• Markets continue to party like it’s 1999; Fed tightening expectations remain too low; October jobs report will be the highlight; ISM services PMI will also be important; Canada highlight will also be October jobs data
  
• The BOE delivered a dovish hold, as expected; Governor Bailey sent very mixed signals; U.K. reported final October services and composite PMIs; both BOE and ECB easing expectations have been moved forward; Germany reported weak September trade data; Czech delivered a hawkish hold
  
• Australia reported Q3 real retail sales and final October services and composite PMIs; Caixin reported soft October services and composite PMIs; reports suggest Korea is considering a temporary ban on short sales of local equities

The dollar is trading lower as markets embrace the dovish Fed narrative. DXY is trading lower for the third straight day near 106 and clean break below 106.03 sets up a test of the October 24 low near 105.36. The euro is trading higher near $1.0645 and clean break of $1.0625 sets up a test of the October 24 high near $1.07. Sterling is trading higher near $1.2225 despite the BOE’s dovish hold (see below) and clean break of $1.2205 sets up a test of the October 24 high near $1.2290. USD/JPY is trading heavy near 150.25 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. Today’s jobs report will be key.

AMERICAS

Markets continue to party like it’s 1999. The Fed has done nothing to dissuade the markets from embracing its dovish narrative and so here we are. Yet there is no doubt that this week's more than 35 bp drop in the U.S. 10-year yield and more than 5% gain in the S&P 500 will loosen financial conditions. The Chicago Fed’s weekly measures come out every Wednesday and had been tightening very modestly since mid-September. Until now. This tightening should reverse quite a bit when this week's conditions are reported next Wednesday.

Fed tightening expectations remain too low. WIRP suggests only 20% odds of a hike December 13, rising modestly to top out near 33% January 31. The first cut isn’t fully priced in until July 31. It will be interesting to see how Fed officials react to recent market moves. Barr, Barkin, Kashkari, and Bostic all speak today. The weekly update to the New York Fed’s Nowcast model will be released later today 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 jobs report will be the highlight. Bloomberg consensus sees 180k for NFP vs. 336k in September, while its whisper number stands at 201k. 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. Of note, NFP has outperformed ADP the past two months.

October ISM services PMI will also be important. 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. This reading will be much more important than ISM manufacturing, which came in at a weaker than expected 46.7 earlier this week.

Canada highlight will also be October jobs data. Consensus sees 25.0k jobs added vs. 63.8k in September, with the unemployment rate seen rising a tick to 5.6%. If so, it would be the highest rate since January 2022. Bank of Canada tightening expectations have evaporated. With growth slowing and inflation falling, the bank delivered a dovish hold last week and markets took notice. WIRP suggests less than 5% odds of a hike December 6, rising modestly to top out near 15% January 24. The first rate cut is mostly priced in for July 24.

EUROPE/MIDDLE EAST/AFRICA

The Bank of England delivered a dovish hold, as expected. The vote was 6-3 and so the number of dissents in favor of a hike fell from the 5-4 vote in September. The bank said restrictive policy is likely needed for an extended period. It said the GDP profile is weaker than what it predicted in August and it now sees a 50% chance of a recession in the forecast period. This was reflected in the updated forecasts, as GDP will be “broadly flat” in the first half of the forecast period. Lastly, the bank said that half of the tightening so far has yet to hit the economy.

Governor Bailey sent very mixed signals. He said the bank is watching to see if further rates hikes are needed, adding it’s much too early to consider rate cuts. Bailey said that while the bank expects inflation to fall this year and next, he stressed that there is “no room for complacency” on inflation. However, Bailey then said the bank shouldn’t keep restrictive policy for too long.

BOE easing expectations have been moved forward. WIRP suggests only 20% odds of a hike December 14, rising modestly to top out near 33% February 1. More importantly, the first cut has been moved forward to September 19 from Q4 before the decision. Hauser, Pill, and Haskel all speak Friday.

The U.K. reported final October services and composite PMIs. Services improved to 49.5 vs. 49.2 preliminary, which helped pull the final composite up a tick to 48.7. Given the BOE’s rather grim forecasts, we expect the composite PMI to remain firmly below 50 for the foreseeable future.

ECB easing expectations have also been moved forward. 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 over 80% odds of a cut April 11 and fully priced in for June 6. De Cos and Centeno speak Friday. The doves control the narrative now.

Germany reported weak September trade data. Exports came at -2.4% m/m vs. -2.0% expected and a revised 0.1% (was -1.2%) in August, while imports came in at -1.7% m/m vs. -0.1% expected and a revised -0.3% (was -0.4%) in August. The y/y rates for both are at or near cycle lows of -7.5% and -16.6%, respectively. Elsewhere, France reported soft September IP at -0.5% m/m vs. 0.0% expected and a revised -0.1% (was -0.3%) in August.

Czech National Bank delivered a hawkish hold yesterday. A 25 bp cut to 6.75% was expected but the bank decided not to start the easing cycle yet. The vote was 5-2 with the two dissents in favor of a cut. Governor Michl said a weaker koruna has partially eased monetary conditions and that the core CPI outlook was a key argument for standing pat. He said initial rate cuts will be small and gradual and that cut and hold options are in play for the December meeting. The swaps market is pricing in 100 bp of easing over the next three months, which seems way too aggressive given the bank’s cautious stance.

ASIA

Australia reported Q3 real retail sales and final October services and composite PMIs. Sales came in at 0.2% q/q vs. -0.3% expected and a revised -0.6% (was -0.5%) in Q2. This was the first positive q/q reading after three straight negative ones and suggests that the Australian consumer is resilient. Elsewhere, both final services and composite PMIs rose three ticks from the preliminary to 47.9 and 47.6, respectively. RBA tightening expectations remain elevated. WIRP suggests 50% 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 60% June 18.

Caixin reported soft October services and composite PMIs. Services came in at 50.4 vs. 51.0 expected and 50.2 in September, which dragged the composite down to 50.0 vs. 50.9 in September. This was the lowest composite reading since December and is consistent with the drop in the official composite PMI to 50.7. Indeed, both Caixin and official PMI readings confirm our skepticism that the modest stimulus measures taken so far will have much lasting impact.

Reports suggest Korea is considering a temporary ban on short sales of local equities. The ban would reportedly be kept in place until regulations and systems related to short selling show “fundamental improvement.” The Financial Services Commission is preparing a detailed plan to be unveiled next week, followed by a final plan to be drawn up before November 21. Korea currently allows short-selling on equities listed in the Kospi 200 and Kosdaq 150 indexes but has maintained its pandemic-era ban on short sales of more than 2,000 other stocks, which are mostly small caps. Retail investors have been complaining about short sales, which many feel favor foreign and institutional investors. Stay tuned.