Powell Leans Against Additional Jumbo Rate Cuts

• Dollar recovers across the board, Treasuries retraced recent gains and equity futures are down.

• The U.S. August JOLTS and September ISM manufacturing index are today’s data highlights.

• The Eurozone September CPI print is expected to show a quickening in disinflationary pressures.

USD is building on yesterday’s gains triggered by cautious comments about the Fed’s easing cycle from Chair Jay Powell. Powell noted the “Fed doesn’t feel like it’s in a hurry to cut rates quickly” and expressed “growing confidence” of a soft landing for economy. Powell highlighted that “with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 percent.”

Following Powell’s talk, Fed funds futures trimmed the probability of a 50 bp Fed funds rate cut in November from over 50% to roughly 35% and pared back odds of 75 bp of total easing by year end.

We continue to believe the market is overestimating the Fed’s capacity to ease. It will likely take stronger than expected U.S. jobs data this week to trigger a material upward reassessment in Fed funds rate expectations in favor of USD. Nonetheless, positive financial market risk sentiment - underpinned by greater stimulus measures out of China and the combination of a dovish Fed and a strong U.S. economy - is an ongoing drag on USD mostly against growth-sensitive currencies.

Today, the U.S. August JOLTS data and September ISM manufacturing index are the focus (both at 3:00pm London). Total job openings are expected to remain at a 42-month low at 7673k in August. Watch-out for job opening, hiring and layoff rates. In July, the job opening rate fell 0.2pts to 4.6%, dangerously close to the 4.5% threshold that typically signals a significant rise in the unemployment rate. Meanwhile, the layoff rate rose 0.1pts to 1.1% but the hiring rate increased 0.2pts to 3.5%. A further pick-up in the layoff rate would be a concern and validate aggressive Fed funds rate cut expectations.

The ISM manufacturing index is projected to recover slightly to 47.5 vs. 47.2 in August. Pay particular attention to the ISM manufacturing employment sub-component. In August, the employment index improved 2.6pts to a two-month high at 46.0 but remains in contraction territory.

Scheduled Fed speakers today include: Atlanta Fed President Raphael Bostic (FOMC voter), Fed Governor Lisa Cook, Richmond Fed President Tom Barkin (FOMC voter) and Boston Fed President Susan Collins (2025 FOMC voter). Yesterday, Bostic echoed Powell’s cautious easing comments. Bostic pointed out “if the story is that inflation is continuing its drop and the labor market is staying strong, I think we have the luxury of being a bit more patient with rate cuts.”

The U.S. vice presidential debate is the next pre-election highlight (9:00pm New York, 2:00am London). Governor Tim Walz and Senator JD Vance meet for the first and only time in debate. While the Vice Presidential debate typically doesn’t move the needle much, this one may take on greater significance as there are no more Presidential debates scheduled ahead of the November election. The race remains close, with betting market and polls giving Vice President Harris a slight edge over former President Trump. Check out our US election special report here.

EUR/USD is down near the lower end of a multi-day 1.1100-1.1200 range. The Eurozone September CPI data is expected to show a quickening in disinflationary pressures (10:00am London). Headline CPI is projected to be flat (vs. 0.1% in August) and ease four ticks to 1.8% y/y, lowest since April 2021. Core CPI inflation is forecast to fall one tick to 2.7% y/y as services inflation remains sticky around 4% y/y.

Overall, the ECB has room to dial-up easing as the Eurozone economy is stagnating and inflation risks undershooting the ECB’s 2% target. ECB President Christine Lagarde effectively set the stage yesterday for a 25 bp ECB rate cut at the October 17 meeting, which is now virtually fully priced-in by the swaps market. Lagarde acknowledge “the latest developments strengthen our confidence that inflation will return to target in a timely manner. We will take that into account in our next monetary policy meeting in October.”

EUR/GBP recovered slightly after trading near the lowest level since April 2022. UK inflation pressures are easing rapidly. The UK BRC shop price index fell -0.6% y/y in September, the lowest since August 2021. Nevertheless, the pick-up in UK economic activity suggests the threshold for an aggressive BOE easing cycle is high. Bottom line: relative monetary policy between the ECB and BOE favors a lower EUR/GBP. BOE Chief Economist Huw Pill speaks later today (3:00pm London).

SEK is down versus USD and EUR. The Riksbank minutes from the September meeting is up next (8:30am London). At that meeting the bank cut rates 25 bp to 3.25%, as expected. The Riksbank warned the policy rate is expected to be cut at a faster pace than was previously communicated. Specifically, the Riksbank noted that “the forecast for the policy rate reflects that a cut of 0.5 percentage points at one of the coming meetings is possible. It also indicates that one or two further cuts may be made during the first half of 2025. Together, these changes imply a relatively large shift of monetary policy in a more expansionary direction.” The market is pricing in almost 175 bp of total easing over the next 12 months that would see the policy rate bottom near 1.50%, which is much lower than the Riksbank projects (2.25%).

USD/JPY is holding on to yesterday’s gains near 144.00. Japan Q3 Tankan report is indicative of a continued modest recovery in real GDP growth. The large manufacturing headline and outlook indexes printed one point higher than expected and remained at their multi-quarter highs at 13 and 14, respectively. Meanwhile, the large non-manufacturing headline and outlook indexes rose one point to the highest level since Q3 1991 at 34 and 28, respectively.

Regardless, the Bank of Japan (BOJ) is in no rush to resume its tightening cycle because most members view financial market as is still unstable. But the BOJ Summary of Opinions of the September meeting showed a couple of members sticking to a hawkish rhetoric. One member warned that “if economic activity and prices remain on track, the Bank can follow a path in which it raises the policy interest rate gradually so that the rate will be 1.0 percent in the second half of fiscal 2025 at the earliest.” Another member said, “if it is confirmed that there will be no major downward revisions to its outlook, it is desirable for the Bank to raise the policy interest rate without taking too much time.” The swaps market is pricing in just 25 bp of total tightening over the next 12 months and continues to weigh on JPY.

AUD/USD pared back overnight gains on broad USD strength. Australian retail sales growth overshot expectations boosted by warmer-than-usual weather. Retail sales rose 0.7% m/m in August (consensus: 0.4%) following a 0.1% increase in July. According to the ABS, “this year was the warmest August on record since 1910, which saw more spending on items typically purchased in spring. This included summer clothing, liquor, outdoor dining, hardware, gardening items, camping goods and outdoor equipment.” We expect the RBA to cut the cash rate target by year-year because Australia underlying economic activity is weak and points to lower inflation pressures. RBA cash rate futures price-in over 60% odds of a 25 bp cut by December.