• U.S. yields continue to sink; financial conditions will remain in focus; FOMC minutes leaned hawkish; October Chicago Fed NAI came in soft; weekly jobless claims and October durable goods orders will be reported
  
• U.K. Chancellor Hunt presents his Autumn Statement shortly; U.K. CBI reported a weak November industrial trends survey; BOE officials are pushing back harder against the dovish market narrative; ECB warned of growing financial stability risks due to a weak economy; South Africa October CPI ran hot
  
• RBA Governor Bullock noted that inflation is currently demand-driven

The dollar is getting some traction despite lower U.S. yields. DXY is trading higher for the second straight day near 103.697. The euro is trading lower near $1.09 as the move higher ran out of steam yesterday at a key retracement objective near $1.0960. Sterling is trading lower near $1.2525 ahead of Chancellor Hunt’s Autumn Statement (see below). USD/JPY is trading higher near 148.85 after trading yesterday at the lowest since mid-September near 147.15. 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 markets think. That said, the dollar remains vulnerable until we see a shift in market Fed expectations. That may be a 2024 story.

AMERICAS

U.S. yields continue to sink. The 30-year yield traded at a new low for this cycle near 4.52% vs. the October peak near 5.18%, while the 10-year yield traded at a new low for this cycle near 4.37% today vs. the October peak near 5.02%. Does one month of somewhat favorable inflation data really warrant such a massive move in rates? We think not and yet here we are. We must respect this move while wholeheartedly disagreeing with it. With year-end approaching, a reversal in the dollar’s fortunes may not be seen until early 2024. Stay tuned.

Financial conditions will remain in focus. The weekly Chicago Fed measure will be reported today, and conditions likely loosened further last week. Conditions for the previous week were the loosest since February 2022, before the Fed started hiking. If this week’s drop in yields and rise in equities are sustained, then we can look forward to another week of looser financial conditions. The recent hawkish shift in the Fed’s tone suggests policymakers are growing concerned that the bond market is no longer doing the heavy lifting and are instead turning into a tailwind for the economy.

FOMC minutes leaned hawkish. At the November 1 decision, the Fed kept rates steady. The minutes show that all on the FOMC agreed to “proceed carefully” on rates and all saw rates remaining restrictive for some time. The Fed saw further tightening if progress on inflation was insufficient. Most saw upside risks to inflation and many saw downside risks to growth. Lastly, a few officials felt that balance sheet runoff could continue after rate cuts. Despite the hawkish tone at the meeting and in the minutes, Fed tightening expectations remain low. WIRP suggests only 5% odds of a hike in December or January. After that, it’s all about the cuts. Nearly four are priced in for 2024, with over 70% odds that the easing cycle starts May 1. We disagree.

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 today 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 will continue to loosen and so there are really no headwinds that will slow growth significantly in Q4.

October Chicago Fed National Activity Index came in soft. Headline came in at -0.49 vs. 0.00 expected and a revised -0.02 (was 0.02) in September. As a result, the 3-month average fell to -0.22 vs. 0.00 in September but remains well above the -0.7 threshold that signals recession. The -0.49 headline is the worst since November 2022, while the -0.22 3-month moving average is the worst since April 2023. This series must be watched closely as we all await the potential recession. Those calling for a soft landing should look for the 3-month moving average to settle somewhere between -0.25 and -0.5, while those calling for a hard landing should look for this average to move well above -0.7.

Weekly jobless claims will be of interest. That’s because initial claims will be for the BLS survey week containing the 12th of the month and they are expected at 228k vs. 231k last week. Continuing claims are reported with a 1-week lag and so next week’s reading will be for the BLS survey week. This week, they are expected at 1.875 mln vs. 1.865 mln last week. If so, they would be the highest since late November 2021. Bloomberg consensus for NFP stands at 175k but its whisper number stands at 140k.

October durable goods order will also be reported. Headline is expected at -3.2% m/m vs. 4.6% in September, while ex-transportation is expected at 0.1% m/m vs. 0.4% in September. Final November University of Michigan consumer sentiment will also be reported.

EUROPE/MIDDLE EAST/AFRICA

U.K. Chancellor Hunt presents his Autumn Statement shortly. Reports suggest he will indefinitely extend the so-called “full expensing” tax break, which saves businesses 25 pence off their tax bill for every GBP1 they invest in plant or machinery. Hunt introduced it in the spring budget and was originally meant to run for three years. Hunt is also expected to announce a cut to national insurance as part of Sunak’s promise to start reducing the country’s tax burden. When all is said and done, the measures to be announced today will be very modest. Anything more would be irresponsible.

U.K. CBI reported a weak November industrial trends survey. Total orders came in at -35 vs. -23 expected and -26 in October, the third straight drop to the lowest since February 2021. Selling prices rose to 11 vs. 5 expected and 7 in October. It’s clear from the recent readings that the U.K. outlook is worsening after a period of surprising outperformance.

Bank of England officials are pushing back harder against the dovish market narrative. Governor Bailey said “I really think the market is putting too much weight on the current data releases and the fact that we’ve seen inflation come down quite rapidly. We are concerned about the persistence of inflation on the rest of the journey.” MPC member Mann said she’s in favor of hiking rates further because holding rates at their current level risks inflation staying “stuck” above the 2% target. Lastly, Deputy Governor Ramsden said he would not rule out further rate hikes and added that “a restrictive policy stance is likely to be warranted for an extended period of time.” BOE easing expectations fell slightly. WIRP now suggests less than 5% odds of a hike December 14 and rise to top out near 10% February 1. The first cut is 40% priced in for May 9 and 75% for June 20, down slightly from the start of the week.

The ECB warned of growing financial stability risks due to a weak economy. In its semiannual Financial Stability Review, the bank warned that as the impact of the ECB’s tightening cycle unfolds, “The weak economic outlook along with the consequences of high inflation are straining the ability of people, firms and governments to service their debt.” The bank noted that market consensus calls for a soft landing. However, it added that historical evidence suggests such a scenario is “difficult - although not impossible - to achieve in practice, especially given the magnitude of rate increases in a short period of time” and that negative surprises to growth risk a “disorderly correction.” WIRP suggests no odds of a rate hike either December 14 or January 25. After that, there are 25% odds of a cut March 7 that rise to 70% April 11 and fully priced in for June 6. Centeno and Nagel speak today.

South Africa October CPI ran hot. Headline came in at 5.9% y/y vs. 5.6% expected and 5.4% in September, while core came in at 4.4% y/y vs. 4.2% expected and 4.5% in September. This was the second straight acceleration in headline to the highest since May and is nearing the top of the 3-6% target range. Reserve Bank of South Africa meets tomorrow is expected to keep rates steady at 8.25%. However, we see some risks of a hawkish surprise after the CPI data. At the last meeting September 21, the bank kept rates steady for the second straight time and Governor Kganyago warned “The job of tackling inflation is not yet done. Risks remain. Should we see them materialize, we stand ready to act.” The swaps market is pricing in 25 bp of easing over the next three months, which seems very unlikely.

ASIA

Reserve Bank of Australia Governor Bullock noted that inflation is currently demand-driven. She noted “If inflation is simply the product of global supply disruptions or other price rises” then the appropriate policy response would be limited. Bullock added “However, a more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy’s potential to meet that demand.” She noted that "An important implication of this homegrown and demand-driven component to inflation is that getting inflation back to target will take time." WIRP suggests no odds of a hike December 5, 25% February 6, and rising modestly to top out near 30% May 7.