• U.S. yields continue to sink; FOMC minutes will be released; October Chicago Fed NAI will be reported; Canada highlight will be October CPI data
  
• U.K. reported October public sector net borrowing; Chancellor Hunt presents the Autumn Statement tomorrow; BOE and ECB are pushing back against the dovish market narrative; Hungary is expected to cut the base rate 75 bp to 11.5%
  
• RBA released its minutes; Governor Bullock added to the hawkish tone; New Zealand reported October trade data; Korea reported weak trade data for the first twenty days of November

The dollar remains under pressure as U.S. yields sink. DXY is trading lower for the third straight day near 103.366 and is on track to test the August 30 low near 102.936. After that is the mid-August low near 101.784 but a break below 102.546 sets up a test of the July low near 99.578. The euro is trading flat near $1.0945 as the move higher ran out of steam near a key retracement objective near $1.0960. Break above that sets up a test of the July high near $1.1275. Sterling is trading higher near $1.2530 and is on track to test the August 30 high near $1.2745. USD/JPY is the big mover again today, trading at the lowest since mid-September near 147.15 before recovering to 147.70 currently. Clean break below 147.30 sets up a test of the September 1 low near 144.45. With the dollar rally stalled, it will take some firm real sector data to challenge the current dovish Fed narrative. We stress that the U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the market thinks. That said, the dollar remains vulnerable until we see a shift in market sentiment and expectations. That may be a 2024 story (see below).

AMERICAS

U.S. yields continue to sink. The 30-year yield traded at a new low for this cycle near 4.52% today but has since recovered to 4.55%. Elsewhere, the 10-year yield traded as low as 4.38% today, matching the cycle low from earlier this week; it has since recovered to 4.41%. While we have been hopeful of a reversal in yields and the dollar, these trends may continue into year-end. It appears that many buyside shops are basically closing their books on 2023 already and so will be unwilling to take any big positions until the start of 2024. Why rock the boat?

We believe that the underlying fundamental story will lead to an eventual reversal of the dovish market narrative. The U.S. economy remains relatively robust and price pressures remain persistent. This is not the time for looser financial conditions and yet that is what we are getting. Some Fed officials are starting to push back against the dovish narrative, but the horses are already out of the barn. It will take a string of strong data to get the markets’ attention. Next Friday may be a start, with Bloomberg consensus for NFP currently at 175k.

FOMC minutes will be released. At the November 1 decision, the Fed kept rates steady and said that tighter financial and credit conditions continue to weigh on the economy. The Fed reiterated that will assess the extent of additional policy firming needed. It acknowledged that job gains have moderated in early 2023 but remain strong, while economic activity expanded at “a strong pace” in Q3. Chair Powell stuck to the dovish script that prevailed before the meeting. Powell said the Fed was attentive to the increase in longer-term yields and that financial conditions have tightened “significantly.” He stressed that its prior hikes would take time to impact the economy and that we are just now seeing the effects of its 2022 hikes. The Fed is expected to keep rates steady in December and January. After that, rates cuts are getting priced in as WIRP suggests nearly 30% odds of a cut March 20, rising to nearly 75% May 1 and fully priced in for June 12. Nearly four cuts are priced in by end-2024.

The U.S. economy remains robust. The Atlanta Fed’s GDPNow model is tracking Q4 growth at 2.0% SAAR vs. 2.2% previously and will be updated tomorrow after the data. Elsewhere, the New York Fed’s Nowcast model is tracking 2.45% SAAR growth vs. 2.51% previously and will be updated Friday. Simply put, the economy continues to grow at or above trend at a time when the Fed is trying to get it below trend in order to lower inflation. Financial conditions continue to loosen and so there are really no headwinds that will slow growth significantly in Q4.

October Chicago Fed National Activity Index will be reported. Headline is expected at 0.00 vs. 0.02 in September. If so, the 3-month average would fall to -0.07 vs. 0.00 in September but would remain well above the -0.7 that signals recession. The continued resilience in the economy is noteworthy and supports our view the Fed still has more work to do in getting to the desired sub-trend growth.

October existing home sales will also be reported. Sales are expected at -1.5% m/m vs. -2.0% in September. However, the recent drop in mortgage rates may breathe some life into the beleaguered housing sector.

Canada highlight will be October CPI data. Headline is expected at 3.1% y/y vs. 3.8% in September. If so, it would be the lowest since June and would move closer to the 2% target. Elsewhere, core trim is expected to fall a tick to 3.6% y/y while core median is expected to fall two ticks to 3.6% y/y. Bank of Canada is expected to keep rates steady in December and January. After that, rates cuts are getting priced in as WIRP suggests nearly 30% odds of a cut March 6, rising to nearly 65% April 10 and fully priced in for June 5. Nearly three cuts are priced in by end-2024.

EUROPE/MIDDLE EAST/AFRICA

U.K. reported October public sector net borrowing. PSNB ex-banking groups came in at GBP14.9 bln vs. GBP12.8 bln expected and a revised GBP14.6 bln (was GBP14.3 bln) in September. For the first seven months of FY23, the deficit was -GBP98.3 bln, which was GBP16.9 bln less than what was forecast back in March. This was driven largely by tax receipts, which were GBP13 bln higher than forecast and helped offset a GBP6.1 bln overshoot in spending. Given this outperformance, we believe the Office for Budget Responsibility is likely to cut its current forecast for a FY23 deficit of -GBP131.6 bln.

Chancellor Hunt presents the Autumn Statement tomorrow. Yesterday, Prime Minister Sunk said that “we can begin the next phase and turn our attention to cutting tax. We will do this in a serious, responsible way, based on fiscal rules to deliver sound money.” While the solid budget numbers are welcome, we do not think Hunt will be able to deliver any significant fiscal loosening ahead of a widely expected recession. Of note, welfare benefits are already running GBP4.5 bln higher than last year and that’s only going to get worse. Hunt said “At my Autumn Statement tomorrow, I will focus on how we boost business investment and get people back into work to deliver the growth our country needs. We met our pledge to halve inflation, but we must keep on supporting the Bank of England to drive inflation down to 2%. That means being responsible with the nation’s finances.” We look for very modest tax relief for corporations and households. Anything more would be irresponsible.

The Bank of England is finally pushing back against the dovish market narrative. Governor Bailey warned that the bank is “on watch for further signs of inflation persistence that may require interest rates to rise again.” Bailey noted that services inflation remains “much too high” and that wage growth is still “elevated,” adding that higher food and energy prices may still be feeding into wage demands that lead to second-round effects. Yet easing expectations remain in place. WIRP suggests less than 5% odds of a hike December 14 and 10% February 1. The first cut is 50% priced in for May 9 and nearly priced in June 20.

ECB officials continue to push back against the dovish market narrative. Simkus said “It’s very important to put the genie back into the bottle and to securely seal it - therefore expectations that we’ll have interest rate cuts in a few months are too optimistic in my view.” Elsewhere, de Cos said “The current level of interest rates maintained long enough should be sufficient to achieve our inflation target of 2% in the medium term. I think it is absolutely premature to start talking about interest rates reductions.” WIRP suggests no odds of a rate hike either December 14 or January 25. After that, there are nearly 25% odds of a rate cut March 7 that rise to 65% April 11 and fully priced in for June 6. Lagarde, Schnabel, and Centeno speak later today.

National Bank of Hungary is expected to cut the base rate 75 bp to 11.5%. At the last meeting October 24, the bank delivered a dovish surprise and cut the base rate 75 bp vs. 50 bp expected. It said that careful monetary policy was needed and that it would proceed with rate cuts at a slower pace. Deputy Governor Virag said that having the base rate end the year at 11% was “realistic.” The swaps market is pricing in 125 bp of easing over the next three months, followed by another 175 bp of easing over the subsequent three months.

ASIA

Reserve Bank of Australia released its minutes. At the November 7 meeting, the bank hiked rates 25 bp to 4.35%. The minute showed that “Members assessed that tightening monetary policy at this meeting would help to mitigate the risk of an unwelcome rise in inflation expectations,” adding that “even a modest further increase in inflation expectations would make it significantly more challenging and costly to return inflation back to target within a reasonable timeframe.” Lastly, the RBA warned that “it was expected to take longer to return inflation to target than it had taken so far to reduce inflation from its peak.”

Governor Bullock added to the hawkish tone. Bullock said “Inflation is a crucial challenge over the next one to two years. Inflation at the moment really is all a supply driven thing. Petrol prices, rents, these sorts of things, energy, but there’s an underlying demand component to it as well. And that’s what central banks are trying to get on top of.” Of note, she stressed that “Although you want to look through supply shocks, if you keep getting them, there comes a point where everyone just expects inflation to remain high and if inflation expectations adjust, then that’s a problem.” It’s clear to us from the recent RBA actions and communications that it remains in tightening mode. Yet WIRP suggests no odds of a hike December 5, rising modestly to 20% February 6 and topping out near 30% May 7. Bullock speaks again tomorrow.

New Zealand reported October trade data. Exports came in at -9.3% y/y vs. -19.4% in September, while imports came in at -14.0% y/y vs. -14.7% in September. While it is possible that trade has bottomed out, it’s too early to call for any sort of strong recovery when New Zealand’s main trading partner China is still struggling.

Korea reported weak trade data for the first twenty days of November. Exports came in at 2.2% y/y while imports came in at -6.2% y/y. If sustained for the entire month, exports would grow two straight months for the first time since August and September 2022. Exports to China fell -2.4% y/y, while exports to the U.S. rose 15.7% y/y. Yesterday, Taiwan export orders came in at -4.6% y/y vs. -7.6% expected and -15.6% in September. This was the best reading since September 2022 and low base effects boost the y/y rates in the coming months. However, a strong and durable recovery in regional trade and activity is likely to be a 2025 story.