• The U.S. Treasury lowered its estimate for Q4 net borrowing; the auto strike is finally over; the two-day FOMC meeting begins today; the dollar tends to weaken on FOMC decision days; key PMI readings for October will continue rolling out; Canada reports August GDP
  
• Eurozone October eurozone CPI readings cooled; eurozone also reported soft Q3 GDP data; U.K. shop prices continue to ease; the favorable data come ahead of the BOE decision Thursday
  
• The two-day BOJ meeting ended with a minor tweak to YCC; updated inflation forecasts posed more questions than answers; Japan also reported key September data; China reported soft official October PMIs

The dollar is soft as the two-day FOMC meeting begins. DXY is trading lower for the third straight day near 105.953 after three straight up days. Clean break of 105.946 sets up a test of the October 24 low near 105.360. The euro is trading higher near $1.0665 and is nearing a test of the October 24 high near$1.0695. Sterling is trading higher near $1.2195 and clean break above $1.2205 sets up a test of the October 24 high near $1.2290. USD/JPY is trading higher near 150.70 after the BOJ delivered a modest tweak to YCC overnight. The pair is on track to test the October 2022 high near 152. We view this week’s dollar softness as a corrective move. Nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended. Simply put, 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.

AMERICAS

The U.S. Treasury lowered its estimate for Q4 net borrowing. It was lowered to $776 bln vs. $852 bln estimated in late July. This was a big surprise. With deficits widening and borrowing costs rising, most observers (including us) were looking for an increase in Q4. Treasury said that the main reason for the decreased borrowing needs was expectations for higher than normal deferred revenues coming from areas in California and other states that had been granted tax extensions due to natural disasters. The lower estimate suggests little to no change in longer-dated debt issuance in tomorrow's quarterly refunding announcement, which currently stands at $103 bln. Looking ahead, Treasury said it expects to borrow a net $816 bln in Q1 2024.

The auto strike is finally over. Reports suggest GM has now tentatively agreed to a 25% wage increase over the life of the contract, matching the deals made with both Ford and Stellantis. Similarly, cost of living allowances will be included that could push wages up by 33% all told. The deals still need to be approved by UAW members at all three auto companies but we suspect they will all pass. The timing couldn’t have been better, as extended strike actions posed significant risks to the U.S. economic outlook.

The two-day FOMC meeting begins today. No change is expected. After it held rates at the September meeting, the Fed noted that “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” Since then, the U.S. economic data have outperformed and the Fed may have to acknowledge this. Similar to its July statement, it said last month that “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Here, we expect no change. Update macro forecasts and Dot Plots won’t come until the December meeting.

The dollar tends to weaken on FOMC decision days. DXY has fallen 7 of the past 8 FOMC decision days and 11 of the past 13. Think about that; even during one of the most aggressive Fed tightening cycles, the dollar still ended weaker on most FOMC decision days, even the ones where it hiked 50 and 75 bp. We suspect part of the blame can be placed on Chair Powell, who often softened the Fed’s hawkish statement with a dovish press conference. Given his dovish turn right before the media blackout, there are significant risks that Powell does this again tomorrow. If Powell doubles down on the dovish narrative, it would be very risky given how strong the data have been. WIRP suggests no odds of a hike tomorrow, rising to 25% December 13 and topping out near 33% January 31.

Key PMI readings for October will continue rolling out. Chicago PMI is expected at 45.0 vs. 44.1 in September. ISM manufacturing PMI will be reported tomorrow and the headline is expected to remain steady at 49.0. Keep an eye on employment and prices paid, which stood at 51.2 and 43.8 in September, respectively. ISM services PMI will be reported Friday and the 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.

Conference Board October consumer confidence will be reported. Headline is expected at 100.5 vs. 103.0 in September. If so, it would be the third straight drop to the lowest since July 2022. However, consumption has held up relatively well in the face of lower confidence.

Other minor data will be reported. Q3 employment cost index is expected to remain steady at 1.0% q/q. FHFA and S&P CoreLogic house price indices for August will also be reported.

Canada reports August GDP. Growth is expected at 0.9% y/y vs. 1.1% in July. If so, it would be the weakest since February 2021. October S&P Global manufacturing PMI will be reported Wednesday.

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 10% odds of a hike December 6, rising modestly to top out near 20% January 24. A rate cut is largely priced in for September 4.

Colombia central bank is expected to keep rates steady at 13.25%. The bank releases its quarterly monetary policy report Thursday. Minutes will be released Friday. At the last policy meeting September 29, the bank kept rates steady by a 5-2 vote and noted 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.” The swaps market is pricing in 25 bp of easing over the next three months, which suggests the start of an easing cycle at the next meeting December 19.

EUROPE/MIDDLE EAST/AFRICA

Eurozone October eurozone CPI readings cooled. Headline came in two ticks lower than expected at 2.9% y/y vs. 4.3% in September and was the lowest since July 2021 and within sight of the 2% target. Core came in steady as expected at 4.2% y/y vs. 4.5% in September. Of note, high base effects are a factor in the October drop in y/y headline inflation but will turn into low base effects in November and December that should boost the y/y rate into year-end. France and Italy also reported CPI data. France’s EU Harmonised CPI came in as expected at 4.5% y/y vs. 5.7% in September, while Italy’s came in three ticks lower than expected at 1.9% y/y vs. 5.6% in September.

The ECB is clearly done hiking. 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 85% odds of a cut April 11 and fully priced in for June 6. De Cos, Visco, Muller, Nagel, and Guindos all speak today. The doves control the narrative now.

Eurozone also reported soft Q3 GDP data. Growth came in a tick lower than expected at -0.1% q/q vs. a revised 0.2% (was 0.1%) in Q2. The eurozone economy has basically stagnated since the end of 2022 and it’s only going to get worse. Italy and France reported GDP too. Italy came in a tick lower than expected at 0.0% q/q vs. -0.4% in Q2, while France came in as expected at 0.1% q/q vs. a revised 0.6% (was 0.5%) in Q2.

Eurozone countries reported soft spending data. Germany reported September retail sales at -0.8% m/m vs. 0.5% expected and a revised -1.1% (was -1.2%) in August, while the y/y rate came in at -4.6% vs. -3.4% expected and -1.9% in August. France reported September consumer spending at 0.2% m/m vs. 0.4% expected and a revised -0.6% (was -0.5%) in August, while the y/y rate came in at -3.0% vs. -2.8% expected and a revised -1.6% (was -1.9%) in August. Of note, France already reported September retail sales at -4.3% y/y vs. -3.9% in August. Eurozone-wide retail sales will be reported November 8. There is clear downside momentum in the economy as Q3 ended.

U.K. shop prices continue to ease. The British Retail Consortium reported shop prices rose 5.2% y/y higher in October vs. 6.2% in September. This was the fifth straight month of deceleration to the lowest y/y rate since August 2022. Of note, food prices rose 8.8% y/y in October, the sixth straight month of deceleration to the lowest y/y rate since July 2022. This bodes well for the October CPI data.

The favorable data come ahead of the Bank of England decision Thursday. 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 fall this week. 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 less than 5% odds of a hike this week, rising modestly to top out near 25% February 1. Like the ECB, the BOE is likely done hiking.

ASIA

The two-day Bank of Japan meeting ended with a minor tweak to Yield Curve Control. It was a minor tweak to the language, as the bank now says the 1% ceiling is a reference point rather than a rigid target. Governor Ueda said “Uncertainty is extremely high within both overseas and domestic economies and financial markets. We decided that it’s appropriate to increase flexibility so that long-term yields can be smoothly shaped, according to different future scenarios.” Otherwise, there were no changes in policy. We still look for an end to YCC either December 19 or January 23, followed by liftoff either March 19 or April 26. Of note, WIRP suggests liftoff is nearly priced in for March 19.

The updated inflation forecasts posed more questions than answers. The FY23 core inflation forecast was revised to 2.8% vs. 2.5% seen in July, while the FY24 forecast was revised to 2.8% vs. 1.9% seen in July. The forecast for FY24 is key, as another year above the 2% target suggests to us that the bank cannot remain on hold much longer and will likely start removing accommodation in early 2024. And yet the bank seems to be in no hurry to do that with today’s minor tweak. The market was disappointed at the lack of policy clarity and so took USD/JPY higher. JGB yields also moved higher as the market will likely test the BOJ’s commitment to keep yields low.

Japan also reported key September data. Labor market, IP, and retail sales data were all reported. Unemployment fell a tick as expected to 2.6%, while the job-to-applicant ratio remained steady as expected at 1.29. Elsewhere, IP came in at 0.2% m/m vs. 2.5% expected and -0.7% in August, while retail sales came in at -0.1% m/m vs. 0.2% expected and a revised 0.2% (was 0.1%) in August. Both y/y rates worsened from August. Lastly, housing starts came in at -6.8% y/y vs. -6.4% expected and -9.4% in August. Overall, the recent real sector data have been softening and so perhaps explain the BOJ’s reluctance to signal an end to its accommodative policies.

China reported soft official October PMIs. Manufacturing came in at 49.5 vs. 50.2 expected and actual in September, while non-manufacturing came in at 50.6 vs. 52.0 expected and 51.7 in September. As a result, the composite fell to 50.7 vs. 52.0 in September and was the lowest since December 2022. Caixin reports manufacturing PMI Wednesday and is expected to rise two ticks to 50.8. Its services and composite PMIs will be reported Friday, with services expected at 51.0 vs. 50.2 in September. The official readings points to downside risks for Caixin, and confirm our skepticism that the modest stimulus measures taken so far will have much lasting impact.