Dollar Treads Water Ahead of PPI

October 11, 2024
  • September CPI ran hot; Fed expectations continue to adjust; PPI will be today’s highlight; University of Michigan reports preliminary October consumer sentiment; weekly claims are worth discussing; Canada highlight will be September jobs data
  • The ECB’s account of the September meeting highlighted three policy path scenarios; the monthly U.K. data dump began
  • China policymakers will hold a briefing on fiscal policy this Saturday; Korea cut rates 25 bp to 3.25%, as expected

The dollar is treading water ahead of PPI data. DXY is trading slightly lower near 102.924 but has not ended a day down since September 27. The yen is underperforming and USD/JPY is trading higher near 149. The euro is trading flat near $1.0935 and is on track to test the August 1 low near $1.0780 as ECB easing expectations ramp up, while sterling is trading flat near $1.3065 after the monthly data dump (see below). 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.

AMERICAS

September CPI ran hot. Headline came in a tick higher than expected at 2.4% y/y vs. 2.5% in August, while core came in a tick higher than expected at 3.3% y/y vs. 3.2% in August. Super core was steady at 4.3% y/y, underscoring the stickiness seen in some price measures. After the September data, the Cleveland Fed's Nowcast model now estimates October headline at 2.6% vs. 2.4% before the data and October core at 3.3% y/y vs. 3.1% before the data. With inflation likely to remain persistent in October, we think the cautious Fed narrative remains intact and that's dollar-positive.

Fed expectations continue to adjust. Two cuts by year-end are no longer priced in. Bostic would seem to reflect this thinking, as he acknowledged that “I am totally comfortable with skipping a meeting if the data suggests that’s appropriate.” He added that his September Dot saw one more 25 bp rate hike this year. Bostic is not the only one, as the September Dots had 7 Fed officials that saw only one more cut in 2024, along with 2 that saw no more cuts. The median came in at 2 cuts as 9 officials saw that number along with 1 official that saw 3 more cuts.

Other Fed policymakers did not seem concerned about the CPI data. Williams said, “Looking ahead, based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time.” Elsewhere, Goolsbee said “There will probably be more close call-type meetings.” Based on his previous comments, we suspect he was the lone policymaker that saw 3 more cuts this year. Lastly, Barkin said “I don’t want the number of things that could happen to stall our progress on inflation to fuzz up the fact that we actually have made a lot of progress.” Goolsbee, Bowman and Logan speak today.

PPI will be today’s highlight. Headline is expected to fall a tick to 1.6% y/y, while core is expected to rise two ticks to 2.6% y/y. Keep an eye on PPI ex-trade, transportation, and warehousing as it feeds into the core PCE calculations. Another sticky print above 4% y/y will post an upside risk to PCE inflation. The Cleveland Fed's Nowcast model currently estimates September headline PCE at 2.1% vs. 2.2% in August and core PCE at 2.6% y/y vs. 2.7% in August.

University of Michigan reports preliminary October consumer sentiment. Headline is expected at 71.0 vs. 70.1 in September, which was the highest since April. Both current conditions and expectations are expected to rise modestly to 64.0 and 74.8, respectively. These readings would be consistent with ongoing robustness in consumption. Elsewhere, 1-year inflation expectations are expected to remain steady at 2.7%, while 5- to 10-year expectations are expected to fall a tick to 3.0%.

Weekly claims are worth discussing. Initial claims spiked sharply to 258k vs. 230k expected and 225k last week. On an unadjusted basis, more than half of the rise came in states that were affected by Hurricane Helene, including North Carolina and Florida. The distortions will carry over into this week's data due to the impact of Hurricane Milton. To make matters even worse, this week is the BLS survey week containing the 12th of the month. There is no Bloomberg consensus yet for NFP but its whisper number stands at 160k. However, it will probably take several weeks before we get a clean read on the state of the labor market.

U.S. growth remains robust. 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 today. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.2% SAAR and will be updated next Thursday after the data. Momentum in the economy remains strong and so little slowdown is likely as we go into 2025.

Canada highlight will be September jobs data. Consensus sees a 27.0k rise in jobs vs. 22.1k in August, while the unemployment rate is expected to rise a tick to a new three-year high of 6.7% and wages are expected to slow two ticks to 4.7% y/y. More evidence of cooling labor market conditions will cement the case for a 50 bp Bank of Canada rate cut at the next October 23 meeting, which would drag CAD lower. The swaps market is currently pricing in nearly 55% odds of a jumbo cut this month.

Bank of Canada also releases its Q3 business outlook survey. We expect the readings to remain under pressure as the economy continues to soften.

EUROPE/MIDDLE EAST/AFRICA

The ECB’s account of the September meeting highlighted three policy path scenarios. They are (1) gradual easing, (2) faster pace of rate cuts, and (3) suspend the easing cycle. According to the ECB, a gradual approach to dialing back restrictiveness would be appropriate if the incoming data were in line with the baseline projection. A faster pace of rate cuts would likely be appropriate if the growth outlook worsened or services inflation slows more than the ECB expects. Finally, pausing the easing cycle would be appropriate if core inflation quickens. Risks are skewed in favor of the second scenario, which can further weigh on the euro. A 25 bp cut is priced in for the October 16-17 meeting.

The monthly U.K. data dump began. August GDP, IP, services, construction, and trade data were all reported. GDP came in as expected at 0.2% m/m vs. flat in July, IP came in at 0.5% m/m vs. 0.2% expected and a revised -0.7% (was -0.8%) in July, services came in a tick lower than expected at 0.1% m/m vs. 0.1% in July, and construction came in a tick lower than expected at 0.4% m/m vs. -0.4% in July. All three major sectors made positive growth contributions in August. Services added 0.06 ppt to the m/m gain in GDP, while production and construction added 0.07 and 0.03 ppt, respectively. The y/y rates were mostly slower but the data do not move the dial on Bank of England policy, and it is still expected to resume cutting rates at the November 7 meeting.

ASIA

China policymakers will hold a briefing on fiscal policy this Saturday. Finance Minister Lan Fo’an will reportedly unveil fiscal measures to boost growth and will take questions from the press. A Bloomberg survey shows consensus for CNY2 trln of fiscal stimulus to be announced, or around 2% of GDP. The stimulus is likely to be funded by issuance of government bonds. Maybe it’s just us, but it would seem that relying on fiscal stimulus that’s funded by piling on even more debt will only worsen the huge debt overhang that is the root problem in China. On the other hand, we acknowledge that the liquidity measures already announced will boost asset markets, but the markets will always be left asking for more and more as these measures are unlikely to significantly impact the real economy.

Bank of Korea cut rates 25 bp to 3.25%, as expected. The bank said that uncertainties on the future growth path have heightened while headline inflation is expected to remain below 2% “for some time” and core inflation is expected to remain around 2%. Governor Rhee said there was one dissent in favor of steady rates and added that five board members see steady rates over the next three months and only one is open to a rate cut over the same period. The market is pricing in steady rates over the next three months followed by 25 bp of total easing over the subsequent months.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction