• With the shutdown averted (for now), we are now back to data dependence and the U.S. data are still coming in strong; the Fed hawks remain vocal; U.S. yields continue to rise; August JOLTS data will be the data highlight; Republican Representative Gaetz formally moved to remove Speaker McCarthy from his post
  
• ECB Chief Economist Lane is in the peak rates camp; U.K. food prices dropped for the first time in over two years; Switzerland September CPI came in soft; Turkey September CPI came in hot
  
• The 10-year JGB auction saw solid demand; RBA kept rates steady at 4.10%, as expected

The dollar continues to power ahead. DXY traded at a new cycle high near 107.21 and remains on track to test the November 21 high near 108. The euro traded at a new cycle low near $1.0460 and remains on track to test the November 30 low near $1.0290, while sterling traded at a new cycle low near $1.2060 and remains on track to test the March low near $1.1805. USD/JPY traded at a marginal new high near 149.95. If and when the 150 level goes, the pair remains on track to test the October high near 152. This week’s price action supports our view that last week’s dollar weakness was corrective in nature and was most likely driven by quarter end rebalancing. Looking beyond that noise, nothing fundamentally has changed and we see no reason to believe the dollar’s uptrend has ended.

AMERICAS

With the shutdown averted (for now), we are now back to data dependence and the U.S. data are still coming in strong. The dollar correction was much shallower than we would have expected but it's clear that the shutdown risks were weighing on the dollar and now that has passed. That means the Fed will get to see key September inflation readings before the November 1 FOMC decision. The Cleveland Fed’s Nowcast model suggests headline and core CPI running at 3.69% and 4.17% in September, respectively, and headline and core PCE running at 3.45% and 3.73%, respectively. Odds of a hike next month stand near 30% and move higher to over 50% December 13.

The Fed hawks remain vocal. Bowman has emerged as one of the leading hawks now that Bullard departed. Yesterday, she said “I continue to expect that further rate increases will likely be needed to return inflation to 2% in a timely way. I see a continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months.” She stressed that “progress on inflation is likely to be slow given the current level of monetary policy restraint.” Elsewhere, Mester said that “I suspect we may well need to raise the fed funds rate once more this year and then hold it there for some time as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred.” Barr reiterated his centrist stance by noting “In my view, the most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals.” Bostic speaks today.

U.S. yields continue to rise. The 10-year yield traded at a new cycle high near 4.70% today, while the 30-year yield traded at a new cycle high near 4.82%. Due to a perfect storm of bond-negative drivers, one can easily see a 5-handle soon on long dated U.S. Treasuries. U.S. real yields continue to climb, with the real 10-year trading today at a new cycle high near 2.35%.

August JOLTS data will be the data highlight. Job openings are expected at 8.815 mln vs. 8.827 mln in July. Openings have fallen three straight months to the lowest since March 2021, while hires have fallen to the lowest since January 2021. On the other hand, quits have fallen to the lowest since February 2021, while layoffs have been steady in recent months near the cycle lows. There seems to be less churn in the labor market and that’s not necessarily bad. Bottom line: there are fewer job openings but this is not being driven by layoffs or quits. Rather, employers may just be getting more reluctant to hire due to rising economic uncertainty.

We will get other labor market data before the September jobs report Friday. Of note, Bloomberg consensus stands at 170k vs. 187k in August but its whisper number stands at 175k. The unemployment rate is expected to fall a tick to 3.7% while average hourly earnings are expected to remain steady at 4.3% y/y. Ahead of that report, we get ADP private sector jobs estimate tomorrow and consensus stands at 150k vs. 177k in August. September Challenger job cuts and weekly jobless claims will be reported Thursday.

September manufacturing ISM PMI came in strong. Headline came in at 49.0 vs. 47.9 expected and 47.6 in August. This was the third straight increase to the highest since November 2022. The details were also strong, as employment came in at 51.2 vs. 48.5 in August, production came in at 52.5 vs. 50.0 in August, and new orders came in at 49.2 vs. 46.8 in August. Of note, supplier deliveries fell to 46.4 vs. 48.6 in August while backlog of orders fell to 42.4 vs. 44.1 in August. Both had risen three straight months and so the drop is welcome as the higher these numbers are, the higher the strains in the supply chains. If both these measures continue to ease, this would be a good sign for inflation going forward and could see the prices paid component fall even further from 43.8 in September vs. 48.4 in August. ISM services PMI will be reported tomorrow and the headline is expected at 53.7 vs. 54.5 in August. Keep an eye on employment and prices paid, which stood at 54.7 and 58.9 in August, respectively.

September vehicle sales will also be reported. Sales are expected at a 15.40 mln SAAR vs. 15.04 mln in August. Sales have bounced between 15-16 mln the past six months. A strong reading would feed into another solid retail sales report, which will be reported October 17.

Republican Representative Matt Gaetz last night formally moved to remove Speaker McCarthy from his post. At least one other Republican has said he would vote to remove McCarthy while several others have expressed their support for the move. Given the razor-thin edge that the party holds in the House, only five Republicans are needed to provide the simple majority needed to oust McCarthy if all Democrats voted against him as well. That is really the biggest question: will Democrats bail him out or let him go down? Trust between the two parties is at all-time lows. McCarthy must call a full House vote within two legislative days, with reports suggesting it could come as soon as today. If McCarthy is ousted, we could see another time-consuming process to find his replacement. Our understanding is that the House cannot take up any legislative work without a Speaker in place. As such, a protracted leadership vote would divert much-needed work away from getting a budget passed before the stopgap measure expires November 17.

EUROPE/MIDDLE EAST/AFRICA

ECB Chief Economist Lane is in the peak rates camp. He said that interest rates have “reached a level that will make a substantial contribution to get inflation to target” and added that the “base case is to maintain this level for as long as needed.” Lane downplayed the December 14 meeting, when updated macro forecasts will be released, noting “Regardless of whether it’s December, next March, next June, there’s a lot of uncertainty - some of this uncertainty will not be defused by December. I would not over-focus on December as a critical decision.” Lane speaks again later today. Villeroy also speaks. WIRP suggests less 5% odds of a hike October 26, then rising modestly to top out near 15% December 14. The first cut is still seen around mid-2024, but leaning a bit more towards June than July previously.

U.K. food prices dropped for the first time in over two years. The British Retail Consortium reported a -0.1% m/m drop in September, while the y/y rate eased to 9.9%, the lowest in over a year. Overall shop prices slowed to 6.2% y/y vs. 6.9% in August, the lowest in a year. BRC official said “We expect shop price inflation to continue to fall over the rest of the year. However, there are still many risks to this trend – high interest rates, climbing oil prices, global shortages of sugar, as well as the supply chain disruption from the war in Ukraine.”

We may already have seen the end of the BOE tightening cycle. After last month’s dovish hold by the Bank of England, WIRP suggests only 33% odds of a hike November 2, rising to top out near 75% in Q1. This is a far cry from the 6.5% peak policy rate that was priced in over the summer and so removes the sole pillar of support for sterling. The first cut is not expected until Q4 2024. Yesterday, leading BOE hawk Mann said “I believe the Monetary Policy Report forecast for a long time has been telling a story fundamentally different from the ones that I consider likely. My story has been one of more resilient domestic demand and more persistent price pressures, which therefore requires a more restrictive monetary policy stance.”

Switzerland September CPI came in soft. Headline came in a tick lower than expected at 1.7% y/y vs. 1.6% in August, while core came in two ticks lower than expected at 1.3% y/y vs. 1.5% in August. This was the first acceleration in headline since February but it remains below the 2% target. At the September 21 meeting, the Swiss National Bank unexpectedly kept rates steady at 1.75%vs. an expected 25 bp hike. The bank said that "From today's perspective, it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.” President Jordan said the battle against inflation is not yet over and that the bank is closely monitoring second round effects, but added that “we could afford to take a break from hikes.” We believe the tightening cycle has likely ended. WIRP suggests only 20% odds of a hike in December, rising to top out near 30% in March.

Turkey September CPI came in hot. Headline came in at 61.53% y/y vs. 61.60% expected and 58.94% in August, while core came in at 68.93% y/y vs. 67.20% expected and 64.85% in August. Headline accelerated for the third straight month to the highest since December 2022, while core accelerated for the fifth straight month to the highest since October 2022. At the last policy meeting September 21, the central bank delivered a hawkish surprise and hiked rates 500 bp to 30.0% vs. 250 bp expected. Next policy meeting is October 26 and another large hike of that magnitude is expected. The swaps market is pricing in a peak policy rate near 37.50% over the next six months, which would not be enough to tame inflation and stabilize the lira.

ASIA

The 10-year JGB auction saw solid demand. The bid-to-cover ratio fell slightly to 3.93 vs. 4.02 at the previous auction September 5. A total of JPY2.7 trln ($18 bln) was sold at a yield of 0.768% vs. 0.657% previously. The sale comes ahead of an extra bond-buying operation tomorrow for 5- to 10-year paper, which will be followed by a JPY900 bln ($6 bln) 30-year JGB auction Thursday. Yields continue to rise even as near-term BOJ liftoff expectations ebbed a bit. WIRP suggests no odds of liftoff October 31 vs. 15% at the start of this week, rising to 15% December 19 vs. 30% at the start of this week, 65% January 23 vs. 85% at the start of this week, and remains fully priced in for March 19.

Reserve Bank of Australia kept rates steady at 4.10%, as expected. This was new Governor Bullock’s first meeting. Similar to her predecessor Lowe, Bullock said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.” One major change to the statement added high fuel costs as an inflationary risk. Otherwise, this was in many ways a placeholder meeting as updated macro forecasts will come November 7. WIRP suggests only 15% odds of a hike November 7, down from 35% at the start of this week. Those odds rise to 40% December 5 and topping out near 85% in March, down from 95% at the start of this week.