest since the January survey week. NFP came in at 517k that month vs. 189k expected. We’re not saying we'll get half a million new jobs in October, but we do think it will be more than the 180k consensus. The unemployment rate is seen steady at 3.8% and average hourly earnings are seen falling two ticks to 4.0% y/y.

On the other hand, September JOLTS data surprised to the upside. Job openings came in at 9.553 mln vs. 9.400 mln expected and a revised 9.497 mln (was 9.610 mln) in August. This was the highest since May. Of note, layoffs fell to 1.517 mln vs. 1.682 mln in August and were the lowest since December, quits were basically flat at 3.661 mln, and hires rose slightly to 5.871 mln. Bottom line: the labor market remains tight. We get more labor market data today, as weekly jobless claims, Q3 nonfarm productivity and unit labor costs, and October Challenger job cuts will all be reported. September factory orders will also be reported and are expected at 2.3% m/m vs. 1.2% in August.

The U.S. economy is showing mixed signs so far in Q4. The Atlanta Fed GDPNow model was revised to 1.2% SAAR vs. the initial 2.3% forecast from last Friday and 4.9% actual in Q3. These early readings are subject to a lot of volatility as new information comes in. Next update will come Tuesday. The weekly update to the New York Fed’s Nowcast model will be released tomorrow and stands at 2.79% SAAR vs. 2.27% previously. If we get another reading above 2% SAAR for Q4, it would be the sixth straight quarter of above trend growth at a time when the Fed is trying to generate below trend growth. It’s still very difficult the say that the Fed has done enough tightening.

October ISM manufacturing PMI was disappointing. Headline came in at 46.7 vs. 49.0 expected and actual in September. The details were also weak, with employment at 46.8 vs. 51.2 in September, new orders at 45.5 vs 49.2 in September, and prices paid at 45.1 vs. 43.8 in September. ISM services PMI is more important and will be reported Friday. Headline is expected at 53.0 vs. 53.6 in September. Keep an eye on employment and prices paid, which stood at 53.4 and 58.9 in September, respectively.

EUROPE/MIDDLE EAST/AFRICA

The Bank of England decision is due shortly and another dovish hold is expected. At the last meeting September 21, it kept rates steady at 5.25% by a 5-4 vote, and we think the number of dissents in favor of a hike will drop today. The bank said then that further tightening may be required if inflation persists, adding that policy must be restrictive enough for a “sufficiently long” period of time. Here too, the market isn’t buying it. WIRP suggests odds of one more hike near 25% December 14, rising modestly to top out near 30% February 1. Updated macro forecasts will be released today and Bailey holds a post-decision press conference. Of note, sterling tends to weaken on BOE decision days. Cable has ended lower 4 straight and 8 of the past 9.

The BOE will release the results of its October DMP inflation survey later today. Inflation expectations had been trending lower but now remain stuck at levels way above the 2% target.

Even the ECB hawks have become doves. Knot said “Personally, and conditional on incoming data confirming the latest projections from September, I see the current level of our policy rates as a good ‘cruising altitude’ where they can remain for some time.” While President Lagarde warned of further hikes if needed, the market isn’t buying it. WIRP suggests no odds of a hike December 14 and after that, only rate cuts are priced in, with a cut now fully priced in for April 11 and a second cut fully priced in July 18. Lane and Schnabel speak later today.

Final eurozone October manufacturing PMIs were reported. Headline came in a tick higher than the preliminary at 43.1. Germany rose a tick to 40.8 from the preliminary while France rose by two ticks to 42.8. Italy and Spain reported for the first time and came in at 44.9 and 45.1, respectively. Both fell significantly from September. Final services and composite PMIs won’t be reported until November 6.

Norges Bank kept rates steady at 4.25%, as expected. It was a dovish hold. While the bank repeated its September statement that another raise was “likely” at the December meeting based on the economic outlook, it left the door open to another hold if it becomes “more assured that underlying inflation is on the decline.” Updated macro forecasts and expected rate path won’t come until the December 14 meeting. Of note, WIRP suggests 45% odds of one more hike next month.

Switzerland reported October CPI. Headline came in steady as expected at 1.7% y/y, while core picked up a tick more than expected to 1.5% y/y vs. 1.3% in September. Headline has remained under the 2% target for the fifth straight month. At the last policy meeting September 21, the Swiss National Bank unexpectedly kept rates steady at 1.75% vs. an expected 25 bp hike. The bank said that "From today's perspective, it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.” President Jordan said the battle against inflation is not yet over and that the bank is closely monitoring second round effects, but added that “we could afford to take a break from hikes.” With inflation remaining low, WIRP suggests no odds of a hike December 14, followed by more than 25% odds of a rate cut March 21 that becomes fully priced in for June 20.

Czech National Bank is expected to start the easing cycle with a 25 bp cut to 6.75%. However, the market is split as basically half the analysts polled by Bloomberg see no change. At the last policy meeting September 27, the bank kept rates steady and Governor Michl said inflation was still at “unacceptably” high levels. Since then, inflation fell more than expected to 6.9% y/y but the koruna has weakened by around 1% vs. the euro, which the bank sees as equivalent to 25 bp of easing. The swaps market sees 75 bp of total easing over the next three months, followed by another 100 bp over the subsequent three months.

ASIA

Japan Prime Minister Kishida announced a stimulus package totaling more than JPY17 trln. The measures are meant to boost growth and help households hurt by inflation, and comes at a time when support for his administration is fading. Sources suggest key provisions of the package will include income and residential tax rebates worth JPY3.5 trln and aid for low-income households worth more than JPY1.0 trln. Kishida said that around JPY13.1 trln of new spending will be funded by an extra budget, adding “We’re seeing the chance to transition into a new economic stage for the first time in three decades. The key here is to strengthen firms’ ability to earn, which in turn can become the source of wage hikes.”

Australia reported September trade and home loan data. Exports came in at -1.4% m/m vs. 4.6% in August, while imports came in at 7.5% m/m vs. -0.8% in August. Exports to China came in at 4.4% m/m, while exports to Japan came in at -4.1% m/m. These two countries are by far its largest trading partners. The y/y rates diverged, with exports worsening to -14.0% vs. -8.1% in August and imports improving to 2.0% vs. -5.9% in August. Elsewhere, home loans came in at 0.6% m/m vs. 1.0% expected and a revised 2.4% (was 2.2%) in August. WIRP suggests 55% odds of a hike November 7, rising to 80% December 5 and fully priced in for February 6. Odds of a second hike top out near 50% in Q2.

Bank Negara kept rates steady at 3.0%, as expected. The bank noted that “The expectations of a higher-for-longer interest rate environment in the US, and increased concerns over the escalation of geopolitical tensions have contributed to a persistently strong US dollar. Nevertheless, these developments are not expected to derail Malaysia’s growth prospects.” It stressed that it would continue to manage the risks by providing liquidity and ensuring an orderly FX market. The swaps market is pricing in steady rates over the next 12 months.