• September CPI data take center stage; Fed officials continue to push gradualism; FOMC minutes are worth discussing; Peru is expected to cut rates 25 bp to 5.0%
  
• ECB publishes the account of the September meeting; French Finance Minister Armand will present the 2025 budget; BOE reported its Q3 credit conditions survey; Norway reported September CPI data
  
• BOJ is maintaining its “wait and see” stance despite recent yen weakness

The dollar remains firm ahead of CPI data. DXY is trading flat near 102.912 and has not fallen since September 27. USD/JPY is trading lower near 148.60 even as BOJ signals a cautious stance (see below). The euro is trading lower near $1.0935 ahead of the French budget (see below), while sterling is trading higher near $1.3080. We believe the recent U.S. data and Fed comments continue to support a very gradual easing cycle (see below). Market easing expectations for the Fed have adjusted after the strong jobs data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher. Today’s CPI data may hasten the process.

AMERICAS

September CPI data take center stage. Headline is expected to fall two ticks to 2.3% y/y, while core is expected to remain steady at 3.2% y/y. If so, headline would be the lowest since February 2021. Keep an eye on super core, which has been stuck near 4.5% y/y for two straight months. Of note, the Cleveland Fed’s inflation Nowcast model sees headline at 2.3% and core at 3.1%. Looking ahead, the model sees October headline at 2.4% and core at 3.1%. PPI data will be reported tomorrow. Disinflation continues, albeit slowly.

Fed officials continue to push gradualism. Logan said she sees “meaningful risk” that inflation could stick above 2%, adding that "These risks suggest the FOMC should not rush to reduce the fed funds target to a 'normal' or 'neutral' level but rather should proceed gradually while monitoring the behavior of financial conditions." Daly said, “I think that two more cuts this year, or one more cut this year, really spans the range of what is likely in my mind, given my projection for the economy.” She added that rising real rates are a recipe for breaking the economy and stressed that “I do not want to see further slowing in the labor market.” Jefferson said cooling of the labor market has been “orderly” and added that the risks to the Fed’s mandate remain “roughly in balance.” Cook, Barkin, and Williams speak today.

FOMC minutes are worth discussing. The minutes showed that “a substantial majority of participants supported lowering the target range for the federal funds rate by 50 bp.” However, “some participants observed that they would have preferred a 25 bp reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision. Several participants noted that a 25 bp reduction would be in line with a gradual path of policy normalization that would allow policymakers time to assess the degree of policy restrictiveness as the economy evolved. A few participants also added that a 25 bp move could signal a more predictable path of policy normalization.” Lastly, "Some participants noted that there had been a plausible case for a 25 bp rate cut at the previous meeting and that data over the intermeeting period had provided further evidence that inflation was on a sustainable path toward 2% while the labor market continued to cool." This fits in with the notion that the 50 bp move was a bit of makeup for the July hold. Going forward, we believe the bar to another jumbo move remains high.

The data and the Fed messaging have had an impact on Fed easing expectations. Of note, a jumbo 50 bp cut is no longer priced in and even then, two 25 bp cuts by year-end are no longer fully priced in either. Looking ahead, the market is pricing in 125 bp of total easing over the next 12 months. The Fed’s rate path will ultimately be determined by the economic data but if the readings remain robust, the market will have to pare its easing expectations even further.

Financial conditions remain loose. The Chicago Fed’s weekly measure has now loosened eight straight weeks through last Friday and are the loosest since mid-November 2021.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is still tracking Q3 growth at 3.2% SAAR after yesterday's update. It will be updated again next Thursday October 17. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 3.1% SAAR and Q4 growth at 2.8% SAAR and will be updated tomorrow. Momentum in the economy remains strong and so little slowdown is likely as we go into 2025, especially with financial conditions remaining so loose.

Peru central bank is expected to cut rates 25 bp to 5.0%. At the last meeting September 12, the central bank cut rates 25 bp for the second straight meeting to 5.25% after keeping rates on hold in June and July. It said that the cut did not imply further cuts ahead but noted that it expected headline to remain within the target range and core to continue slowing. Headline inflation came in at 1.78% y/y in September vs. 2.03% in August, the lowest since October 2020 and in the bottom half of the 1-3% target range. Furthermore, core inflation fell to 2.64% y/y, the lowest since September 2021.

EUROPE/MIDDLE EAST/AFRICA

The ECB publishes the account of the September meeting. At that meeting, the ECB delivered on expectations so we doubt the account will offer any fresh policy guidance. The ECB unanimously voted to cut the key deposit facility rate (DFR) 25 bp to 3.50% and reiterated that it will “follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.” Since then, the data have come in very weak and so ECB officials have largely tilted more dovish. A 25 bp cut next week is largely priced inn. Looking ahead, the market is pricing in 150 bp of total easing over the next 12 months.

French Finance Minister Antoine Armand will present the 2025 budget. The budget is expected to include EUR60 bln in spending cuts and tax hikes to rein in the ballooning fiscal deficit. Prime Minister Barnier also confirmed plans to delay the timing by two years to 2029 for bringing the budget deficit (which is expected to hit -6% of GDP this year) to within the -3% of GDP EU Stability and Growth Pact limit. The French-German 10-year government bond yield spread has tightened a bit lately but is just 5 bp below the June high of 82 bp and remains wide of Spain at 73 bp. More encouragingly, the higher risk premium on France is not spreading to the rest of the Eurozone and should limit the drag on the euro.

The Bank of England reported its Q3 credit conditions survey. it showed that demand for secured house purchase lending was unchanged in Q3 but was expected to increase in Q4 with a net balance of 34.1%. the highest since Q1 2023. However, default rates on these loans rose in Q3 and expected to increase again in Q4. Elsewhere, demand for unsecured lending was expected to fall in Q4, driven largely by credit cards. While a November cut remains nearly priced in, the odds of a follow-up December cut have fallen to around 40% vs. 50% at the start of last week.

Norway reported September CPI data. Headline came in two ticks lower than expected at 3.0% y/y vs. 2.6% in August, while underlying came in a tick lower than expected at 3.1% y/y vs. 3.2% in August. Headline was the highest since May and moves further above the 2% target. At the last meeting September 18, the Norges Bank left the policy rate steady at 4.50% and highlighted that “the policy rate will likely be kept at 4.5% to the end of the year” along with a first full 25 bp cut implied for Q2 2025. The risk is the Norges Bank eases sooner than they project as mainland economic growth is sluggish and underlying inflation is easing rapidly. The market is pricing in the first cut in January, along with 100 bp of total easing over the next 12 months.

ASIA

The Bank of Japan is maintaining its “wait and see” stance despite recent yen weakness. Deputy Governor Himino said that If the outlook for the economy and inflation is realized, “the bank will accordingly continue to raise the policy interest rate” and added that “The policy board will carefully assess incoming data, the evolving outlook, and the balance of risks at each meeting. We are not on a preset course.” More importantly, Himino said there is “a strong will” to learn from the August market turmoil, which confirms that financial stability remains an input to policy decisions. Elsewhere, September PPI rose two ticks to 2.8% y/y vs. 2.3% expected. Of note, national CPI data will be reported next Friday. Headline is expected at 2.5% y/y vs. 3.0% in August, core (ex-fresh food) is expected at 2.3% y/y s. 2.8% in August, and core ex-energy is expected to remain steady at 2.0% y/y. Bottom line: the BOJ’s loose for longer policy stance is intact and remains a drag for JPY.