• Fed officials remain cautious; October regional Fed surveys start rolling out; Canada reported soft September CPI data
  
• The two-day ECB meeting began today; U.K. reported soft September CPI data
  
• Japan reported weak August core machine orders; BOJ officials remain dovish; RBA Assistant Governor Hunter hinted the policy stance could soon turn less restrictive; New Zealand reported Q3 CPI data; Thailand and Philippines cut rates 25 bp; Indonesia kept rates steady at 6.0%

The dollar remains firm as divergences continue to widen. DXY is trading flat near 103.276 after making a new cycle high near 103.397 earlier today. Sterling is underperforming after soft CPI data (see below) and traded at the lowest since late August near $1.2985 before recovering slightly to $1.3015 currently. The euro is trading lower near $1.0890 after making a new cycle low earlier near $1.0875 and remains on track to test the August 1 low near $1.0780 as the two-day ECB meeting got under way (see below). USD/JPY is trading higher near 149.35 after trading briefly below 149. We believe the recent U.S. data and Fed comments continue to support a very gradual easing cycle (see below). Market easing expectations for the Fed have adjusted after the recent spate of strong U.S. data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher. In the meantime, soft data in the rest of the world highlights the ongoing divergences that favor the greenback.

AMERICAS

Fed officials remain cautious. Yesterday, San Francisco Fed President Daly reiterated that “one or two cuts was a reasonable thing” as the U.S. economy is more balanced. Similarly, Atlanta Fed President Bostic suggested again the possibility of holding off easing at the next November meeting, pointing out he has one more 25 bp cut penciled in for this year. Both are voters and their cautious stance likely reflects Fed consensus now. Two cuts by year-end are no longer fully priced in, but 150 bp of total easing is seen over the next 12 months vs 125 bp last week. If the data remain strong, there is still scope for these Fed easing expectations to adjust further. There are no Fed speakers scheduled today.

October regional Fed surveys started rolling out. Empire manufacturing kicked things off yesterday and came in at -11.9 vs. 3.6 expected and 11.5 in September. New York Fed services will be reported today and stood at 0.5 in September. Philly Fed manufacturing will be reported tomorrow and is expected at 3.0 vs. 1.7 in August.

Canada reported soft September CPI data. Headline CPI inflation fell below the midpoint of the BOC’s 1-3% target range to 1.6% y/y vs. 1.8% expected and 2.0% in August and was the lowest since February 2021. Elsewhere, the average of the BOC’s core measures (trim and median) printed at 2.35% y/y, same as in August. This was in line with consensus but lower than the BOC’s Q3 projection of 2.5% y/y. Odds of a 50 bp BOC rate cut next week have risen to nearly 80% from about 50% before the CPI data.

Canada joins a handful of G10 economies with headline CPI inflation below 2% in September. Eurozone came in at 1.8%, Switzerland at 0.8%, Sweden at 1.6%, and the U.K. at 1.7% y/y. Japan reports this Friday and its headline is expected at 2.5% y/y. In contrast, U.S. headline CPI inflation printed at 2.4% y/y in September, suggesting there is greater room for an upward reassessment in U.S. interest rate expectations relative to most other major economies.

EUROPE/MIDDLE EAST/AFRICA

The two-day European Central Bank meeting began today. It is widely 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%.

U.K. reported soft September CPI data. Headline fell two ticks more than expected to 1.7% y/y vs. 2.2% in August, core fell two ticks more than expected to 3.2% y/y vs. 3.6% in August, and CPIH fell a tick more than expected to 2.6% y/y vs. 3.1% in August. Services inflation fell three ticks more than expected to 4.9% y/y vs. 5.6% in August. Headline was the lowest since April 2021 and below the 2% target. The data raises the likelihood that the BOE is more aggressive in cutting interest rates, which is a drag for GBP. A November cut is fully priced in, while odds of a December cut have risen to over 75% vs. less than 50% at the start of this week.

ASIA

Japan reported weak August core machine orders. Orders came in at -1.9% m/m vs. 0.1% expected and -0.1% in July, while the y/y rate came in at -3.4% vs. 3.8% expected and 8.7% in July. This was the weakest y/y reading since January, and the drop in September machine tool orders points to further downside risks ahead for core machine orders.

Bank of Japan officials remain dovish. Board member Adachi signaled the BOJ is in no rush to remove policy accommodation. Adachi said “What we need to be careful of, in a gradual rate hike process, is that we raise it extremely gradually while keeping financial conditions accommodative.” He added that “I’m not thinking about any particular month for another rate hike. We should proceed cautiously.” The “looser for longer” BOJ policy stance can further weigh on JPY.

RBA Assistant Governor Hunter hinted the policy stance could soon turn less restrictive. Hunter pointed out “there’s no evidence of [inflation] expectations being more persistent than normal…And there’s even some evidence of households and unions extrapolating less from recent inflation.” We expect the RBA to join the global easing cycle later this year as underlying economic activity is weak and points to lower inflation pressures. The market is pricing in nearly 50% odds of a 25 bp cut by December. The September labor force report tomorrow should guide near-term RBA rate expectations.

New Zealand reported Q3 CPI data. Headline came in as expected at 0.7% q/q vs. 0.4% in Q2, while the y/y rate came in as expected at 2.2% vs. 3.3% in Q3. This was the lowest y/y rate since Q1 2021 and nearing the center of the 1-3% target range. CPI tradeable came in a tick lower than expected at -0.2% q/q vs. -0.5% in Q2, while CPI non-tradeable came in as expected at 1.3% q/q vs. 0.9% in Q2. Lastly, core fell two ticks to 3.4% y/y. The average of the core measures (sectoral factor model, trimmed mean, weighted median, and CPI excluding food and energy) is now within the bank’s target band at 2.94% vs. 3.56% in Q2. Bottom line: the RBNZ has ample room to continue its easing cycle after last week’s 50 bp cut to 4.75%. Indeed, the policy rate is still well above the RBNZ’s estimate for the nominal neutral rate range of 2-4%. Markets have fully priced in another 50 bp cut for November 27 along with 35% odds of a larger 75 bp cut.

Bank of Thailand unexpectedly cut rates 25 bp to 2.25%. No change was expected, as only 5 of the 28 analysts polled by Bloomberg looked for a 25 bp cut. The vote was 5-2, with the two dissents in favor of steady rates. The bank noted that “Most members thus voted to cut the policy rate by 0.25 percentage point to alleviate debt-servicing burden for borrowers. Moreover, the lower policy rate would not impede debt deleveraging given the expected slowdown in loan growth and would remain neutral and consistent with economic potential.” The bank stressed that the cut was a “recalibration” and not the start of an easing cycle. The swaps market disagrees and is pricing in 25 bp of easing over the next three months, followed by another 25 bp of easing over the subsequent nine months.

Philippines central bank cut rates 25 bp to 6.0%, as expected. Governor Remolona said that another 25 bp cut in December was possible but noted that a 50 bp cut would be “too aggressive.” He added that “We prefer to take baby steps in terms of adjusting the policy rate, meaning 25 bp at a time - but not necessarily every quarter or not necessarily every meeting. Lastly, Remolona said that while another 100 bp of easing is possible, it would be on the “dovish side.” The swaps market is pricing in 225 bp of total easing over the next 12 months that would see the policy rate bottom near 3.75%.

Bank Indonesia kept rates steady at 6.0%, as expected. The bank noted that "The focus of short-term monetary policy is on rupiah exchange rate stability, due to increasing global financial-market uncertainty." It added that "macroprudential policies continue to be pursued to encourage bank credit/financing to priority sectors for growth and job creation, including MSMEs (small businesses) and the green economy, while maintaining prudential principles." Governor Warjiyo said “BI continues to keep an eye on the room for policy rate cuts while keeping in mind the outlook for CPI, IDR, and economic growth.” As the rupiah recovers, the bank is likely to resume cutting rates cautiously.