The broad-based dollar recovery continued on the back of firm U.S. data. CHF, SEK, and JPY outperformed while CAD, NZD, and AUD underperformed. Data this week should continue to underscore the widening economic and monetary policy divergences that have favored the dollar in recent weeks. The dollar should remain bid as the risk rally may run out of steam after the disappointing fiscal news out of China this weekend.
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. Two cuts by year-end are no longer priced in, while 125 bp of total easing is seen over the next 12 months. If the data remain strong, there is still scope for Fed easing expectations to adjust further. Fed speakers this week should largely reflect caution. Kashkari (twice) and Waller speak Monday. Daly and Kugler speak Tuesday. Goolsbee speaks Thursday. Kashkari (twice) and Waller speak Friday.
U.S. data highlight will be September retail sales Thursday. Headline is expected at 0.3% m/m vs. 0.1% in August, while ex-autos is expected at 0.2% m/m vs. 0.1% in August. The so-called control group used for GDP calculations is expected at 0.4% m/m vs. 0.3% in August. Overall, consumer spending is supported by positive real wage growth, healthy labor market, and strong household balance sheets. August business inventories and industrial production are also reported Thursday.
U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.2% SAAR and will be updated Thursday 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 Friday. 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 253 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 1.888 mln vs. 1.861 mln last week. Bloomberg consensus for October NFP is at 120k, while whisper number stands at 160k vs. 254k in September. It will probably take several months before we get a truly clean read on the state of the labor market.
October regional Fed surveys start rolling out. Empire manufacturing kicks things off Tuesday and is expected at 3.6 vs. 11.5 in September. New York Fed services will be reported Wednesday. Philly Fed manufacturing will be reported Thursday and is expected at 3.5 vs. 1.7 in August.
Housing market data will be released throughout the week. The September NAHB housing market index Thursday is projected to point to a small one point improvement in homebuilder confidence to 42. In contrast, August building permits and housing starts Wednesday are expected to remain consistent with weak housing market activity. 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.
Canada highlight will be September CPI data Tuesday. Headline is expected to fall two ticks to 1.8% y/y, while core median is expected to remain steady at 2.3% y/y and core trim is expected to rise a tick to 2.5% y/y. If so, headline would be the lowest since February 2021 and in the bottom half of the 1-3% target range. Slower inflation could boost the case for a 50 bp cut at the next October 23 BOC meeting. The market is pricing in 55% odds of this jumbo cut.
EUROPE/MIDDLE EAST/AFRICA
European Central Bank meets Thursday and 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. 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%.
The ECB will report its Q3 Bank Lending Survey Tuesday. The monthly money supply data showed credit dynamics are improving but remain weak by historical standards amidst weak loan demand.
Germany October ZEW survey will be reported Tuesday. Expectations are expected at 10.0 vs. 3.6 in September, while current situation is expected at -84.0 vs. -84.5 in September. Germany remains the weak link in the eurozone as it slides into recession.
U.K. highlight will be September CPI data Wednesday. Headline is expected to fall three ticks to 1.9% y/y, core is expected to fall two ticks to 3.4% y/y, and CPIH is expected to fall four ticks to 2.7% y/y. Keep an eye on services inflation, which is expected to fall four ticks to 5.2% y/y. If so, headline would be the lowest since April 2021 and below the 2% target. For reference, the BOE projects September headline CPI at 2.1% y/y and services CPI at 5.5% y/y.
Labor market data Tuesday will also be important. Average weekly earnings ex-bonuses are expected to fall two ticks to 4.9% y/y and would largely track the Bank of England’s Q3 projection of 4.8% y/y. The unemployment rate is forecast to stay at 4.1% for a second consecutive month in August and would remain below the BOE’s Q3 forecast of 4.4%.
September retail sales data will be reported Friday. Headline sales are expected to decline -0.5% m/m due to unseasonably wet weather in England after surging 1.0% in August. Nevertheless, the recovery in U.K. real incomes supports a recovery in consumption spending activity. Bottom line: CPI and retail sales data will reinforce the case for the Bank of England to resume cutting rates at the November 7 meeting. However, the gradual normalization in the labor market argues for a cautious BOE easing cycle. The market sees 125 bp of total easing over the next 12 months. The lonesome dove Dhingra speaks Monday.
ASIA
On Saturday, China Ministry of Finance pledged that more fiscal spending is in the pipeline but did not offer any hard numbers. Instead, Finance Minister Lan said the central government “has room” to raise debt and increase the deficit. In the meantime, Lan pointed out that local governments can tap funding from unused bond quota worth 2.3 trillion yuan by year-end. This is not fresh stimulus. Detailed fiscal spending measures are expected to be unveiled later this month at a meeting of the Standing Committee of the National People’s Congress. The prospect of more aggressive fiscal stimulus measures from China should continue to support Chinese equity markets and growth sensitive currencies and risk assets. However, until the size and target of the additional fiscal package are clear, these assets are unlikely to see any further significant gains.
Japan highlight will be September national CPI data Friday. Headline is expected at 2.5% y/y vs. 3.0% in August, core (ex-fresh food) is expected at 2.3% y/y s. 2.8% in August, and core ex-energy is expected to remain steady at 2.0% y/y. If so, core would be the lowest since April and closer to the 2% target. Of note, September PPI rose two ticks to 2.8% y/y vs. 2.3% expected and so there are still some inflation risks lurking. That said, underlying inflation in Japan remains in a firm downtrend and argues for a cautious tightening cycle. Adachi speaks Wednesday.
September trade data Thursday will also be important. Exports are expected at 0.8% y/y vs. 5.5% in August, while imports are expected at 2.8% y/y vs. 2.3% in August. Recent weakness in the trade data has been disappointing given the low base effects from last year.
Australia highlight will be September jobs data Thursday. Consensus sees 25.0k jobs added vs. 47.5 k in August, while the unemployment rate is expected to remain steady at 4.2%. The RBA’s view is that “further falls in vacancies can still occur alongside a relatively modest increase in the unemployment rate.” Nevertheless, we expect the RBA to join the global easing cycle later this year because Australia underlying economic activity is weak and points to lower inflation pressures. The market is pricing in 50% odds of a 25 bp cut by December.
New Zealand highlight will be Q3 CPI data Wednesday. Headline is expected at 0.7% q/q vs. 0.4% in Q2, while the y/y rate is expected at 2.2% vs. 3.3% in Q3. If so, it would be the lowest y/y rate since Q1 2021 and nearing the center of the 1-3% target range. Of note, CPI tradeable is expected at -0.1% q/q vs. -0.5% in Q2, while CPI non-tradeable is expected at 1.3% q/q vs. 0.9% in Q2. The data should leave ample room for the RBNZ to continue its easing cycle after last week’s 50 bp cut. Moreover, monetary policy is too tight and heightens the risk a deeper economic downturn. At 4.75%, the policy rate is still above the RBNZ’s estimate for the nominal neutral rate range of 2-4%. RBNZ Governor Orr speaks Monday. Deputy Governor Hawkesby speaks Tuesday. Assistant Governor Silk speaks Wednesday.