The dollar’s broad rally against the majors continued last week. EUR outperformed and was the only major to gain while the Scandies and AUD underperformed. The U.S. elections and the FOMC meeting will dominate the news stream this week but looking through these events, we believe the fundamental economic backdrop continues to favor the dollar.
AMERICAS
U.S. elections Tuesday will dominate the news flow this week. It’s possible that we may not know the winner until days later. Recall that in 2020, the vote was held Tuesday November 3 but the race was not over until Saturday November 7, when most major outlets called Pennsylvania for Biden. Even then, there were legal challenges by the Trump campaign as well as several recounts. On December 14, so-called electors for each state met in the state capitols and formally voted. Biden received 306 electoral votes and Trump received 232, which meant that Biden was to be declared President at the Joint Session of Congress scheduled for January 6, 2021. President Biden was inaugurated January 20, 2021.
We also may not know the makeup of Congress immediately. Recall that Georgia had to hold runoff elections for both of its Senate seats on January 5, 2021. This time around, polls suggest Democrats have greater odds of winning a majority in the House of Representatives while Republicans are favored to win the Senate. As such, a divided Congress is the most likely scenario in our view. The political gridlock will make it hard for the next president to implement major fiscal changes, meaning fiscal policy will become a drag to growth over the next few years as the 2017 tax cuts expire. Please see our special piece here for an in-depth analysis of what the elections could mean for financial markets.
The two-day FOMC meeting ends Thursday with an expected 25 bp cut. In our view, the vote split and Chair Powell’s post-meeting press conference will likely signal that the bar is high for the FOMC cut rates more aggressively. At the September meeting, Governor Bowman cast the sole dissenting vote in support of a 25 bp rate cut and we see risks that she again votes to keep rates steady this week. Meanwhile, we expect Powell to stick to the message he delivered in October that the “Fed doesn’t feel like it’s in a hurry to cut rates quickly” given “growing confidence” of a soft landing for economy.
The jobs report Friday did not make the Fed’s job any easier. Looking through the distorted jobs data, we believe most indicators show the U.S. economy growing rather robustly and the labor market remaining in solid shape. Our thesis will be tested in the coming months. Before the following FOMC meeting December 17-18, we get one more jobs report and two more CPI, PPI, and retail sales reports. Fed Funds futures are pricing in over 80% odds of a December cut, while the swaps market is pricing in close to 50% odds.
Growth remains solid in Q4. The Atlanta Fed GDPNow model's initial estimate for Q4 GDP stands at 2.3% SAAR and will be updated Tuesday. Elsewhere, the New York Fed’s Nowcast model is tracking Q4 growth at 2.0% SAAR and will be updated Friday, while its initial forecast for Q1 2025 will come at the end of November. Bottom line: the US economy continues to grow at or above trend as we move into 2025.
Data highlight will be October ISM services PMI Tuesday. Headline is expected at 53.8 vs. 54.9 in September. Keep an eye on employment and prices paid. Last week, ISM manufacturing PMI saw a drop in employment to 44.4 but a rise in prices paid to 54.8, which was the highest since May. The regional Fed services surveys point to upside risk. In addition, the US S&P Global services PMI rose to 55.3 vs. 55.2 in September.
Q3 unit labor costs and nonfarm productivity will be reported Thursday. Productivity (GDP/hours worked) is expected at 2.5% q/q vs. 2.5% in Q2, while ULC are expected at 1.2% q/q vs. 0.4% in Q2. Importantly, annual productivity growth is running above its post-war average of 2.1%. Rising productivity leads to low inflationary economic growth which translates to higher real interest rate and an appreciation in the currency over the longer term.
November University of Michigan consumer sentiment will be reported Friday. Headline is expected at 71.0 vs. 70.5 in October. If so, it would be the highest since April and consistent with healthy consumer spending activity. Indeed, with gasoline prices falling to the lowest since late January, we expect consumer confidence to continue rising. Elsewhere, 1-year inflation expectations are expected to remain steady at 2.7% and 5 to 10-year expectations are expected to remain steady at 3.0%. Positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.
Bank of Canada releases its summary of deliberations Wednesday. At that October 23 meeting, the BOC delivered the expected 50 bp rate cut to 3.75%. Governor Macklem confirmed there was a “clear consensus” for a 50 bp cut. Importantly, more easing is in the pipeline as the BOC highlighted “we anticipate cutting our policy rate further.” However, the BOC inflation outlook was neutral and argued for a cautious easing cycle. The bank forecasts inflation to remain close to the 2% target over the projection horizon and sees upward and downward risks to its inflation projection as “reasonably balanced.”
Canada data highlight will be October jobs report Friday. Consensus sees a 29.3k rise in jobs vs. 46.7k in September, while the unemployment rate is expected to rise a tick to 6.6% with an unchanged participation rate of 64.9%. Overall, the labor market is softening and the BOC’s Q3 Business survey showed firms’ hiring intentions remain weak. Bottom line: the Bank of Canada has room to keep cutting the policy rate. The market is pricing in over 50% odds of a follow-up 50 bp cut in December.
October PMIs will also be important. S&P Global reports services and composite PMIs Tuesday. Last week, S&P Global manufacturing PMI came in at 51.1 vs. 50.4 in September. Ivey PMI will be reported Wednesday.
EUROPE/MIDDLE EAST/AFRICA
Bank of England meeting ends Thursday with an expected 25 bp cut to 4.75%. We expect the BOE to reiterate that “monetary policy will need to continue to remain restrictive for sufficiently long.” The focus will be on the MPC vote split and the monetary policy implications of the fiscal loosening measures contained in the government’s Autumn Budget. The market has already pared back bets on BOE easing and now sees the policy rate bottoming at 4.0% over the next 12 months vs. 3.75% before the budget. Updated macroeconomic projections will offer additional guidance on the scope of the BOE’s easing cycle, with 2027 added to the forecast horizon. Chief Economist Pill then speaks Friday.
October DMP inflation expectations will be reported Thursday. 1-year inflation expectations are expected to remain steady at 2.7%. In September, 3-year inflation expectations stood at 2.7% for a second consecutive month and still within the same narrow range that’s held throughout the year. Overall, inflation expectations are contained and support a cautious BOE easing approach.
European Central Bank easing expectations have been pared back after last week’s firm data. The swaps market is now pricing in 125 bp of total tightening over the next 12 months that would see the policy rate bottom near 2.0% vs. 1.5% in mid-October. There will be plenty of ECB speakers this week. Nagel and Holzmann speak Monday. Schnabel speaks Tuesday. Escriva, Lagarde, and Guindos speak Wednesday. Stournaras, Schnabel, Elderson, Escriva, and Lane speak Thursday.
Final October eurozone PMIs will be reported. Manufacturing will be reported Monday. Italy and Spain report for the first time and both are expected to rise modestly to 48.5 and 53.2, respectively. Services and composite PMIs will be reported Wednesday. Here too, Italy and Spain report for the first time and their composite PMIs are expected at 50.0 and 56.4, respectively. Despite the firmer survey data, the eurozone outlook remains weak.
Eurozone real sector data will be reported. France reports September IP Tuesday. Germany reports September factory orders Wednesday. Germany and Spain report IP Thursday. Germany reports trade data Thursday. Eurozone September retail sales will be reported Thursday. Italy reports IP Friday. Eurozone IP will be reported November 13.
Norges Bank meets Thursday and is expected to keep rates steady at 4.5%. Forward guidance will be key. At the September 19 meeting, the Norges Bank highlighted that “the policy rate will remain at 4.5% to the end of 2024 before being gradually reduced from 2025 Q1.” The market is pricing in 75-100 bp of total easing over the next 12 months which is roughly in line with the Norges Bank’s projections.
Riksbank meets Thursday and is expected to cut rates 50 bp to 2.75%. It’s not a sure thing, as the swaps market sees nearly 80% odds of a larger 50 bp cut while 3 of the 18 analysts polled by Bloomberg see a smaller 25 bp cut. At the September 25 meeting the Riksbank cut rates 25 bp to 3.25% and 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.” The market is pricing in about 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% forecast. Unless inflation cools more than expected, there is room for market pricing to converge towards the Riksbank’s forecast. Sweden reports October CPI data that same day. Headline is expected to fall a tick to 1.5% y/y, CPIF is expected to pick up two ticks to 1.3% y/y, and CPIF ex-energy is expected to fall a tick to 1.9% y/y. If so, CPIF would remain well below the 2% target.
ASIA
Bank of Japan publishes minutes to the September 19-20 meeting Wednesday. It delivered a dovish hold then, as the updated policy guidance and comments from Governor Ueda signaled that the BOJ is in no rush to remove policy accommodation. Indeed, Ueda emphasized that financial markets are still unstable and upside inflation risks have eased. Ueda added there was no schedule for how long it would take to decide on the next hike as the BOJ keeps assessing the impact of the two rate hikes already seen this year. The summary of opinions for the October 30-31 meeting will be released next Monday. The market is still not fully pricing in the next hike until Q2 2025, with 35 bp of total tightening seen over the next 12 months.
Japan data highlight will be September cash earnings Thursday. Nominal earnings are expected to pick up two ticks to 3.0% y/y, while real earnings are expected at 0.1% y/y vs. -0.8% in August. The less volatile scheduled pay growth for full-time workers is forecast to remain at 2.8% y/y. Faster wage growth would raise the likelihood the BOJ resumes normalizing policy at its next meeting December 19, though markets currently see only 30% odds of a hike then.
Reserve Bank of Australia meets Tuesday and is expected to keep rates steady at 4.35%. The RBA is also anticipated to stick to its neutral policy guidance after Q3 underlying inflation remained above the RBA’s 2-3% target and is largely tracking the RBA’s December projection of 3.5% y/y. Specifically, we expect the RBA to reiterate that “the Board is not ruling anything in or out.” The RBA is also expected to caution again “that it will be some time yet before inflation is sustainably in the target range” and “the need to remain vigilant to upside risks to inflation.” The risk in our view, however, is that RBA Governor Bullock confirms during her post-meeting press conference that the Board considered the option of cutting rates. If so, AUD would be vulnerable to a kneejerk drop as odds of a December cut would rise. Markets are currently pricing in less than 20% probability of a 25 bp RBA cut then. Updated forecasts will be contained in the Statement on Monetary Policy.
Australia data highlight will be September trade data Thursday. Both exports and imports have been weakening, signifying risks to both external and domestic demand.
New Zealand highlight will be Q3 employment data Wednesday. Employment is expected to rise 0.1% q/q vs. 0.6% in Q2, while the RBNZ has penciled in -0.4% q/q. The unemployment rate is expected to rise four ticks to 5.0% on a lower participation rate of 71.5% vs. 71.7% in Q2, while private wages are forecast at 0.7% q/q vs. 0.9% q/q in Q2. This would be in line with RBNZ projections. The market has fully priced in a 50 bp cut in November and sees nearly 30% odds of a larger 75 bp move. In our view, the RBNZ has plenty of room to dial up its easing because policy is too tight, heightening the risk a deeper economic downturn. At 4.75%, the RBNZ policy rate is still well above the RBNZ estimate for the nominal neutral rate range of 2-4%. The swaps market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom near 3.25%. RBNZ publishes its financial stability report Tuesday.
