• The divergence story is alive and well; data highlight will be S&P Global preliminary October PMIs; Fed Beige Book for the upcoming November 6-7 FOMC meeting was released; September Chicago FAI will also be reported; BOC cut rates 50 bp to 3.75%, as expected; Brazil and Mexico report mid-October inflation data
  
• Key ECB officials continue to temper expectations of a steeper easing cycle; eurozone reported mixed preliminary October PMIs; U.K. reported soft preliminary October PMIs and CBI October distributive trades survey; BOE Governor Bailey’s comments yesterday were surprisingly balanced
  
• Japan reported weak preliminary October PMIs; Finance Minister Kato stuck to the government’s well-honed currency script; Australia reported mixed preliminary October PMIs; RBNZ Governor Orr managed expectations for more aggressive easing

The dollar is seeing a technical correction. DXY is trading lower for the first time since last Friday near 104.155 after making at a new high for this move yesterday near 104.570. It remains on track to test the July 30 high near 104.799 but looking further ahead, clean break above 103.848 sets up a test of the June 26 high near 106.130. The yen is outperforming, with USD/JPY trading lower near 151.85 after trading at a new high for this move near 153.20 yesterday. The euro is trading higher near $1.08 after trading at a new low for this move near $1.0760 yesterday. We believe it remains on track to test the June 26 low near $1.0665. Lastly, sterling is trading higher near $1.2970 after support held near $1.29. We believe that recent U.S. data and Fed comments continue to support a very gradual easing cycle. Market easing expectations for the Fed have adjusted after the recent spate of strong U.S. data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher. In the meantime, the weaker growth outlook for the rest of the world highlights the ongoing divergences that favor the greenback (see below).

AMERICAS

The divergence story is alive and well. Preliminary October PMIs weakened for most of the major economies that have reported so far today, with Japan’s composite PMI delivering the biggest shock by falling below 50 to the lowest since November 2022. The U.K. also saw its composite PMI fall sharply to the lowest since last November, while the eurozone and Australian composites remained below 50 despite modest improvements. Will the U.S. continue to outperform? All indications say yes.

U.S. data highlight will be S&P Global preliminary October PMIs. Manufacturing is expected to rise two ticks to 47.5, services is expected to fall two ticks to 55.0, and the composite PMI is expected to fall two ticks to 53.8. If so, it would be the second straight drop but would not be far off the cycle peak of 54.8 in June.

The Fed Beige Book for the upcoming November 6-7 FOMC meeting was released. Overall Economic Activity: On balance, economic activity was little changed in nearly all Districts since early September, though two Districts reported modest growth. Despite elevated uncertainty, contacts were somewhat more optimistic about the longer-term outlook. Labor Markets: On balance, employment increased slightly during this reporting period, with more than half of the Districts reporting slight or modest growth and the remaining Districts reporting little or no change. Wages generally continued to rise at a modest to moderate pace. Prices: Inflation continued to moderate with selling prices reportedly increasing at a slight or modest pace in most Districts. Multiple Districts reported that input prices generally rose faster than selling prices, compressing firms’ profit margins. This does not sound like a central bank that’s going to cut rates aggressively. Hammack speaks today. At midnight Friday, the media blackout goes into effect and there will be no Fed speakers until Chair Powell’s press conference November 7.

Financial conditions continue to loosen. The Chicago Fed’s weekly measure has now loosened ten straight weeks through last Friday and are the loosest since mid-November 2021. No wonder the economy continues to grow at a robust pace.

September Chicago Fed National Activity Index will also be reported. Positive readings represent above-trend growth. Headline is expected at 0.50 vs. 0.12 in August. If so, the 3-month moving average would rise to 0.07 vs. -0.17 in August. This would be the highest since October 2022 and would remain far above the -0.70 threshold that typically signals recession.

Regional Fed surveys will continue to roll out. Kansas City Fed manufacturing survey is expected to rise a point to -7. Its services survey will be reported tomorrow.

Bank of Canada cut rates 50 bp to 3.75%, as expected. It signaled more easing was in the pipeline as “we anticipate cutting our policy rate further to support demand and keep inflation on target.” Governor Macklem confirmed there was a “clear consensus” for a 50 bp cut. The updated inflation forecasts show inflation remaining close to the 2% target over the forecast horizon even as the bank noted that risks to its inflation outlook were “reasonably balanced.” Regardless, the BOC has plenty of room to cut rates further because policy is too tight and a downside risk to growth. At 3.75%, the BOC policy rate is still above the bank’s nominal neutral interest rate estimate of 2.25-3.25%.

Brazil reports mid-October IPCA inflation. Headline is expected at 4.43% y/y vs. 4.12% in mid-September. If so, it would be approaching the top of the 1.5-4.5% target range. At the last policy meeting September 18, COPOM started the tightening cycle with a 25 bp hike to 10.75% and delivered a hawkish statement. Next meeting is November 6 and a 50 bp hike to 11.25% is priced in. Looking ahead, the swaps market is pricing in 275 bp of total tightening over the next 12 months.

Mexico reports mid-October CPI data. Headline is expected at 4.66% y/y vs. 4.50% previously while core is expected at 3.82% y/y vs. 3.88% previously. While the acceleration in headline would be worrisome, policymakers have been putting more emphasis on core. At the last policy meeting September 26, Banco de Mexico delivered the second straight 25 bp cut by a 4-1 vote that took the policy rate down to 10.5%. It said that inflation may allow for the discussion of more rate cuts, adding that the balance of risks to growth were biased to the downside. Next meeting is November 14 and another 25 bp cut seems likely. The swaps market is pricing in 125 bp of total easing over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Key ECB officials continue to temper expectations of a steeper easing cycle. President Lagarde reiterated that rate cuts “should be continued with that caution element about it.” Lane noted that while there was “high conviction that the disinflation process is well on track”, the eurozone economy isn’t showing signs of “dramatic weakening.” Holzmann said “a quarter-point step is probable in December…A bigger half-point cut is unlikely though not impossible.” However, a few other ECB officials are more dovish. Centeno said the ECB is probably behind the curve and should consider steeper rate cuts while Panetta warned the ECB cannot exclude lowering the policy rate below neutral. The swaps market is still pricing in nearly 45% odds of a jumbo 50 bp cut in December, along with 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75% vs. 2.0% at the start of last week. Kazaks and Lane speak today.

Eurozone reported mixed preliminary October PMIs. Headline manufacturing came in at 45.9 vs. 45.1 expected and 45.0 in September, services came in at 51.2 vs. 51.5 expected and 51.4 in September, and the composite came in as expected at 49.7 vs. 49.6 in September. The country breakdown was mixed, as the German composite came in at 48.4 vs. 47.6 expected and 47.5 in September and the French composite came in at 47.3 vs. 48.9 expected and 48.6 in September. Italy and Spain will be reported with the final PMI readings in early November.

U.K. reported soft preliminary October PMIs. Headline manufacturing came in at 50.3 vs. 51.5 expected and actual in September, services came in at 51.8 vs. 52.4 expected and actual in September, and the composite came in at 51.7 vs. 52.5 expected and 52.6 in September. This was the second straight drop in the composite to the lowest since November 2023. The weak PMI print along with the sharp slowdown in inflation raise the likelihood the BOE dials up its easing cycle, which can further curtail GBP upside momentum on the crosses.

The CBI October distributive trades survey also came in soft. Total orders came in at -27 vs. -28 expected and -35 in September, while selling prices came in at 0 vs. 9 expected and 8 in September. Most importantly, its quarterly measure of business optimism came in at -24 vs. -5 expected and -9 in July and is the lowest since October 2022. CBI distributive trades survey will be reported next Monday.

BOE Governor Bailey’s comments yesterday were surprisingly balanced. While he did not hint at more aggressive rate cuts like he did earlier this month, Bailey acknowledged that “disinflation is happening I think faster than we expected it to, but we have still genuine question marks about whether there have been some structural changes in the economy.” Bailey also warned that services inflation (4.9% y/y in September) is still higher than what is consistent with target and the labor market was “probably loosening” but still tight. Bailey speaks again today. MPC member Mann also speaks today.

ASIA

Japan reported weak preliminary October PMIs. Manufacturing fell to 49.0 vs. 49.7 in September, services plunged to 49.3 vs. 53.1 in September, and the composite fell sharply to 49.4 vs. 52.0 in September. After peaking at 52.9 in August, the composite PMI has fallen two straight months to the lowest since November 2022. We had been expecting further weakness in the economy but the PMIs were much softer than even we anticipated. Given the deteriorating outlook, we do not expect the Bank of Japan to take a more hawkish tone at next week’s meeting. As such, the upward trend in USD/JPY should remain intact.

Finance Minister Kato stuck to the government’s well-honed currency script. He warned that “We are seeing one-sided, rapid moves…We will closely monitor the foreign exchange market with a stronger sense of urgency, including watching for speculative trading.” Still, it comes down to monetary policy divergences. Most observers assumed that Prime Minister Ishiba would be more hawkish but with the elections looming, he and his cabinet have turned out to be much more dovish. Let’s see if things change after this weekend’s vote.

Australia reported mixed preliminary October PMIs. Manufacturing fell a tick to 46.6, services rose a tick to 50.6, and the composite rose two ticks to 49.8. This was the first improvement in the composite since August but it has been below 50 for three of the past four months. Looking ahead, Australian activity may be buoyed temporarily by mainland China’s stimulus push. However, we still expect the RBA to join the global easing cycle later this year as underlying economic activity is weak and points to lower inflation pressures. Next week’s Q3 CPI report will either support our view or ensure the RBA continues to lag its international peers.

RBNZ Governor Orr managed expectations for more aggressive easing. Orr noted that policy will remain on the restrictive side “over the coming quarters as we get more and more confident that pricing behavior has renormalized.” Orr added that “on the way down we can be more incremental because we’re in calmer waters but also because of that lingering inflation persistence on the domestic side.” The swaps market responded quickly to Orr’s speech, with odds of a 75 bp cut in November falling to 25% from around 40% beforehand. Still, the RBNZ has plenty of room to continue easing as the policy rate of 4.75% is still well above the bank’s estimate for the nominal neutral rate range of 2-4%.