• Fed tightening expectations have fallen; financial conditions are finally starting to tighten, albeit modestly; we get more labor market data today; ADP jobs came in lower than expected; September ISM manufacturing PMI was solid; Canada reports August trade data and September Ivey PMI; Peru is expected to cut rates 25 bp to 7.25%
  
• ECB doves have seized control of the narrative; Germany reported weak August trade data; France and Spain reported soft August IP; BOE released its September DMP survey; BOE’s Broadbent said the U.K. economy is responding to monetary tightening
  
• BOJ projections of its current account balances suggest it did not intervene in FX markets Tuesday; Australia reported August trade data; Taiwan acknowledged that it intervened in the FX market in September; Korea and Philippine September CPI came in hot

The dollar is consolidating its recent gains. DXY is trading lower the for the second day in a row near 106.692 after it traded at a new cycle high near 107.348 Tuesday. USD/JPY is trading in a narrow range near149 as markets try to flesh out whether intervention did or didn’t happen (see below). Without a shift in monetary policy divergences, we believe the pair will resume its climb. The euro is trading higher near $1.0520 despite weak eurozone data (see below),while sterling is trading flat near $1.2140. 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. Tomorrow’s jobs data will be very important for the dollar’s near-term direction.

AMERICAS

Fed tightening expectations have fallen. Odds of a hike November 1 have fallen to 25% vs. 33% at the start of the week and have fallen to 40% December 13 vs. over 50% at the start of this week. What’s changed? Not a lot, really. The data remain firm and we see no reason for the Fed to take it’s foot off the brake. Mester, Kashkari, Barkin, Daly, and Barr all speak today.

Financial conditions are finally starting to tighten, albeit modestly. Chicago Fed's measure through September 29 tightened for the second week in a row to the tightest since late August. Still, financial conditions remain relatively loose considering how much U.S. yields have risen in recent weeks. We suspect the Fed would like to see more pass-through of its rate hikes to the real economy as it seeks to get sub-trend growth in an effort to cool inflation.

We get more labor market data today. September Challenger job cuts and weekly jobless claims will be reported. Initial claims are expected at 210k vs. 204k last week, while continuing claims are expected at 1.671 mln vs. 1.670 mln last week. August trade data will also be reported and is expected at -$59.8 bln vs. -$65.0 bln in July. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 4.9% SAAR and the next update comes today after the data.

ADP jobs came in lower than expected. Private sector jobs rose only 89k vs. 150k expected and a revised 180k (was 177k) in August. While this suggests a low NFP number Friday, we know that ADP is a poor predictor of NFP. As things stand, Bloomberg consensus for NFP stands at 170k vs. 187k in August but its whisper number stands at 185k. 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.

September ISM manufacturing PMI was solid. Headline came in a tick higher than expected at 53.6 vs. 54.5 in August. The details were also solid, as employment came in at 53.4 vs. 54.7 in August, activity came in at 58.8 vs.57.3 in August, and prices paid came in steady at 58.9. ISM services activity has risen three straight month to the highest since June. Similarly, ISM manufacturing production has also risen three straight month to the highest since July 2022. Simply put, the US economy is chugging along quite nicely. Elsewhere, factory orders came in firm at 1.2% m/m vs. 0.3% expected.

Canada reports August trade data and September Ivey PMI. Earlier this week, S&P Global reported September manufacturing PMI at 47.5 vs. 48.0 in August. Bank of Canada tightening expectations remain elevated as recent data have come in firm. WIRP suggests 30% odds of a hike October 25, rising to 55% December 6 and topping out near 75% in Q1.

Peru central bank is expected to cut rates 25 bp to 7.25%. At the last meeting, the bank started the easing cycle with a 25 bp cut to 7.5%. Over the weekend, Peru reported September CPI and headline came in at 5.04% y/y vs. 5.31% expected and 5.58% in August. This was the lowest since August 2021 but still above the 1-3% target range. Bloomberg consensus sees the policy rate at 6.75% by year-end, 6.0% by the end of Q1, 5.25% by the end of Q2, and 4.75% by the end of Q3. This seems too aggressive and would surely invite further sol weakness.

EUROPE/MIDDLE EAST/AFRICA

ECB doves have seized control of the narrative. Kazimir said “I strongly believe that our rate hike at the last meeting was the last one. We’ll need to wait for the December and March forecasts. Only real data can persuade us that we’re at the peak.” Centeno said “It can be expected that the cycle of interest-rate rises has been, for now and with the present economic conditions, concluded.” Lane, Nagel, Guindos, and Villeroy speak later today. WIRP suggests no odds of a hike October 26, then rising modestly to top out near 10% December 14. The first cut is still seen around mid-2024, but now leaning more towards June 6 than July 18 previously.

Germany reported weak August trade data. Exports came in at -1.2% m/m vs. -0.6% expected and a revised -1.9% (was -0.9%) in July, while imports came in at -0.4% m/m vs. 0.5% expected and a revised -1.3% (was 1.4%) in July. The y/y rates continued to worsen to new cycle lows, with the -16.7% reading for imports particularly worrisome. Germany reports August factory orders tomorrow and are expected at 1.5% m/m vs. -11.7% in July.

France and Spain reported soft August IP. France IP came in a tick higher than expected at -0.3% m/m vs. a revised 0.5% (was 0.8%) in July, while the y/y rate came in as expected at -0.5% vs. a revised 2.5% (was 2.7%) in July. This was the first y/y contraction since January. Elsewhere, Spain IP came in at -0.8% m/m vs. -0.3% expected and a revised 0.1% (was 0.2%) in July, while the y/y rate came in at -3.4% vs. -1.8% expected and a revised -2.2% (was -1.8%) in July. This was the fifth straight month of contraction. Despite the recent bump up in the PMI readings, the eurozone data are likely to continue weakening well into 2024 as ECB tightening hits and China’s recovery fades.

BOE released its September decision maker panel survey. 1-year ahead inflation expectations fell to 4.8% vs. a revised 5.0% (was 4.9%) in August, while 2-year ahead expectations rose a tick to 3.2%. The Bank of England will be happy to see near-term expectations fall but they remain well above the 2% target. WIRP suggests 35% odds of a hike November 2, rising to top out near 70% February 1. The first cut is not expected until Q4 2024.

BOE’s Broadbent said the U.K. economy is responding to monetary tightening. He noted that interest rate sensitive sectors like spending on consumer durable goods and housing investment have “weakened quite a lot.” Broadbent noted that “There are now reasonably clear signs that monetary policy tightening is having some effect, not least in the shape of demand in the UK. Even in aggregate, we’ve seen weaker demand growth and the beginnings at least of some rise in unemployment.” In that regard, the U.K. reported soft September construction PMI. It fell to 45.0 vs. 50.0 expected and 50.8 in August, and was the low for this cycle. We think the slight stabilization in the composite PMI seen in recent months is unlikely to last given the headwinds on the economy.

ASIA

BOJ projections of its current account balances suggest it did not intervene in FX markets Tuesday. When it intervened last September and October, some signs were apparently seen in current account estimates. BOJ reports its FX intervention on a monthly basis and so we won’t see concrete evidence (or lack thereof) of BOJ action this week until early November.

Australia reported August trade data. Exports rose 4% m/m vs. -2% in July, while imports were flat m/m vs. 3% in July. However, the y/y rate for both remained negative. Exports of metal ores and minerals rose 4.4% m/m, while imports of fuels and lubricants jumped 20.8% m/m. Trade has stabilized somewhat in recent months but we do not expect any significant improvement as China’s outlook remains quite weak.

Taiwan central bank acknowledged that it intervened in the FX market in September. The bank said it did so to maintain order during a period of imbalance in supply and demand. Foreign reserves fell last month, and the bank said the decline was partly due to valuation effects and the strong dollar. Of note, the bank has acknowledged intervention in August as well, but the amounts appear modest as reserves fell $1 bln in August and $1.5 bln in September. A senior central bank official noted that foreign investors net sold Taiwan stocks significantly on this week, which had an impact on the FX market. This suggests the bank has intervened in October as well.

Korea September CPI came in hot. Headline came in at 3.7% y/y ca. 3.5% expected and 3.4% in August, while core was steady as expected at 3.3% y/y. Headline accelerated for the second straight month to the highest since April and moves further above the 2% target. At the last policy meeting August 24, Bank of Korea kept rates steady at 3.5% and Governor Rhee noted that China poses risks to Korea’s economy. As in past meetings, all six members of the board remained open to another hike if needed. However, we think the tightening cycle has ended as downside risks to growth build. The swaps market is now pricing in 25 bp of tightening over the next six months.

Philippines September CPI came in hot. Headline came in at 6.1% y/y vs. 5.3% expected and actual in August. Headline accelerated for the second straight month to the highest since May and moves further above the 2-4% target range. At the last policy meeting September 21, the central bank kept rates steady at 6.25% but it was a hawkish hold, as Governor Remolona warned “A rate hike is on the table for November. How big it will be will depend on the data. We’re ready to raise if the supply shocks are significant enough.” He added “So if we raise in November, then I expect rates to stay at that level for the early part of next year.” Next policy meeting is November 16 and a 25 bp hike seems likely now. However, October CPI will be reported before that meeting and will help determine the final decision. The swaps market is not pricing in any more hikes but it is clearly data dependent.