• U.S. data highlight will be September retail sales; U.S. growth remains robust; weekly jobless claims will be closely watched; Chile is expected to cut rates 25 bp to 5.25%
  
• The ECB is expected to cut rates 25 bp; Turkey is expected to keep rates steady at 50.0%
  
• Nippon Life plans to reduce its holdings of yen-denominated bonds in the second half of FY24; Japan reported weak September trade data; Australia reported solid September jobs data; markets are unimpressed with China’s latest measures to support the ailing property sector

The dollar remains firm ahead of the ECB decision and retail sales data. DXY is trading flat near 103.530 after making a new cycle high near 103.657 earlier today. It is on track to test the July 30 high near 104.799 and the only thing standing in the way is the 200-day moving average that comes in near 103.788 today. That level nearly coincides with the key 62% retracement objective for the June-September drop near 103.848 and a break above sets up a test of the June 26 high near 106.130. The euro is trading flat near $1.0865 ahead of the ECB decision due shortly (see below). Clean break of $1.0875 sets up a test of the June 26 low near $1.0665. Sterling is trading higher near $1.3010 and USD/JPY is trading flat near 149.60 after testing the 150 level earlier. 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 recent spate of strong U.S. data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher. In the meantime, soft data and dovish central banks in the rest of the world highlight the ongoing divergences that favor the greenback.

AMERICAS

Fed easing expectations continue to evolve. After the strong jobs data the previous week, higher than expected CPI data last week support our long-held view that the Fed is likely to maintain a very cautious approach to cutting rates. After adjusting downwards initial, Fed easing expectations have picked up again. Two cuts by year-end are nearly priced in, while nearly 150 bp of total easing is seen over the next 12 months vs. 125 bp last week. If the data remain strong, there is still scope for Fed easing expectations to adjust yet again. Fed speakers have largely reflected caution. Goolsbee speaks today.

U.S. data highlight will be September retail sales. Headline is expected at 0.3% m/m vs. 0.1% in August, while ex-autos is expected at 0.1% m/m vs. 0.1% in August. The so-called control group used for GDP calculations is expected at 0.3% m/m vs. 0.3% in August. Overall, consumer spending is supported by positive real wage growth, a healthy labor market, and strong household balance sheets and this should continue into 2025. August business inventories and industrial production will also be reported today.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.2% SAAR and will be updated today after the data. 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 a sharp slowdown is unlikely to be seen as we move into 2025.

Weekly jobless claims will be closely watched. That’s because initial claims will be for the BLS survey week containing the 12th of the month and are expected at 258k vs. 258k last week. Last week’s claims were affected by Hurricane Helene and those distortions will carry over into this week's data due to the impact of Hurricane Milton. Continuing claims are reported with a 1-week lag and are expected at 1.865 mln vs. 1.861 mln last week. Bloomberg consensus for October NFP is 125k vs. 254k in September, while its whisper number stands at 156k. However, it will probably take several weeks or months before we get a truly clean read on the state of the labor market. As such, expect heightened market volatility in the meantime.

October regional Fed surveys will continue rolling out. Philly Fed manufacturing is expected at 3.0 vs. 1.7 in August. Earlier this week, Empire manufacturing came in -11.9 vs. at 3.6 expected and 11.5 in September while New York Fed services came in at -2.2 vs. 0.5 in September.

Housing market data will be in focus. The September NAHB housing market index is expected to see a small one point improvement in homebuilder confidence to 42. The recent rise in mortgage rates may keep a lid on the recovery in the housing sector. Of note, the bottom for 30-year mortgage rates was September 17, one day before the Fed cut rates 50 bp.

Chile central bank is expected to cut rates 25 bp to 5.25%. At the last meeting September 3, the bank cut rates 25 bp to 5.5% and warned that both bank credit and consumer spending were weak. The bank added that if the economy meets its forecasts, “the reduction of the key rate toward its neutral level will be somewhat faster than expected in June.” Since then, September inflation came in 4.1% y/y vs. 4.7% in August, the first deceleration since March and nearing the 2-4% target range. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 4.25%.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank is expected to cut rates 25 bp. We expect the ECB to reiterate that it “is not pre-committing to a particular rate path.” However, the risk is that ECB president Christine Lagarde sounds dovish during her post-meeting press conference because the eurozone economy is stagnating and inflation is undershooting the ECB’s 2% target. There will be no updated macro forecasts until the December meeting. The market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 2.0%, but there are growing odds of an additional 25 bp cut. Of note, final September headline inflation was revised down a tick to 1.7% y/y.

Turkey central bank is expected to keep rates steady at 50.0%. At the last meeting September 19, the bank kept rates steady at 50.0% but began setting the table for a rate cut by leaving out a previous pledge to hike rates further if needed. This meeting seems too soon for a cut as core inflation remains uncomfortably high around 49% y/y. Instead, we look for the first cut at the November 21 meeting. The swaps market is pricing in 350 bp of total easing over the next three months, which seems about right.

ASIA

Nippon Life plans to reduce its holdings of yen-denominated bonds in the second half of FY24. Senior investment official Akira Tsuzuki said that the company plans to cut its yen bond holdings in line with the JPY380 bln ($2.5 bln) decrease seen in the first half of FY24. Tsuzuki said Nippon Life increased its holding of longer dated JGBs but offloaded its shorter-term holding in anticipation of BOJ rate hikes. He added that Nippon Life reduced its holdings of hedged foreign bonds in the first half of FY24 by JPY310 bln and increased its holdings of unhedged foreign bonds by JPY110 bln. Tsuzuki said that it plans to increase its holdings of hedged foreign bonds in the second half of FY24 while keeping its holdings of unhedged foreign bonds flat or decrease.

The company’s forecasts are worth discussing. Tsuzuki noted that Nippon Life expects the 10-year JGB yield to rise to 1.4% by the end of FY24, while the 30-year JGB yield is expected to rise to the 2.0-2.5% range. Tsuzuki said that “In the second half of the year, we expect to see a certain amount of yield rises, so we will buy firmly where yields are good, and hold back where yields are a little low.” He added that the 30-year JGB yield is at “a sufficiently attractive level at the moment. It’s more likely that the yield on bonds with maturities of 10 years or less will rise.” Nippon Life expects the Bank of Japan to hike rates again at the end of this year or at the start of 2025. This is a slightly more aggressive view than the swaps market, which does not fully price in the next hike until Q2 of next year. With the economy slowing and the BOJ likely to remain cautious, we also question whether JGB yields will rise as much as Nippon Life expects. Stay tuned.

Japan reported weak September trade data. Exports came in at -1.7% y/y vs. 0.9% expected and 5.5% in August, while imports came in at 2.1% y/y vs. 2.8% expected and 2.3% in August. This was the first y/y drop in exports since November 2023 and the recent weakness in the trade data has been all the more disappointing given the low base effects from last year.

Australia reported solid September jobs data. There were 64.1k jobs added vs. 25.0k expected and a revised 42.6k (was 47.5 k) in August, while the unemployment rate came in a tick lower than expected at 4.1%. The mix was good, with 51.6k full-time jobs and 12.5k part-time jobs added. The market is now pricing in only 35% odds of a 25 bp cut in December vs. 50% last week, and this is helping AUD outperform so far today. Nevertheless, we expect the RBA to join the global easing cycle later this year as underlying economic activity is weak and points to lower inflation pressures. The Q3 CPI report due out October 30 will either support our view or ensure the RBA continues to lag its international peers.

Financial markets are unimpressed with China’s latest measures to support the ailing property sector. Mainland and Hong Kong equity markets continue to slide and are down nearly 15% from the October peaks. Same goes for iron ore, while copper and oil are down about 10% from the peaks. China will reportedly boost the credit available to “white list” real estate projects from CNY2.23 trln to CNY4 trln by year-end in an effort to complete unfinished projects. The "white list" was launched January 26 and is a mechanism whereby local authorities recommend to banks real estate projects eligible for financial support. Moreover, local governments will be allowed to issue special bonds to finance the renovation of 1 mln more homes in run-down downtown districts. Investors are still waiting for the details of China’s fiscal stimulus pledge which are anticipated to be unveiled later this month.