The majors were firmer across the board last week as the dollar came under broad-based pressure. GBP, SEK, and NOK outperformed while JPY, CHF, and CAD underperformed. With the Fed expected to deliver another 75 bp hike and maintain its hawkish stance, we believe the dollar could start to stage a recovery this week. We will also get key data this week that should show continued resilience in the U.S. economy that underscores the need for the Fed to go higher for longer.

AMERICAS

The two-day FOMC meeting ends Wednesday and another 75 bp hike is expected. There won’t be updated macro forecasts and Dot Plots until the December 13-14 meeting, when WIRP suggests a 50 bp hike is fully priced in with nearly 35% odds of a larger 75 bp move. Between these two meetings, we will see two more sets of jobs, inflation, and retail sales reports and so the December meeting will be fully data dependent. His press conference will be closely watched but we expect Chair Powell to maintain the hawkish tone that been consistently held since Jackson Hole in late August. We do not think he will give the markets what they are looking for, which is some hint of a pivot. After the decision, Fed officials will go forth to spread the message. Collins is first up and speaks Friday. The swaps market is still pricing in a peak policy rate near 5.0%.

This is also a big week for U.S. data. The jobs report Friday is the highlight, with NFP consensus at 190k vs. 263k in September. The unemployment rate is expected to rise a tick to 3.6%, while average hourly earnings are expected at 4.7% y/y vs. 5.0% in September. We know that the labor market is a lagging indicator but the Fed is counting on seeing some weakness in order to help fight inflation. So far, the unemployment rate hasn’t been cooperating. Ahead of the jobs data, ADP reports its private sector jobs estimate Wednesday and is expected at 180k vs. 208k in September. September JOLTS job openings will be reported Tuesday and are expected at 9.625 mln vs. 10.053 mln in August, while October Challenger job cuts and weekly jobless claims will be reported Thursday.

Key October survey data will be reported. Chicago PMI will be reported Monday and is expected at 47.0 vs. 45.7 in September. ISM manufacturing PMI will be reported Tuesday and is expected at 50.0 vs. 50.9 in September. Keep an eye on prices paid and employment, which stood at 51.7 and 48.7 in September, respectively. ISM services PMI will be reported Thursday and is expected at 55.1 vs. 56.7 in September. Keep an eye on prices paid and employment, which stood at 68.7 and 53.0 in September, respectively. Lastly, the Fed regional manufacturing surveys wrap up Monday with Dallas expected at -18.5 vs. -17.2 in September. Last week, S&P Global reported soft preliminary October PMI readings. Manufacturing came in at 49.9 vs. 52.0 in September, services came in at 46.6 vs. 49.3 in September, and the composite came in at 47.3 vs. 49.5 in September. However, it’s worth noting that the ISM readings have been running higher than S&P Global in recent months and appear to be more closely reflecting the resilience of the U.S. economy.

Other minor data will be reported. September construction spending (-0.5% m/m expected) and October vehicle sales (14.30 mln annual pace expected) will be reported Tuesday. September trade (-$72.0 bln expected), factory orders (0.3% m/m expected), and Q3 nonfarm productivity and unit labor costs will be reported Thursday.

Canada highlight is also jobs data Friday. Consensus sees 5.0k jobs added vs. 21.1 k in September, with unemployment seen up a tick to 5.3%. October Ivey PMI will also be reported Friday, while S&P Global manufacturing PMI will be reported Tuesday. September building permits and trade data will be reported Thursday. Last week, the Bank of Canada delivered a dovish surprise and hiked rates 50 bp to 3.75% vs. 75 bp expected. While it said that rates will need to rise further given high inflation, the shift was a surprise given how firm recent data have been. At his post-decision press conference, Governor Macklem said that the economy remains overheated and that there is still no generalized decline in price pressures. However, he added that the bank is trying to balance the risk of under- and over-tightening as past rate hikes are beginning to weigh on growth. Lastly, Macklem said the bank “is still not there” in terms of ending its tightening cycle but added that it is getting closer to the end. We all know there are lags involved with monetary policy but we feel that Macklem is sending a very mixed message and that's not good. WIRP suggests a 25 bp hike is fully priced in for the next meeting December 7, with around 30% odds of a larger 50 bp move. The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 4.25%.

EUROPE/MIDDLE EAST/AFRICA

U.K. Chancellor Hunt has delayed his budget statement until November 17. The unveiling was originally planned for this week but we do not take any issue with its delay. The budget will be a key factor in regaining market credibility and so there is no need to rush it. Contrast this to the approach taken by Kwarteng, who announced his ill-conceived mini-budget without consulting the cabinet nor the OBR. Of note, the Treasury has been forced to engage in pro-cyclical fiscal tightening in order to regain market confidence, but this will weigh heavily on the economy. In the best of times, fiscal policy is meant to be counter-cyclical. It’s a quiet week for U.K. data. Final October PMI readings will also be reported, with manufacturing Tuesday and services and composite Thursday.

Bank of England is expected to hike rates 75 bp to 3.0% Thursday. At the last policy meeting September 22, the bank hiked rates 75 bp to 2.5% but the MPC was unusually split, with 5 voting for 50 bp, 3 for 75 bp, and 1 for 25 bp. It said then that it still sees inflation peaking at just under 11% next month but remaining above 10% in the following months. Of note, Quantitative Tightening (QT) will begin Tuesday but longer-dated gilts will be excluded. Look for some guidance from the bank when this exclusion might end. Updated forecasts will be released at this week’s meeting and while there is still some fiscal uncertainty, the bank may be able to incorporate a rough framework of the fiscal plan to be unveiled by Chancellor Hunt. If nothing else, the coordination and communication between the BOE and the government can only improve from the Truss lows. Looking ahead, the swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 5.0%, down sharply from 6.25% right after the mini-budget in late September.

Eurozone October CPI Monday will be the data highlight. Consensus sees headline at 10.3% y/y vs. 9.9% in September and core at 5.0% y/y vs. 4.8% in September. However, we see clear upside risks after the country data Friday from Germany, France, and Italy showed sharp accelerations from September. September PPI will be reported Friday and is expected at 42.0% y/y vs. 43.3% in August. These readings will keep pressure on the ECB to continue tightening aggressively even as the eurozone slips into recession.

Eurozone Q3 GDP data Monday will also hold some interest. Consensus sees 0.1% q/q vs. 0.8% in Q2 while the y/y rate is expected at 2.1% vs. 4.1% in Q2. There are also risks of an upside surprise here after country level data were released Friday. Germany grew 0.3% q/q vs. -0.2% expected, France grew 0.2% q/q as expected, and Spain grew a tick less than expected at 0.2% q/q. That said, the slowdown is unmistakable and ECB President Lagarde warned last week that the economy is likely to slow further in Q4 and Q1.

Final eurozone October PMI readings will be reported. Manufacturing will be reported Wednesday. Italy and Spain report for the first time and are expected at 46.9 and 47.5, respectively, both down around a point and a half from September. Services and composite will be reported Friday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 47.4 and 48.1, respectively, both down a couple of ticks from September.

Lastly, Germany reports key data. September retail sales will be reported Monday and are expected at -0.5% m/m vs. -1.8% in August. September trade and October unemployment data will be reported Wednesday. Exports are expected at 0.4% m/m vs. 3.2% in August, while imports are expected at -0.8% m/m vs. 5.2% in August. September factory orders will be reported Friday and are expected at -0.5% m/m vs. -2.4% in August. Germany remains the weak link in the eurozone but the rest are already following it into recession. France has held up surprisingly well but is also weakening.

Markets are still digesting last week’s ECB decision. The bank hiked rates 75 bp, as expected, but the vote was split as three policymakers wanted a smaller 50 bp move. Furthermore, the bank cited “substantial progress” in normalizing policy and removed the reference to further hikes “over the next several meetings” from its statement. All in all, these developments were seen as a pivot by the ECB. President Lagarde tried some damage control in her press conference, noting that the bank “might well” still hike at several more meetings and that the size of future hikes will depend on the data. She acknowledged that the ECB deliberately didn’t discuss Quantitative Tightening (QT) at this meeting and will decide on those principles at the December meeting. However, subsequent reports suggest the timing for the start of QT won’t be announced then. Lastly, Madame Lagarde acknowledged weakness ahead by noting risks to the economic outlook were “clearly” to the downside and admitting that the likely significant Q3 slowdown will deepen in Q4 and Q1. With a big chunk of the eurozone already tipping into recession, can the ECB hike as aggressively as anticipated? WIRP suggests another 75 bp is nearly priced in for December 15, while the swaps market is pricing in a peak policy rate between 3.5-3.75%.

Norges Bank is expected to hike rates 25 bp to 2.5% Thursday. However, markets are split. Half the analysts polled by Bloomberg look for a 25 bp hike while the other half look for hikes of either 50 or 75 bp. At the last policy meeting September 22, the bank hiked rates 50 bp to 2.25% and said it would probably hike rates again at the next meeting. The bank noted “Monetary policy is starting to have a tightening effect on the Norwegian economy. This may suggest a more gradual approach to policy rate setting ahead.” Updated macro forecasts and expected rate path were released then. Growth forecasts were lowered and inflation forecasts were raised. Of note, the expected rate path sees the policy rate peaking near 3.0% in Q3 23. This is more hawkish than the swaps market, which is pricing in 50 bp of tightening over the next 12 months that would see the policy rate peak near 2.75%. Of note, September CPI picked up to 6.9% y/y, the highest since June 1988 and further above the 2% target. As such, we see some risks of a hawkish surprise this week and think that market pricing will eventually move closer to the Norges Bank’s view. Of note, the next forecast updates will come at the December 15 meeting.

ASIA

With the BOJ delivering another dovish hold last Friday, we think USD/JPY remains a buy at current levels. Governor Kuroda said he doesn’t expect the bank to hike rates or exit stimulus anytime soon, adding that it still doesn’t see core inflation at its 2% target even in FY24. He added that the bank needs to see real wage growth around 3% to meet its inflation goal. His stance confirms our belief that current ultra-loose policy will be maintained through the end of his term in April, which is an eternity for the markets and gives the yen ample time to continue weakening. Yes, the BOJ will intervene from time to time but any related dips should be viewed as buying opportunities for USD/JPY.

Japan has a quiet week. September IP and retail sales will be reported Monday. IP is expected at -0.8% m/m vs. 3.4% in August, while sales are expected at 0.8% m/m vs. 1.3% in August. Final October PMI readings will also be reported, with manufacturing Tuesday and services and composite Friday. The economy continues to recover but policymakers remain concerned about growing headwinds. Why else would the government order another extra budget to the tune of JPY29.1 trln ($199 bln) to fund new stimulus last week even as the BOJ maintained its ultra-loose policy?

Reserve Bank of Australia is expected to hike rates 25 bp to 2.85% Tuesday. A handful of analysts polled by Bloomberg look for a larger 50 bp move. At the last policy meeting October 4, it hiked rates 25 bp to 2.60% vs. 50 bp expected. Governor Lowe stated then that “The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 bp this month as it assesses the outlook for inflation and economic growth in Australia.” Since that meeting, inflation has come in even hotter with CPI rising 7.3% y/y in both September and Q3, both cycle highs. The newly created monthly core CPI also ran hot at a cycle high 6.8% y/y. New macro forecasts will be released Friday in the RBA’s Statement on Monetary Policy. Of note, the swaps market sees the policy rate peaking near 4.15%.

Australia also reports some key data. September retail sales and private sector credit will be reported Monday. Sales are expected at 0.4% m/m vs. 0.6% in August, while credit is expected at 0.7% m/m vs. 0.8% in August. September housing market data will be reported Wednesday, including home loans value (-3.0% m/m expected) and building approvals (-10.0% m/m expected). Trade data will be reported Thursday. Exports are expected at 1% m/m vs. 3% in August, while imports are expected at 3% m/m vs. 4% in August. Q3 real retail sales will be reported Friday and are expected at 0.4% q/q vs. 1.4% in Q2. Final October PMI readings will also be reported, with manufacturing Tuesday and services and composite Thursday.

New Zealand reports Q3 labor market data Wednesday. The unemployment rate is expected to fall a tick to 3.2%, driven by an expected 0.5% q/q gain in employment. Private wages including overtime are expected at 1.2% q/q vs. 1.3% in Q2. At the last policy meeting October 5, the RBNZ hiked rates 50 bp to 3.5% and noted that “The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation is too high and labor resources are scarce.” The bank acknowledged that it discussed a 75 bp move before settling on 50 bp. This maintains the more hawkish tone established at the August 17 meeting. The bank also noted that “A lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon.” Updated forecasts will come at the next meeting November 23, where WIRP suggests a 75 bp hike to 4.25% is about 65% priced in. The swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 5.25%, which is well above the bank’s current expected rate path. We expect a hawkish shift in the rate path next month that moves the bank closer to market pricing.