• Former President Trump has secured the 270 EC votes needed to become President again; Republicans took control of the Senate; the two-day FOMC meeting begins today; October ISM services PMI was stellar; Brazil is expected to hike rates 50 bp to 11.25%
  
• Final October eurozone services PMIs were firm; Germany reported firm September factory orders; Poland is expected to keep rates steady at 5.75%
  
• BOJ published the minutes to the September 19-20 meeting; New Zealand reported soft Q3 employment data; Malaysia kept rates steady at 3.0%, as expected

The dollar is surging as the Trump Trade rolls on. With former President Trump set to become President again, the dollar and UST yields are surging along with U.S. equity futures. DXY is trading higher near 105.041 and is on track to test the June high near106.130. The euro is the worst performing major and is trading lower near $1.0720. The yen is right behind it, with USD/JPY trading higher near 154.15 and on track to test the July high near 162. EM FX is lower across the board, with MXN the worst performer with USD/MXN trading at the highest since August 2022 near 20.74. While the election results have turbo-charged this move, faithful readers will recall that we have been resolute in our belief that the strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Recent data have showed that the labor market remains firm and supportive of continued robust consumption that is fueling above-trend growth. While the Fed is likely to cut rates 25 bp this week, we believe it will continue to take a cautious tone going forward, especially in light of what we view as heightened inflation risks in a second Trump term.

AMERICAS

Former President Trump has just secured the 270 Electoral College votes needed to become President again. Markets had anticipated the victory as the dollar, UST yields, and U.S. equity futures rose throughout the night. The macro logic behind the so-called “Trump Trade” is that fiscal and trade policies under a Trump presidency will be inflationary, which would force the Fed to keep policy restrictive for longer. However, Trump’s ambiguous currency policy could be a headwind for the dollar.

Elsewhere, Republicans took control of the Senate. This was expected as Democrats were defending 2/3 of the 34 seats up for grabs. The House race is currently leaning in favor of Republicans with 190 seats vs. 166 for the Democrats vs. 218 needed for a majority. Historically, the dollar has benefitted the most under a Republican president, a Republican Senate, and a Democratic House. Please see our special piece here for an in-depth analysis of what the elections could mean for financial markets.

The two-day FOMC meeting begins today and should end with the expected 25 bp cut. In our view, the vote split and Chair Powell’s post-meeting press conference will likely signal that the bar is high for the FOMC cut rates more aggressively. At the September meeting, Governor Bowman cast the sole dissenting vote in support of a 25 bp rate cut and we see risks that she again votes to keep rates steady this week. Meanwhile, we expect Powell to stick to the message he delivered in October that the “Fed doesn’t feel like it’s in a hurry to cut rates quickly” given “growing confidence” of a soft landing for economy.

The jobs report last Friday did not make the Fed’s job any easier. Looking through the distorted jobs data, we believe most indicators show the U.S. economy growing rather robustly and the labor market remaining in solid shape. Indeed, the end of the Boeing strike should lead to a noticeable uptick in November NFP. That said, our thesis will be tested in the coming months. Before the following FOMC meeting December 17-18, we get one more jobs report and two more CPI, PPI, and retail sales reports. Fed Funds futures are pricing in nearly 70% odds of a December cut, while the swaps market is pricing in close to 50% odds. Both are down from the start of this week.

October ISM services PMI was stellar. Headline came in at 56.0 vs. 53.8 expected and 54.9 in September and was the highest since July 2022. The details were also very strong, as employment jumped to 53.0 vs. 48.0 expected and 48.1 in September, the highest since August 2023. Activity fell from the 59.9 peak in September to a still-high 57.2. Lastly, prices paid fell to 58.1 vs. 58.0 expected and 59.4 in September. Bottom line: the services sector remains strong, reflecting robust consumption as we move into Q4.

Growth remains solid in Q4. The Atlanta Fed GDPNow model's estimate for Q4 GDP is at 2.4% SAAR and will be updated tomorrow after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.0% SAAR and will be updated Friday, while its initial forecast for Q1 2025 will come at the end of November. Despite all the concerns, the US economy continues to grow at or above trend as we move into 2025.

Canada October PMIs were also firm. S&P Global services PMI came in at 50.4 vs. 46.4 in September, which dragged the composite PMI higher to 50.7 vs. 47.0 in September. This was the first composite reading above 50 since May and the highest since April 2023. Last week, S&P Global manufacturing PMI came in at 51.1 vs. 50.4 in September. Ivey PMI will be reported today and stood at 53.1 in September.

Brazil COPOM is expected to hike rates 50 bp to 11.25%. At the last meeting September 18, the bank started the tightening cycle by hiking rates 25 bp as expected to 10.75% and warned that “the risks to its inflation scenarios are tilted to the upside.” Indeed, IPCA inflation has been sticky near the top-end of the 1.5-4.5% target band since July. Brazil reports October IPCA inflation Friday. Headline is expected at 4.74% y/y vs. 4.42% in September. If so, headline would be the highest since October 2023 and move above the 1.5-4.5% target range. The swaps market is pricing in 275 bp of total tightening over the next 12 months that would see the policy rate peak between 13.50%.

EUROPE/MIDDLE EAST/AFRICA

Final October eurozone services PMIs were reported. Headline services came in at 51.6 vs. 51.2 preliminary, while headline composite came in at 50.0 vs. 49.7 preliminary. If this bounce is sustained, it would mean that the composite fell below 50 for only one month. Looking at the country breakdown, the German composite rose two ticks from the preliminary to 48.6 while the French composite rose nearly a point to 48.1. Italy and Spain reported for the first time and their composite PMIs came in at 51.0 and 55.2, respectively. Despite the firmer survey data, we believe the eurozone outlook remains weak.

Germany reported firm September factory orders. Orders came in at 4.2% m/m vs. 1.5% expected and a revised -5.4% (was -5.8%) in August, while the y/y rate came in at 1.0% vs. -2.1% expected and a revised -3.4% (was -3.9%) in August. Germany reports IP and trade data tomorrow.

European Central Bank easing expectations have been pared back after the recent string of firm data. The swaps market is now pricing in 125-150 bp of total tightening over the next 12 months that would see the policy rate bottom between 1.75-2.0% vs. 1.5% in mid-October. Vujcic, Lagarde, Guindos, and Villeroy speak today.

National Bank of Poland is expected to keep rates steady at 5.75%. Governor Glapinski will hold his post-meeting press conference Thursday. Minutes from the October 2 meeting will be published Friday. At that meeting, the bank kept rates steady but Governor Glapinski continued to tilt more dovish and said a cut could come in March, April, or even earlier. He added that under the optimistic scenario, the central bank’s March forecasts would show inflation has stabilized and may fall back to the 2.5% target. The market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months and 50 bp of easing over the subsequent six months.

ASIA

Bank of Japan published the minutes to the September 19-20 meeting. It delivered a dovish hold then but there was no new material information in the minutes. Interestingly, members discussed how best to communicate monetary policy after unexpectedly spooking the markets in July with a hawkish surprise. Overall, members concluded that “it was necessary for the Bank to carefully disseminate information about underlying inflation, the outlook and risks for economic activity and prices, and the likelihood of realizing the outlook.” The summary of opinions for the October 30-31 meeting will be released next Monday. The market is still not fully pricing in the next hike until Q2 2025, with 40 bp of total tightening seen over the next 12 months. This is up from around 20 bp seen at the start of October but has done little to support the yen.

New Zealand reported soft Q3 employment data. Employment fell a tick more than expected at -0.5% q/q while the previous quarter’s increase was slashed in half to 0.2% q/q. The unemployment rate rose two ticks to 4.8% vs. 5.0% expected but was largely due to a 0.5 ppt drop in the participation rate to 71.2%, the lowest since Q2 2022. Finally, private sector wage growth was a tick softer than expected at 0.6% q/q vs. 0.9% in Q2. Overall, the readings were weak and leaves plenty of room for the RBNZ to crank up its easing cycle, which can further weigh on NZD. The market is fully pricing in a 50 bp cut this month, with 25% odds of a larger 75 bp move.

Bank Negara Malaysia kept rates steady at 3.0%, as expected. The central bank reiterated that “at the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.” Further weakness in MYR will likely prevent the bank from turning dovish anytime soon. The swaps market is pricing in steady rates over the next 12 months.