• An eventful quarter draws to a close; August PCE readings will be the data highlight; personal income and spending will be reported at the same time; September Chicago PMI will also be important; weekly jobless claims are worth discussing; Colombia is expected to keep rates steady at 13.25%
  
• September eurozone CPI came in soft; Germany reported soft August retail sales; U.K. reported final Q2 GDP data, Q2 current account, and August consumer credit; Poland September CPI came in soft
  
• BOJ bought JGBs to slow the rise in yields; September Tokyo CPI data was mixed; Japan reported some key real sector data too; Australia reported August private sector credit; China PMI readings for September will be reported this weekend

The dollar is trading lower as the much-needed correction continues. After making a new cycle high Wednesday near 106.839, DXY is trading lower for the second straight day near 105.700 after six straight up days. After this correction runs its course, we believe DXY is on track to test the November 30 high near 107.195. The euro is trading higher near $1.0610 despite softer than expected CPI data (see below), while sterling is trading higher near $1.2265. USD/JPY is trading lower near 149.10 after the BOJ held an unscheduled bond-buying operation to slow the rise in JGB yields (see below). We view this dollar weakness as corrective in nature and is most likely driven by quarter end rebalancing. Looking beyond this move, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended. We’re not sure how long this correction lasts but investors should be looking for an opportunity to go long dollars again at cheaper levels.

AMERICAS

An eventful quarter draws to a close. As of this writing, NOK is the only major currency to gain against the dollar in Q3 at 1.5% QTD, while SEK was nearly flat at -0.2% QTD. GBP was the worst performer at -3.5% QTD, followed by JPY at -3.2% QTD and EUR at -2.9% QTD. In EM, COP is the only currency to gain against the dollar in Q3 at 2.4% QTD, while ZAR was nearly flat at 0.2% QTD. ARS was the worst performer at -26.7% QTD, followed by CLP at -11.5% QTD, HUF at -7.2% QTD, and PLN at -7% QTD. U.S. equity indices were down 2-4% in Q3, while the U.S. 10-year yield rose 70 bp in Q3 and the 30-yaer nearly 80 bp. While moves of these magnitudes are unlikely to be repeated in Q4, we think the trends will remain intact: strong dollar, higher yields, and lower equities.

August PCE readings will be the data highlight. Headline is expected at 3.5% y/y vs. 3.3% in July, while core is expected at 3.9% y/y vs. 4.2% in August. Of note, the Cleveland Fed’s Nowcast model shows August PCE and core PCE at 3.53% and 3.95%, respectively. For September, it shows PCE and core PCE at 3.53% and 3.80%, respectively. When all is said and done, headline inflation is creeping up towards 4% while core inflation remains stuck near 4%. The Fed simply cannot say that its job is finished.

Personal income and spending will be reported at the same time. Income is expected at 0.4% m/m vs. 0.2% in July, while spending is expected at 0.5% m/m vs. 0.8% in July. Real personal spending is expected at 0.0% m/m vs. 0.6% in July. Retail sales slowed in August but that only measures goods. Personal spending includes services, which has been running hot in recent months. Final September University of Michigan consumer sentiment, August retail and wholesale inventories, and August trade data will also be reported.

Fed tightening expectations have yet to adjust significantly higher. WIRP suggests only 20% odds of a hike November 1, rising to 40% for both December 13 and January 31. These odds are way too low given the Fed’s hawkish stance and should move higher if the data remain firm, as we expect. Williams speaks today and he has quietly moved into the dovish camp in recent months.

September Chicago PMI will also be important. It is expected at 47.6 vs. 48.7 in August. If so, it would be the first drop after three straight increases. Last week, S&P Global reported soft preliminary September PMI readings. Headline manufacturing came in at 48.9 vs. 48.2 expected and 47.9 in August, services came in at 50.2 vs. 50.7 expected and 50.5 in August, and the composite came in at 50.1 vs. 50.4 expected and 50.2 in August. The ISM PMIs are much more widely followed and will be reported next week. Recently, the ISM readings have been coming in much stronger than the S&P Global readings.

Weekly jobless claims are worth discussing. That’s because continuing claims were for the BLS week containing the 12th of the month and they came in at 1.670 mln vs. 1.675 mln expected and a revised 1.658 mln (was 1.662 mln) last week. Initial claims came in at 204k vs. 215k expected and a revised 202k (was 201k) last week, while the 4-week moving average fell to 211k, the lowest since the week ending February 11. NFP that month came in at 311k vs. 225k expected. Right now, Bloomberg consensus for September is 170k while its whisper number is 175k. Given the recent weekly claims data, we see upside risks to the jobs data. Despite the strikes, the labor market appears to be as tight as ever.

We got another revision to Q2 GDP data. Growth was steady at 2.1% SAAR vs. 2.2% expected. However, the mix of growth shifted. Personal consumption’s contribution to GDP growth fell to 0.55 ppt vs. 1.14 previously but was offset by a rise in fixed investment’s contribution to 0.90 vs. 0.66 previously, a rise in net exports’ contribution to 0.04 vs. -0.22 previously, and a rise in inventories’ contribution to 0.00 vs. -0.09 previously. Government consumption was nearly steady at 0.57 ppt. Still, that’s old news and markets are looking ahead to Q3 and Q4. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 4.9% SAAR and the next update comes today after the data.

Colombia central bank is expected to keep rates steady at 13.25%. At the last policy meeting July 31, the bank delivered a hawkish hold as minutes showed it “acknowledged that the fight against inflation is not over. In this regard, they agreed on the need to maintain the current restrictive stance of monetary policy, until they see convincing signs of the convergence of inflation toward its target.” It's worth noting that Colombia was the last in Latin American to stop hiking and so will likely be the last to start easing. Swaps market is pricing in 25 bp of easing over the next three months, which seems about right given the bank’s hawkish stance. We look for another hold October 31 followed by a 25 bp cut December 19.

EUROPE/MIDDLE EAST/AFRICA

September eurozone CPI came in soft. Headline came in two ticks lower than expected at 4.3% y/y vs. 5.2% in August, while core came in three ticks lower than expected at 4.5% y/y vs. 5.3% in August. Headline decelerated for the fifth straight month to the lowest since October 2021 while core decelerated for the second straight month to the lowest since August 2022. The readings feed right into the dovish ECB narrative. France and Italy also reported CPI. France’s EU Harmonised inflation came in three ticks lower than expected at 5.6% y/y vs. 5.7% in August, while Italy’s came in three ticks higher than expected at 5.7% y/y vs. 5.5% in August.

Except for a few hawkish holdouts, the discussion at the ECB has clearly shifted from how high to how long. WIRP suggests less than 5% odds of a hike October 26, then rising to top out just below 20% December 14. The first cut is still seen around mid-2024 but has shifted more towards June rather than July. Kazaks said “Most likely, rates will be around where they are at the moment and also remain there for some time. Of course, that’s dependent on the economy — if inflation doesn’t go down, then there could be a small increase.” Vasle, Vujcic, and Visco all speak later today.

Germany reported soft August retail sales. Sales came in at -1.2% m/m vs. 0.5% expected and a revised 0.0% (was -0.8%) in July, while the y/y WDA rate remained steady at -2.3%. France already reported weak sales for August. Eurozone sales won’t be reported until October 4, while Italy reports retail sales October 6. Germany also reported September unemployment and it remained steady as expected at 5.7%.

The U.K. reported final Q2 GDP data, Q2 current account, and August consumer credit. The q/q rate was unchanged at 0.2%, while the y/y rate was revised higher two ticks to 0.6%. Private consumption slowed to 0.5% q/q vs. 0.7% preliminary while government spending slowed to 2.5% vs. 3.1% preliminary. However, this was offset by GFCF, which picked up to 0.8% q/q vs. 0.0% preliminary. Bloomberg consensus sees 0.1% q/q growth in both Q3 and Q4, which seems way too optimistic as the U.K. is clearly slipping into recession. Elsewhere, the current account deficit came in at -GBP25.3 bln vs. -GBP14.3 bln expected and a revised -GBP15.2 bln (was -GBP10.8 bln) in Q1.

After last week’s dovish hold by the Bank of England, we may already have seen the end of its tightening cycle. WIRP suggests nearly 40% odds of a hike November 2, rising to nearly 70% December 14 and topping out near 85% in Q1.

Poland September CPI came in soft. Headline came in three ticks lower than expected at 8.2% y/y vs. 10.1% in August. This was the lowest since November 2021 but still well above the 1.5-3.5% target range. At the last policy meeting September 6, the bank delivered a dovish surprise and cut rates 75 bp to 6.0% vs. 25 bp expected. However, the ensuing zloty weakness led several officials to sound less dovish. Next meeting is October 4 and is expected to cut rates 25 bp to 5.75%. However, the market is split. Of the 16 analysts polled by Bloomberg, 3 see no cut, 9 see a 25 bp cut, 3 see 50 bp, and 1 sees 75 bp. We think the size of the cut will depend in large part on how the zloty is trading. The swaps market is pricing in 75 bp of total easing over the next three months followed by another 50 bp over the subsequent three months.

ASIA

Bank of Japan bought JGBs to slow the rise in yields. The bank bought JPY300 bln of 5- to 10-yaer bonds in an unscheduled operation, a relatively small amount that was meant to just serve as a reminder to the market not to get too carried away. Yields remained elevated after the operation, as the 30-year yield traded at the highest since 2013, while the 20-year yield traded at the highest since 2014. Even with YCC in place, the 10-year yield traded at the highest since 2013.

September Tokyo CPI data was mixed. Headline came in a tick higher than expected at 2.8% y/y vs. 2.9% in August, while core (ex-fresh food) came in a tick lower than expected at 2.5% vs. 2.8% in. Core fell for the third straight month to the lowest since July 2022 and obviously bodes well for the national reading. Core ex-energy fell a tick more than expected to 3.8% y/y vs. 4.0% in August and was the first deceleration since June. This too bodes well for the national reading and suggests underlying price pressures have finally topped out.

BOJ tightening expectations have been pushed out into 2014. WIRP suggests only 20% odds of liftoff in December vs. 70% at the end of last week, rising to nearly 80% in January vs. 75% at the end of last week, and remains fully priced in for March.

Japan reported some key real sector data too. Labor market data, IP, retail sales, and housing starts were all reported. Unemployment came in a tick higher than expected and remained steady at 2.7%, while the job-to-applicant ratio remained steady as expected at 1.29. Recent softness suggests progress in obtaining higher wage growth will be limited. Elsewhere, IP came in at 0.0% m/m vs. -0.8% expected and -1.8% in July and retail sales came in at 0.1% m/m vs. 0.4% expected and a revised 2.2% (was 2.1%) in July.

Australia reported August private sector credit. It came in at 0.4% m/m vs. 0.3% expected and actual in July. The y/y rate slowed two ticks to 5.1% and is likely weighing on retail sales. RBA tightening expectations have picked up a bit. WIRP suggests no change at new Governor Bullock’s first meeting October 3. However, those odds rise to around 33% November 7, nearly 50% December 5, and fully priced in for March 19.

China PMI readings for September will be reported this weekend. Official PMIs come first on Saturday. Manufacturing is expected at 50.1 vs. 49.7 in August, while non-manufacturing is expected at 51.6 vs. 51.0 in August. If so, the composite would rise for the second straight month. Caixin then reports its PMI readings Sunday. Manufacturing is expected at 51.2 vs. 51.0 in August, while services is expected at 52.0 vs. 51.8 in August. If so, its composite would fall for the fourth straight month. We do not think the modest bounce in the recent data can be sustained when global growth is slowing and domestic stimulus measures have so far been very mild.