US
The BBDXY index (broad USD index) is trading just under two key resistance levels at 1224.64 (August 1 high) and 1228.38 (200-day moving average). The bond market is stable but global stocks are selling off. Wall Street chief executives warned yesterday that investors should brace for a healthy equity market pullback of more than 10% in the next 12 to 24 months.
Tough to argue against that. While the stock market rally is not irrational (backed by solid company earnings and easier monetary policy), it does reflect a degree of exuberance judging by elevated investor bullishness and options market positioning.
ADP will release today its preliminary weekly employment estimate. In the four weeks ending on October 11, ADP estimated the US private sector added 14,250 jobs. The ADP’s monthly employment data is due tomorrow. Consensus expects ADP payrolls to rebound by 40k in October after declining -32k in September and -3k in August. Positive labor data would fuel further USD gains, while softer figures can trigger a partial USD correction.
The September JOLTS and trade data were scheduled for release today but will be postponed by the government shutdown. Today is day 35 of the US government shutdown, tying the longest in history. If the government remains shutdown until tomorrow (day 36), it will be the longest-ever. The federal government shutdown will weigh on activity in the near term, but its effects are expected to unwind once it ends. As such, the Fed will look through a temporary slowdown in activity due to the government shutdown.
Fed Governor Lisa Cook struck a cautious tone on further easing. Cook stressed “I see the current policy rate as remaining modestly restrictive, which is appropriate given that inflation remains somewhat above our 2 percent target.” In contrast, San Francisco Fed President Mary Daly (non-voter) was more dovish. Meanwhile, San Francisco Fed President Mary Daly (non-voter) said officials should “keep an open mind” about a December move. Fed Vice Chair for Supervision Michelle Bowman speaks today (11:35am London, 6:35am New York).
US October ISM manufacturing was not as bad as the headline number suggests. Headline unexpectedly slipped to 48.7 (consensus: 49.5) vs. 49.1 in September, consistent with a deeper contraction in manufacturing activity.
However, the rise in the new orders-to-inventories ratio (to 1.08, highest since January) suggests firms may need to ramp up production as demand is outpacing supply. Moreover, job losses are moderating as the employment index improved to a five-month high at 46.0 vs. 45.3.
Importantly, the prices paid index dropped sharply to a 9-month low at 58.0 (consensus: 62.5) vs. 61.9 in September, suggesting upside risks to inflation continue to recede. That should leave room for the Fed to deliver a follow-up cut in December. Fed funds futures price in 66% odds of a 25bps cut at the next December 9-10 meeting.
UK
GBP/USD plunged to the lowest level since April. UK Chancellor Rachel Reeve signaled today that tax rises are coming in her Autumn Budget on November 26. The expected fiscal drag should leave room for the Bank of England (BOE) to deliver more easing than is currently priced-in (50bps in the next 12 months) and further weigh on GBP.
The next BOE policy decision is Thursday, and the swaps market implies 30% odds of a 25bps cut to 3.75%. We expect the BOE to wait until after the budget to resume cutting rates. UK inflation is still nearly double the BOE’s 2% target and leading indicators suggest UK Q3 real GDP growth (due November 13) will overshoot the BOE’s 0.3% q/q projection.
JAPAN
USD/JPY hit an 8-month high near 154.50 before drifting lower towards 153.30 after Japan Finance Minister Satsuki Katayama warned against excessive yen moves. Katayama said “I’m seeing one-sided and rapid moves in the currency market…There’s no change in our stance of assessing developments with a high sense of urgency.”
Katayama’s warning on yen volatility rings hollow. A more hawkish Bank of Japan (BOJ) last week would’ve done more to support JPY. Instead, the BOJ’s laid-back policy stance means any intervention will only slow, not stop the yen’s slide. The BOJ would be throwing good money after bad.
AUSTRALIA
AUD/USD is down almost 1% from yesterday’s high. Broad risk off market sentiment outweighs the tailwind to AUD from the RBA’s hawkish hold. As was widely expected, the RBA voted unanimously to leave the policy rate unchanged for a second straight meeting at 3.60%.
Importantly, the RBA signaled it plans to keep rates on hold for some time. The RBA projects underlying inflation to be above the 2–3% range in coming quarters and does not expect labor market conditions to ease much from here. RBA Governor Michele Bullock also suggested policy is in the right spot highlighting “we think we are pretty close to neutral…We don’t have a bias.”
