The dollar mounted a broad-based recovery against the majors on the back of strong U.S. data. CAD, NOK, and AUD outperformed while JPY, NZD, and SEK underperformed. Data last week confirmed what we already knew; that is, the U.S. economy continues to outperform and the Fed is therefore unlikely to slash rates as much as the market expects. While those expectations have adjusted, more needs to be done. This week brings key U.S. inflation data that should help extend the dollar recovery.
AMERICAS
Last Friday’s jobs report was a game-changer. Expectations for aggressive Fed easing have been knee-capped, with odds of a 50 bp cut now at zero for November and 20% for December. We will get one more jobs report before the November 6-7 FOMC meeting but let’s face it, all indications are that the U.S. economy remains quite robust and not in need of aggressive easing. For now, gradualism has won the debate but despite this most recent batch of strong data, the markets are still pricing in nearly 150 bp of total easing over the next 12 months. This needs to adjust further.
Monetary policy divergences are alive and well. Besides the less hawkish Fed story, we are clearly getting a more dovish ECB, BOJ, BOE, and SNB. Same goes for the Riksbank, RBNZ, and BOC. Eventually, the holdouts RBA and Norges Bank will have to capitulate. Meanwhile, EM central banks for the most part continue to cut rates aggressively and Bank of Korea is expected to join these ranks this week. Bottom line: these policy divergences should continue to favor the dollar.
FOMC minutes Wednesday will be very important. At the September 17-18 meeting, the Fed delivered an unexpected 50 bp cut. Only Governor Bowman dissented in favor of a smaller 25 bp cut, which means virtually the entire FOMC was on board with Powell. That said, Fed official comments since the decision have largely tilted more cautious. Indeed, Chair Powell’s post-decision press conference was measured. He stressed that the Fed is not in a rush and that no one should view 50 bp as the new pace. Powell said the Fed does not believe it is behind the curve but noted that the rate cut is a sign of commitment not to get behind.
There will be plenty of Fed speakers this week. Bowman Kashkari, Bostic, and Musalem speak Monday. Kugler, Bostic, Collins, and Jefferson speak Tuesday. Bostic, Logan, Goolsbee, Jefferson, Collins, and Daly speak Wednesday. Cook, Barkin, Williams speaks Thursday. Goolsbee, Bowman and Logan speak Friday. Virtually all are expected to remain in the gradual camp. After the jobs data, even uber-dove Goolsbee finally stopped calling for “a lot more easing” over the next year.
Inflation data take center stage this week. CPI will be reported Thursday. Headline is expected to fall two ticks to 2.3% y/y, while core is expected to remain steady at 3.2% y/y. Of note, the Cleveland Fed’s inflation Nowcast model sees headline at 2.3% and core at 3.1%. Looking ahead, the model sees October headline at 2.5% and core at 3.1%. PPI will be reported Friday. Headline is expected to fall a tick to 1.6% y/y, while core is expected to rise three ticks to 2.7% 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 is an upside risk to PCE inflation.
University of Michigan reports preliminary October consumer sentiment Friday. Headline is expected at 70.5 vs. 70.1 in September, which was the highest since April. Both current conditions and expectations are expected to rise to 64.5 and 75.0, respectively. 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%.
U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 2.5% SAAR and will be updated Tuesday 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 little slowdown is likely as we go into 2025.
Canada highlight will be September jobs data Friday. Consensus sees a 31.5k 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. Overall, Canada’s labor market has cooled significantly, leaving plenty of room for the Bank of Canada to keep easing. The swaps market is pricing in 25% odds of a 50 bp rate cut at the upcoming October 23 meeting.
Bank of Canada also releases its Q3 business outlook survey Friday. We expect the readings to remain under pressure as the economy continues to soften.
EUROPE/MIDDLE EAST/AFRICA
France Finance Minister Antoine Armand will present the 2025 budget sometime this week. The budget is expected to include EUR60 bln in spending cuts and tax hikes to rein in the ballooning fiscal deficit. Prime Minister Barnier also confirmed plans to delay the timing by two years to 2029 for bringing the budget deficit, which is expected to hit -6% of GDP this year, within the -3% of GDP EU Stability and Growth Pact limit. The 2025 budget has a decent chance of passing in the National Assembly. The leader of the far-right National Rally Marine Le Pen said her party would refrain from bringing down the government while President Emmanuel Macron endorsed a temporary “exceptional taxation on corporates.”
Markets remain skeptical. The French-German 10-year government bond yield spread has tightened a bit lately to 78 bp but is just slightly below the June high of 82 bp and is wide of Spain at 76 bp. More encouragingly, the higher risk premium on French bonds yields is not spreading to the rest of the Eurozone which limits the drag on the euro.
The European Central Bank can no longer deny the undeniable. The economic outlook has deteriorated significantly even as price pressures have weakened sharply. As such, an October 17 cut is almost fully priced in along with four more cuts through mid-2025. Odds of a sixth cut in Q3 stand around 80%. The doves have the upper hand now and are unlikely to relinquish it. Cipollone, Lane, Escriva, and Nagel speak Monday. Centeno and Nagel speak Tuesday. Elderson and Villeroy speak Wednesday. After that, the media blackout for the October 16-17 meeting begins and we get no more ECB speakers until President Lagarde’s post-decision press conference next Thursday.
Germany reports key data. August factory orders will be reported Monday and are expected at -1.6% y/y vs. 3.7% in July. IP will be reported Tuesday and is expected at -4.0% y/y vs. -5.3% in July. Trade data will be reported Wednesday. Exports are expected at -1.0% m/m vs. 1.9% in July, while imports are expected at -3.0% m/m vs. 5.0% in July. Current account data will be reported Friday. Eurozone also August retail sales data Monday. Sales are expected at 0.2% m/m vs. 0.1% in July, while the y/y rate is expected at 1.0% vs. -0.1% in July.
The Bank of England outlook has changed. Even though Chief Economist Pill tried to walk it back, Governor Bailey’s dovish pivot last week continues to weigh on sterling. While a November cut remains fully priced in, the odds of a follow-up December cut have risen to over 60% vs. 50% at the start of last week.
Monthly U.K. data dump begins Friday. August GDP, IP, services, construction, and trade data will all be reported. GDP is expected at 0.2% m/m vs. flat in July, IP is expected at 0.2% m/m vs. -0.8% in July, services is expected at 0.2% m/m vs. 0.1% in July, and construction is expected at 0.5% m/m vs. -0.4% in July. The PMI data indicate all three sectors of the economy (services, manufacturing, and construction) made positive contribution to monthly growth. For reference, the Bank of England forecasts Q3 GDP growth of 0.4% q/q.
Sweden reports September CPI data Tuesday. Headline is expected to fall three ticks to 1.6% y/y, CPIF is expected to fall a tick to 1.1% y/y, and CPIF ex-energy is expected to fall three ticks to 1.9% y/y. If so, CPIF would be the lowest since December 2020 and further below the 2% target. The Riksbank projects CPIF and CPIF ex-energy to print at 1.0% and 1.9%, respectively. Next meeting is November 7 and the market sees 70% odds of a 50 bp cut. Looking ahead, the market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%, which is lower than the Riksbank’s 2.25% projection. Unless inflation cools more than expected, there is room for interest rate expectations to converge towards the Riksbank’s forecast. Deputy Governor Bunge speaks Tuesday. Governor Thedeen speaks Thursday.
Norway reports September CPI data Thursday. Headline is expected at 3.2% y/y vs. 2.6% in August, while underlying is expected to remain steady at 3.2% y/y. If so, headline would be the highest since April and further above the 2% target. At the last meeting September 18, the Norges Bank left the policy rate steady at 4.50% and highlighted that “the policy rate will likely be kept at 4.5% to the end of the year” along with a first full 25 bp cut implied for Q2 2025. That policy guidance was similar to the one made in June “but indicates a slightly faster decline in the policy rate through 2025.” The market is pricing in the first cut in January, along with 125 bp of total easing over the next 12 months.
ASIA
Japan highlight will be August cash earnings data Tuesday. Nominal earnings are expected to fall four ticks to 3.0% y/y, while real earnings are expected at -0.5% y/y vs. 0.3% in August and would be the first negative reading since May. Scheduled earnings are expected to remain steady at 3.0% y/y. Japan’s modest wage improvement so far is unlikely to change the BOJ’s more cautious approach to remove policy accommodation, as most members view financial markets as still unstable even as signs of softness spread in the economy.
August current account data Tuesday will also be important. An adjusted surplus of JPY2.419 trln is expected vs. JPY2.803 bln in July. However, the investment flows will be of more interest. The July data showed that Japan investors turned net buyers of U.S. bonds (JPY1.182 trln) after one month of net selling. Japan investors stayed net buyers (JPY137.5 bln) of Australian bonds for the second straight month after five straight months of net selling and also stayed net buyers of Canadian bonds (JPY97.0 mln) for the second straight month. Investors stayed sellers of Italian bonds (-JPY42.5 bln) for the second straight month after two straight months of net buying. Overall, Japan investors stayed total net sellers of foreign bonds (-JPY1.9 trln) for the second straight month. With the outlook for Japan yields muddied by the BOJ’s dovish pivot, it’s possible that Japan investors will continue chasing higher yields abroad.
Japan reports September machine tool orders Wednesday. Both domestic and foreign orders have been softening, yet another warning sign for the BOJ.
Reserve Bank of Australia releases its minutes Tuesday. At the September 24 meeting, the RBA left the cash rate target unchanged at 4.35% (widely expected) and stuck to its neutral guidance. However, Governor Bullock toned down the hawkish rhetoric by confirming that the Board “didn’t explicitly consider a rate hike this time.” We expect the RBA to join the global easing cycle later this year because underlying economic activity is weak and points to lower inflation pressures. The market is pricing in less than 50% odds of a 25 bp cut by December in favor of a February start to the easing cycle. Hauser speaks Tuesday, Kent speaks Wednesday, and Hunter speaks Thursday.
Reserve Bank of New Zealand meets Wednesday and is expected to cut rates 50 bp to 4.75%. The market sees 75% odds of a 50 bp cut while the vast majority of analysts surveyed by Bloomberg have a 50 bp cut penciled in. The RBNZ policy stance is too tight, heightening the risk of a deeper economic downturn. In fact, the OCR is well above the RBNZ’s estimate for the nominal neutral rate range of 2-4%. There is no media conference nor updated macroeconomic projections for this meeting.
