- The dollar rally has been derailed by weak US data and rising recession fears
- The September jobs data was not a game-changer and so we are left waiting for more clues
- Believe it or not, the US economy remains solid; however, the US repo market has not fully normalized yet
- The Chinese trade delegation arrives in Washington Thursday for two days of trade talks
- Brexit optimism has worn off; there are several key EM events
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The dollar rally has been derailed by weak US data and rising recession fears. While we believe those fears are overblown, we acknowledge that this dollar correction probably has some room to run. That said, we ask dollar bears where do they go? The eurozone, UK, and Japan all have their own problems and risks. So too does EM. When all is said and done, we feel that the US economy is likely to continue outperforming.
The September jobs data was not a game-changer and so we are left waiting for more clues ahead of the October 30 FOMC meeting. We will get some important US inflation data this week, as well as FOMC minutes. Fed officials continue to stress that the US economy is in “a good place” whilst also noting downside risks. Clearly, the Fed is waiting for more information to base its next policy decision on. While a cut this month is becoming more likely, it is by no means a done deal. WIRP has odds at nearly 80%, while we’d put it a little lower at around 65%.
Believe it or not, the US economy remains solid. The Atlanta Fed’s GDPNow model is tracking 1.8% SAAR growth in Q3, which is still near trend (~2%) with little drop-off from 2.0% in Q2. Elsewhere, the NY Fed’s Nowcast model is tracking 2.0% SAAR growth in Q3, down from 2.1% previously. Its forecast for Q4 growth is now 1.3% SAAR, down from 1.8% previously.
However, the US repo market has not fully normalized yet. The Fed announced a series of repo operations Friday that will be held through November 4. Why so long? At that point, we are getting close to the quarter- and year-end, when stresses are likely to pick up again. We think some sort of permanent solution will be announced at the October 30 FOMC meeting. After that, the December 11 meeting will be too late to address year-end pressures.
The Chinese trade delegation arrives in Washington Thursday for two days of trade talks. This latest round comes just days before the next round of tariffs kicks in mid-October. They were originally planned for October 1 but President Trump deferred them for two weeks as a goodwill gesture. We suspect there is very little goodwill left right now. Reports suggest China will not agree to a broad trade deal, taking discussions of industrial policy and subsidies off the table.
Brexit optimism has worn off. The EU has given a cold shoulder to UK Prime Minister Johnson’s latest proposal. In turn, Johnson has sharpened the rhetoric and pledged to leave the EU October 31 no matter what. UK Parliament will have a say in this. The EU summit in Brussels October 17-18 is likely to be the last opportunity for the UK to make another proposal.
There are several key EM events. China reports September money and loan data this week (no date has been set). The MAS meets this week (no date has been set) and it is expected to ease policy by adjusting its S$NEER trading band. Bank of Israel meets Monday, no change is expected. Peru central bank meets Thursday and the market is split between no move and a 25 bp cut.
CALENDAR
Monday:
US reports August consumer credit. Kashkari speaks.
Germany reports August factory orders and a drop of -0.3% m/m is expected. This would take the y/y down to -6.4% from -5.6% in July.
UK Parliament will be suspended ahead of the Queen’s Speech scheduled for October 14.
Norway reports August IP and a drop of -0.2% m/m is expected. The economy is slowing, making it more difficult for Norges Bank to hike rates again.
Tuesday:
US reports September PPI. Headline is expected to rise 1.8% y/y and core by 2.3% y/y, both steady from August. Evans, Powell, and Kashkari speak.
Germany reports August IP reports August factory orders and a drop of -0.1% m/m is expected. Â This would keep the y/y rate steady at -4.2%.
Japan reports August cash earnings, household spending, and current account data.
Wednesday:Â
US reports August JOLTS jobs openings (7265 expected) along with August wholesale trade. Powell takes part in a “Fed Listens” event. FOMC minutes will be released.
Norway reports August GDP and a drop of -0.3% m/m is expected.
Thursday:
US reports September CPI. Headline is expected to rise a tick to 1.8% y/y while core is expected to remain steady at 2.4% y/y. Weekly jobless claims will be also reported (218k expected). Mester and Bostic speak.
ECB releases its account of its September meeting. Germany reports August trade and current account data.
UK reports August GDP (flat m/m expected), IP (0.1% m/m expected), construction output (-0.4% m/m expected), and trade (-GBP1.05 bln expected).
Norway reports September CPI, with headline expected to rise 1.5% y/y and underlying by 2.1% y/y. Next policy meeting is October 24, no change is expected then.
Sweden reports September CPI, with headline expected to rise 1.3% y/y and underlying CPIF by 1.2% y/y. Next policy meeting is October 24, no change is expected then.
Japan reports September machine tool orders, PPI (-1.1% y/y expected), and August core machine orders (-8.4% y/y expected).
Friday:
US reports September import/export prices and preliminary October Michigan sentiment (92.0 expected). Kashkari, Rosengren, and Kaplan speak.
Germany reports final September CPI and is expected to remain steady at 1.2% y/y.
Canada reports September jobs. Total employment is expected to rise 5.7k, with unemployment seen steady at 5.7%. Next policy meeting is October 30, no change is expected then.
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