• U.S. Treasury yields continue to slide; Fed tightening expectations have fallen; some Fed hawks are pushing back; FOMC minutes will be released; September inflation data take center stage; House Republicans will vote on a new speaker today; Brazil reports September IPCA inflation
  
• ECB hawks have thrown in the towel; ECB reported August inflation expectations; polls suggest Poland’s opposition may win enough seats to lead a majority collation in parliamentary elections this Sunday
  
• Japan reported September machine tool orders; Australia-China relations continue to improve; RBA Assistant Governor Kent spoke; Taiwan reported firm September trade data

The dollar has steadied ahead of PPI data. DXY is trading flat near 105.808 despite the continued fall in U.S. yields. DXY has retraced about 38% of its August-October rally and could eventually retrace by as much as 50% to 105.142. The euro is trading flat near $1.06, sterling is trading flat near $1.2285, and USD/JPY is trading flat near 148.70. We believe this current dollar weakness is corrective in nature. Looking beyond the current noise related to safe haven flows and dovish Fed comments, 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 and Friday’s jobs data confirm that the U.S. economy is still running hot and needs further tightening. This drop in long date yields, if sustained, would deflate the dove’s assertion that the market is doing the heavy lifting (see below).

AMERICAS

U.S. Treasury yields continue to slide. The 10-year yield traded as low as 4.54% today vs. last week’s high near 4.89% but has since recovered to 4.56%, while the 30-year yield traded as low as 4.70% today vs. last week’s high near 5.05% but has since recovered to 4.72%. The short end has not fully taken part in the rally, as the 2-year yield traded as low as 4.92% yesterday vs. last week’s high near 5.18% but has since recovered to 4.97%. The drop in yields is due to some combination of safe haven flows from Middle East tensions as well as more dovish Fed comments in recent days.

Several Fed officials have recently been highlighting the potential tightening impact of higher U.S. yields at the long end. Some were even running victory lap, saying this rise would preclude the need for further rate hikes. One of those was leading dove Bostic, who said “I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%. I actually don’t think we need to increase rates anymore.” With this recent drop in yields at the long end, it seems these doves spoke too soon and may have to eat their words if this drop in yields is sustained. The Fed simply cannot count on the market to do the heavy lifting for them.

As a result of recent dovish comments, Fed tightening expectations have fallen. WIRP suggests only 10% odds of a hike November 1 and rising to top out near 30% December 13. Both are down sharply from last week but we think the market is very wrong about the Fed, as it's been this whole cycle.

Some Fed hawks are pushing back. Kashkari said “It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down. But if those higher long-term yields are higher because their expectations about what we’re going to do has changed, then we might actually need to follow through on their expectations in order to maintain those yields.” He added “It’s hard for me to say definitively that because they moved, we don’t have to move. I don’t know yet.” Elsewhere, Daly said “I completely could imagine that we go from 2.5 — anywhere between 2.5 and 3 as the nominal neutral. But that’s 50 bp, not 250 bp.” Bowman, Waller, Bostic, and Collins speak today. Bowman, Waller and Collins are in the hawkish camp while Bostic is firmly in the dovish camp.

Financial conditions remain loose despite the recent back up in yields. As such, we are perplexed that the Fed doves are so quick to say the Fed has done enough. If financial conditions are a proxy measure for policy effectiveness, then the Fed clearly hasn’t done enough and that’s a big reason why the U.S. economy continues to grow above trend. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 5.1% SAAR vs. 4.9% previously. Next model update comes next Tuesday.

FOMC minutes will be released. At the September meeting, the Fed delivered a hawkish hold, as expected. 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.” The Dot Plots shifted more hawkish. As we expected, the Dot Plots were unchanged for end-2023 and still imply one more hike this year. However, we got a hawkish shift for end-2024 and end-2025 to 5.125% and 3.875% vs. 4.625% and 3.375% seen in June, respectively.

September inflation data take center stage. PPI will be reported today. Headline is expected to remain steady at 1.6% y/y, while core is expected to pick up a tick to 2.3% y/y. CPI will be reported tomorrow. Headline is expected to fall a tick to 3.6% y/y, while core is expected to fall two ticks to 4.1% y/y. The Cleveland Fed Nowcast model suggests headline at 3.69% and core at 4.17%, which is a little north of consensus. For October, the model suggests headline at 3.48% and core at 4.19%.

House Republicans will vote on a new speaker today. Last night, the party held a closed door candidate forum. As of this writing, Steve Scalise and Jim Jordan are the only two declared candidates. While the party hopes to avoid a protracted process, comments from the rank and file suggest neither has the 217 votes needed to win. Until a Speaker is chosen, the House cannot conduct any legislative business. Former Speaker Kevin McCarthy injected an element of uncertainty when he would not rule out another run if his party wanted it, but reports suggest he told his colleagues at the candidate forum last night not to nominate him. Stay tuned.

Brazil reports September IPCA inflation. Headline is expected at 5.25% y/y vs. 4.61% in August. If so, it would be the third straight month of acceleration to the highest since February and above the 1.75-4.75% target range. However, much of this is due to low base effects and so the centra bank is looking through it and has cut rates 50 bp two meetings in a row and signaled a steady pace of cuts ahead. Next meetings are November 1 and December 13 and 50 bp cuts are expected at each one that would take the policy rate down to 11.75% at year-end.

EUROPE/MIDDLE EAST/AFRICA

ECB hawks have thrown in the towel. Knot said current ECB inflation forecasts of a return to target in H2 2025 “would be an acceptable return for me” and added that “at the moment, I’m getting a little bit more confident in our projections again, because these unprecedented shocks that made our models a bit obsolete and the output of the models less reliable than would normally be the case, these shocks are waning.” However, he warned that “Of course, we’re open to the realization that disinflation processes never take place in a sort of linear fashion and there may be new shocks ahead of us. In such a case, we will remain vigilant and we will stand ready to adjust interest rates even more if the disinflation process were to stall as the risks of prolonged wage growth and further second round effects of course remain.” WIRP is pricing in no more ECB rate hikes but more importantly, it suggests 60% odds of a cut in April and fully priced in for June 6, presumably due to a deep recession. This is very euro-negative, to state the obvious. Villeroy and de Cos speak later today.

ECB reported August inflation expectations. Both 1- and 3-year expectations rose a tick to 3.5% and 2.5%, respectively. This was the first increase in the 1- year expectations since March but was the second straight increase for the 3-year measure. ECB policymakers will not be too happy about this, and yet they must be feeling a measure of relief that actual CPI readings continue to decelerate.

Polls suggest Poland’s opposition may win enough seats to lead a majority collation in parliamentary elections this Sunday. Latest poll from United Surveys shows support for the ruling Law and Justice party rose 1.5 percentage points to 33.8% while support for opposition Civic Platform rose 1.7 percentage points to 28.1%. The Left saw its support rise to 10.2% and overtook the Third Way Alliance, which saw its support fall to 9.4%. If the polls are accurate, a potential three-way coalition of Civic Platform, the Left, and the Third Way Alliance would give the coalition a narrow majority of 236 seats in the 460-seat lower house. Among other things, a government led by Civic Platform would likely lead to improved relations with the EU. Stay tuned.

ASIA

Japan reported September machine tool orders. Total orders came in at -11.2% y/y vs. -17.6% in August, the best reading since February. Domestic orders came in at -14.1% y/y, the best since January, while foreign orders came in at -9.7% y/y, unchanged from August. Of note, low base effects will start to kick and boost the y/y rates in Q4. August core machine orders will be reported tomorrow and are expected at -6.7% y/y vs. -13.0% in July.

Australia-China relations continue to improve. Australian journalist Cheng Lei was released after nearly three years of detention in China and has returned home. Relations between the two nations have improved over the past year, as high-level ministerial meetings were restarted and several export restrictions by China were eliminated. Australia is once again exporting coal to China and the two countries announced a deal aimed at eliminating China’s tariffs on barley. Australian trade has suffered this past year and so this rapprochement is welcome news for local exporters.

RBA Assistant Governor Kent spoke. He reiterated that the bank is still in its so-called “third phase” of monetary policy tightening, which former Governor Lowe set out as a period where policymakers assess the impact of past rate hikes. Kent added that further hikes may still be needed. Kent also said “We don’t have any current plans to sell bonds to pursue what’s called active QT at the moment” but added that if it were to do so, it would be done in a way that didn’t disrupt markets. WIRP suggests less than 5% odds of one last hike November 7, rising modestly to 15% December 5 and topping out near 35% in Q1.

Taiwan reported firm September trade data. Exports came in at 3.4% y/y vs. -2.5% expected and -7.3% in August, while imports came in at -12.2% y/y vs. -13.8% expected and a revised -23.0% (was -22.9%) in August. This was the first y/y gain in exports since August 2022. Low base effects boosted the y/y rate and will continue to do so in the coming months.