The dollar was mostly weaker against the majors last week as the greenback surrendered most of its gains during the post-jobs report reversal across markets. The dollar bloc and NOK outperformed while GBP and EUR underperformed. When all is said and done, we remain positive on the dollar as the U.S. jobs data supports our view that the Fed will have to go higher for longer. This should also keep downward pressure on equities and upward pressure on bond yields.
AMERICAS
Friday’s jobs data validated the Fed’s hawkish stance. The expected market reaction should have been higher bond yields, lower equities, and a stronger dollar. And that’s what we got, for about an hour. This trade then unraveled quickly and the exact opposite happened for the rest of the day. Sometimes, there are just days when the price action can’t be explained by fundamental developments and that’s what happened Friday. For the week ahead, we continue to believe that markets should stay focused on the fundamentals, which have not changed and remain dollar-supportive.
Many Fed speakers will spread the word this week. Collins, Mester, and Barkin speak Monday. William and Barkin speak Wednesday. Waller, Logan, Mester, and George speak Thursday. Last Friday, Collins said that recent data have “broadened” her view on peak rates and added that rates may need to go higher than she expected in September. However, she added that it makes sense to move more slowly in order to balance the risks. Also on Friday, Barkin said it’s “conceivable” that rates end up above 5% as she sees a potentially higher terminal rate. He said he’s unsure of the December meeting as more data is still coming in. And so the new messaging begins. This is entirely consistent with Powell's message last Wednesday. Since the August Jackson Hole Symposium, the Fed has been incredibly consistent in its communications.
Future Fed decisions remain data dependent. We will get one more jobs reports and two sets of inflation and retail sales data before the December 13-14 meeting. WIRP suggests a 50 bp hike then is fully priced in, with 20% odds of a larger 75 bp move. The swaps market continues to price in a terminal rate between 5.0-5.25%.
October CPI data Thursday will be the highlight. Headline is expected to fall three ticks to 7.9% y/y and core is expected to fall a tick to 6.5% y/y. Headline has been steadily decelerating from the 9.1% peak in June but core has continued to accelerate and that’s what the Fed is most concerned about. If core does indeed decelerate, markets will likely breath a short sigh of relief. PPI won’t be reported until next Tuesday.
Other than that, it’s mostly minor data. September consumer credit will be reported Monday and is expected at $30.0 bln vs. $32.24 bln in August. Wholesale trade sales and inventories will be reported Wednesday. Weekly jobless claims and the October budget statement will be reported Thursday. Preliminary November University of Michigan consumer sentiment will be reported Friday. The headline is expected to fall a few ticks to 59.5, driven by falls in both current conditions and expectations to 63.4 and 54.5, respectively.
The U.S. midterm elections Tuesday could have important implications for 2023. That is because Congressional Republicans have threatened a debt ceiling showdown next year in an effort to cut entitlements and Medicare if they win a majority in the House. In recent weeks, polls have been tilting in favor of the Republicans in both the House and the Senate. Some reports suggest that Congressional Democrats will consider acting on the debt ceiling during the lame duck session in early 2023 if they lose control of Congress. Stay tuned.
EUROPE/MIDDLE EAST/AFRICA
ECB tightening expectations have been pared back. WIRP suggests another 75 bp is about 60% priced in for December 15 vs. fully priced in after the October decision, while the swaps market is pricing in a peak policy rate between 3.0-3.25% vs. 3.5-3.75% after the October decision. There may be some modest relief to the CPI readings in the months ahead after PPI decelerated in September to 41.9% y/y vs. 43.4% in August. Lagarde and Panetta speak Monday, followed by Nagel and Wunsch Tuesday. Elderson speaks Wednesday, followed by de Cos, Schnabel, Kazimir, and Vasle Thursday. Holzmann, Panetta, Guindos, Lane, de Cos, Centeno, and Nagel all speak Friday.
Eurozone data reports this week are limited. Germany reports September IP Monday. IP is expected at 0.1% m/m vs. -0.8% in August, while the y/y rate is expected at 2.0% y/y vs. 2.1% in August. Last week’s soft factory orders reading (-4.0% m/m) suggests little relief for the German manufacturing sector anytime soon. Eurozone and Italy report September retail sales Tuesday. Italy is expected at 0.2% m/m vs. -0.4% in August, while the eurozone is expected at 0.4% m/m vs. -0.3% in August.
The monthly U.K. data dump begins Friday. Q3 and September GDP, construction output, IP, services, and trade will all be reported. Q3 growth is expected at -0.5% q/q vs. 0.2% in Q2, which would translate into a y/y rate of 2.1% vs. 4.4% in Q2. The Bank of England warned last week that the recession had already started and would likely last two years. Construction is expected at -0.6% m/m vs. 0.4% in August, IP is expected at -0.2% m/m vs. -1.8% in August, services index is expected at -0.5% m/m vs. -0.1% in August, and the trade balance is expected at -GBP7 bln vs. -GBP7.1 bln in August.
BOE tightening expectations need to adjust lower. After its dovish message last week, WIRP suggests only 35% odds of another 75 bp hike December 15. The swaps market is still pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 4.75%. This is down sharply from 6.25% right after the mini-budget in late September, but it seems that this should move even lower after the BOE decision. Pill speaks twice Tuesday, followed by Haskel and Cunliffe Wednesday. Ramsden speaks Thursday, followed by Haskel and Tenreyro Friday. Of note, Tenreyro voted for a 25 bp cut last week and so her comments should tilt dovish.
Norway reports October CPI Thursday. Headline is expected at 7.1% y/y vs. 6.9% in September, while underlying is expected at 5.5% y/y vs. 5.3% in September. If so, headline would be the highest since March 1988 and further above the 2% target. Norges Bank just delivered a dovish surprise last week and hiked rates 25 bp to 2.5% vs. 50 bp expected. The swaps market is pricing in steady rates going forward but with price pressures still rising, we think this will move higher. Indeed, we expect another 25 bp hike to 2.75% at the next policy meeting December 15.
ASIA
The Bank of Japan releases the summary of opinions for the October 27-28 meeting Tuesday. The bank delivered another dovish hold and so the opinions are likely to tilt dovish as well. We expect officials to continue stressing the need to see wage growth before tightening. Expect some concern about the weak yen as the meeting came just week after it was thought to have intervened again to support the currency.
Japan has a busy week. September cash earnings and household spending will be reported Tuesday. Nominal earnings are expected to remain steady at 1.7% y/y, while real earnings are expected to fall a tick to -1.8% y/y. We know Bank of Japan officials are reluctant to remove accommodation unless real wage growth picks up and we’re clearly not seeing that yet. Spending is expected at 2.7% y/y vs. 5.1% in August. October machine tool orders will be reported Thursday. October PPI will be reported Friday and is expected at 8.8% y/y vs. 9.7% in September.
September current account data Wednesday will be of interest. The adjusted balance is expected at JPY29 bln vs. -JPY531 bln in August. If so, it would be the third straight monthly deficit as the external accounts continue to worsen due to higher energy prices and weaker exports. However, the investment flows will be of most interest. August data showed that Japan investors were net buyers of U.S. bonds for the first time (JPY565 bln) after nine straight months of net selling. Japan investors remained net sellers (-JPY136 bln) of Australian bonds for the second straight month and Canadian bonds (-JPY119 bln) for the seventh straight month. Lastly, they turned net sellers of Italian bonds (-JPY124 bln).
