• House Speaker McCarthy was ousted; U.S. yields hit new highs before retreating; Fed officials remain split; ADP private sector jobs estimate will be closely watched; August JOLTS data support our view that the labor market remains very tight; September ISM services PMI will also be important; Colombia central bank releases its minutes
  
• ECB President Lagarde reiterated her policy stance; the eurozone and the U.K. reported final services and composite PMIs; August eurozone retail sales were weak; BOE Governor Bailey warned of persistent inflation; U.K. Prime Minister Sunak will speak at the Tory annual conference; Poland is expected to cut rates 25 bp to 5.75%
  
• Japan would not confirm that it conducted FX intervention; Japan and Australia reported final September services and composite PMIs; RBNZ kept rates steady at 5.5%, as expected

The dollar is trading softer ahead of ADP. DXY traded at a new cycle high near 107.348 but has fallen back to trade near 106.78 after yesterday’s big FX moves. USD/JPY traded at a new cycle high near 150.15 yesterday before plunging in a matter of minutes to 147.45 and then recovering to 149.10 currently. Without a shift in monetary policy divergences, we believe the pair will resume its climb. The euro traded at a new cycle low near $1.0450 yesterday but is currently trading near $1.05. It remains on track to test the November 30 low near $1.0290. Sterling traded at a new cycle low near $1.2035 yesterday but is currently trading near $1.2125. It remains on track to test the March low near $1.1805. Like last week’s correction, we believe this week’s dollar weakness is also corrective in nature. Looking beyond the potential intervention noise, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended.

AMERICAS

House Speaker McCarthy was ousted. The vote was 216-210, with 8 Republican rebels joining all the Democrats in removing him. McCarthy can run again for Speaker but he has already ruled it out. Republican lawmakers say they expect the first vote for the next Speaker to be held October 11. There are no official candidates yet but McCarthy’s number two Steve Scalise said he is making calls to gauge support for a potential run for the post. Our understanding is that the House cannot take up any legislative work without a Speaker in place. As such, a protracted leadership vote would divert much-needed work away from getting a budget passed before the stopgap measure expires November 17. Stay tuned.

U.S. yields hit new highs before retreating. The 10-year yield traded at a new cycle high near 4.88% today before falling back to 4.82% currently, while the 30-year yield traded at a new cycle high near 5.01% before falling back to 4.94% currently. Due to a perfect storm of bond-negative drivers, a 5-handle on long dated U.S . Treasuries now seemed inevitable and here we are. We think this pullback is a temporary one. U.S. real yields continue to climb, with the real 10-year trading today at a new cycle high near 2.46%.

Fed officials remain split. Noted hawk Mester said “If the economy looks the way it did at the next meeting similar to the way it looked at our recent meeting, I would do the further rate increase.” She added “We’ll wait and see all the data coming in and make the evaluation at the time.” On the other hand, noted Dove Bostic said “I am not in a hurry to raise, but I am not in a hurry to reduce either. I want us to hold. I think that’s the appropriate thing to do, for a long time.” Markets are also split. Odds of a hike November 1 stand near 30% and move higher to peak near 50% December 13. Given how strong recent data have come in, these odds should be much higher. Bowman and Goolsbee speak today. Bowman is in the hawk camp and Goolsbee is in the dove camp and so their comments will clearly reflect this.

ADP private sector jobs estimate will be closely watched. Consensus stands at 150k vs. 177k in August. While ADP has proven to be a poor predictor of NFP, it nonetheless remains one of the major clues. Challenger job cuts and weekly jobless claims will be reported tomorrow. After that comes September jobs report Friday. Bloomberg consensus stands at 170k vs. 187k in August but its whisper number stands at 180k. The unemployment rate is expected to fall a tick to 3.7% while average hourly earnings are expected to remain steady at 4.3% y/y.

August JOLTS data support our view that the labor market remains very tight. Headline openings came in at 9.61 mln vs. a revised 8.92 mln (was 8.827 mln) in July. This was the highest reading since May. Hires rose to 5.857 mln, quits rose to 3.638 mln, and layoffs were basically flat at 1.68 mln. The labor market remains as tight as ever and so solid job creation is likely to continue in the coming months.

September ISM services PMI will also be important. Headline is expected at 53.5 vs. 54.5 in August. Keep an eye on employment and prices paid, which stood at 54.7 and 58.9 in August, respectively. August factory orders will also be reported and are expected at 0.3% m/m vs. -2.1% in July. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 4.9% SAAR. Next update comes tomorrow after the data.

Colombia central bank releases its minutes. At last week’s meeting, the bank kept rates steady at 13.25% by a 5-2 vote, with the two dissents in favor of a cut. Governor Villar said that “The majority of the board considers that, with the available information, it isn’t prudent to start a process of cutting interest rates, the sustainability of which would face important risks.” Next meeting is October 31 and no change is expected then either. The swaps market is pricing in 25 bp of easing over the next three months, which would imply a 25 bp cut at the December 19 meeting. This seems plausible in light of the bank’s recent caution.

High carry just isn't offering any protection from this relentless dollar rally. Worst EM performers yesterday were MXN, BRL, COP, CLP, and ZAR. All are high yielders that did well in H1 but are now coming under increasing pressure in H2. USD/BRL traded at the highest since March 30 near 5.17 and is on its way to testing that month's high near 5.34. Similarly, USD/MXN traded at the highest since April near 18.2165 and is on its way to testing that month’s high near 18.40.

EUROPE/MIDDLE EAST/AFRICA

ECB President Lagarde reiterated her current stance. Similar to the September meeting, she said that future ECB decisions “will ensure that the interest rates will be set at sufficiently restrictive levels for as long as necessary.” Recall that this was her oblique way of signaling that rates had likely peaked but would be kept there for an extended amount of time. Except for a handful of holdout hawks, most ECB officials since that last meeting have specifically said that policy rates have likely peaked at current levels. The market has listened. WIRP suggests less 5% odds of a hike October 26, then rising modestly to top out near 15% December 14. The first cut is still seen around mid-2024, but now leaning more towards June than July previously. Centeno, Guindos,, and Panetta speak later today.

The eurozone reported final services and composite PMIs. Headline services rose three ticks from the preliminary to 48.7, while the composite rose 1 tick from the preliminary to 47.2. Looking at the country breakdown, Germany’s composite rose two ticks from the preliminary to 46.4 and France’s rose six ticks from the preliminary to 44.1. Italy and Spain reported for the first time and their composite PMIs came in at 49.2 and 50.1, respectively, both up sharply from August. Spain’s composite spent only one month below the 50 boom/bust line but it is not out of the woods by any stretch.

August eurozone retail sales were weak. Sales came in at -1.2% m/m vs. -0.5% expected and a revised -0.1% (was -0.2%) in July, while the y/y came in at -2.1% vs. -1.0% expected and actual in July. This was the weakest y/y reading since May.

BOE Governor Bailey warned of persistent inflation. He sees inflation falling to 5% “or a bit below” by year-end but added that after that, “we still have a way to go to bring it down” to the 2% target. This suggests limited scope to cut rates next year. WIRP suggests only 35% odds of a hike November 2, rising to 65% December 14 and topping out near 75% February 1. This is a far cry from the 6.5% peak policy rate that was priced in over the summer and so removes the sole pillar of support for sterling. The first cut is not expected until Q4 2024, which fits in with Bailey’s inflation outlook.

U.K. Prime Minister Sunak will speak at the Tory annual conference. He is widely expected to lay out his vision for the U.K. in what is really the start of the campaign season. Elections are likely to be held in Q4 of next year, giving Sunak only one year to boost his party’s popularity. The conference slogan “Long-Term Decisions for a Brighter Future” will surely be tested as Sunak faces some critical and possibly unpopular choices. Sunak has already backtracked from his party’s plan for net zero carbon emissions, and reports suggest he is likely to scrap part of the HS2 high speed rail project that was meant to boost north-south linkages. Sunak won’t be able to announce any fiscal goodies, as Chancellor Hunt has already said there is no fiscal headroom for increased spending.

The U.K. reported final services and composite PMIs. Headline services rose came in at 49.3 vs. 47.2 preliminary, while the composite came in at 48.5 vs. 46.8 preliminary. The composite PMI still fell for the fifth straight month, only less so. We can’t get excited about this little bounce as the worst is yet to come for the U.K economy. Construction PMI will be reported tomorrow.

National Bank of Poland is expected to cut rates 25 bp to 5.75%. The market is split, however. Of the 33 analysts polled by Bloomberg, 7 see no change, 16 see a 25 bp cut, 9 see a 50 bp cut, and 1 sees a 75 bp cut. The bank publishes the minutes of its September 6 meeting Friday. At that meeting, the bank delivered a dovish surprise with a 75 bp cut vs. 25 bp expected. The swaps market is pricing in 75 bp of easing over the next three months followed by another 50 bp over the subsequent three months. This seems too aggressive and would likely lead to further pressure on the zloty.

ASIA

Japan would not confirm that it conducted FX intervention. Vice Finance Minister for International Affairs Kanda said “I refrain from commenting on whether there has been foreign exchange intervention. We will continue with the existing stance on our response to excessive currency moves.” USD/JPY dropped suddenly during the North American morning yesterday. The sharp price action suggests possible FX intervention but officials are staying mum. Recall that when the BOJ intervened September 22, it was widely and immediately reported. Same goes when it intervened October 21. However, Kanda also said September 22 that the bank could conduct stealth intervention. It's possible that the BOJ just wants to keep markets guessing on its tactics but this really won't change the underlying weak yen trend. BOJ reports its FX intervention on a monthly basis and so we won’t see evidence of BOJ action (if any) until early November. Of note, the BOJ bought JPY70.1 bln ($470 mln) of ETFs overnight, the first such purchase since March 14, as the Topix fell more than 2%.

Only a BOJ pivot would reverse the weak yen trend and we still think that's a 2024 story. BOJ liftoff expectations have been pushed out, with WIRP suggesting no odds of a hike October 31, rising to 30% December 19, 70% January 23, and nearly priced in for March 19.

Japan reported final September services and composite PMIs. Services came in half a point higher from the preliminary at 53.8, which helped drag the composite up to 52.1 vs. 51.8 preliminary. This is still the lowest since June but remains in expansionary territory.

Australia reported final September services and composite PMIs. Services came in 51.8 vs. 50.5 preliminary, which helped drag the composite up to 51.5 vs. 50.2 preliminary. This is the highest since May and is likely due in large part to the modest bounce we’re seeing in the mainland China economy.

Reserve Bank of New Zealand kept rates steady at 5.5%, as expected. The bank noted that “Interest rates are constraining economic activity and reducing inflationary pressure as required” but added that “the Committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time.” There was no press conference nor updated macro forecasts, both of which will come at the next meeting November 29. WIRP suggests 55% odds of a hike then, rising to 75% February 28 and nearly priced in for April 10. There are 20% odds of another hike May 22.