Soft US Headline CPI is Unlikely to Be Sufficient to Reanimate Expectations of another Large Fed Cut

Overview: The US dollar is mostly softer ahead of the September CPI. The euro and Canadian dollar have recorded new lows for the move. The greenback extended its gains against the yen to JPY149.55 but has fallen to new session lows in the European morning near JPY148.85. Given the pushback against Fed Chair Powell's 50 bp cut last month revealed in the FOMC minutes, it will take more than a soft headline CPI today to renew speculation of another large move. In fact, the Fed funds futures, which a week ago was discounting about a 50% chance of another half-point cut is now pricing in about an 83% chance of a quarter-point cut. There are 44 bp of easing discounted for this year down from about 67 bp a week ago. Three Fed officials speak in the North American morning (Cook, Barkin, and Williams) but their views are known. The US Treasury sells $185 bln in bills today and $22 bln of 30-year bonds. 

The PBOC's CNY500 bln swap facility for institutions to buy equities has formally been launched, and speculation ahead of Saturday's briefing by Finance Minister Lan helped lift Chinese stocks (CSI 300 rose about 1% and the index of mainland shares that trade in HK rose nearly 3.5%). The other large bourses in the region also rose after the S&P 500 rose new record highs yesterday. The Stoxx 600 in Europe and US index futures are softer. Bond markets are under modest selling pressures. European yields are firmer, with a four-basis point jump in Gilt yield to a new three-month near 4.22%. The presentation of the French budget later today could impact tomorrow. Gold is firm and appears to have carved a shelf near $2600. November WTI is consolidating in the upper end of yesterday's range amid ongoing risks that the war in the Middle East escalates. 

Asia Pacific

The record increase in base pay in Japan (2.9% year-over-year) in August did not translate to an increase in household spending. It fell by 1.9% year-over-year. Still, even though wages, adjusted for inflation fell, household spending rose month-over-month. Prime Minister Ishiba's government is putting together a package of economic measures and a supplementary budget that will be unveiled after the election. Australia's economic diary is light until next Thursday's release of September employment figures. The central bank meets on November 5 and is expected to stand pat. Many remain skeptical that China's efforts have turned an important corner. While recognizing that monetary and fiscal policy can be blurred, observers are critical of the lack of stronger fiscal stimulus from Beijing. The briefing Saturday by the finance minister coupled with the establishment of the PBOC swap facility (CNY500 bln or ~$70.5 bln) to fund institutional equity purchases helped steady the stock market after yesterday's drop. 

The dollar trended higher yesterday and reached its highest level since early August in the local session today near JPY149.55. But the upside momentum has faltered, and the dollar has been sold to new session lows slightly below JPY148.85 in the European morning. The five basis point rise in the 10-year US yield arguably help lift the greenback yesterday. It is nearly flat today. The US yield poked above 4.07% for the first time since the end of July. Recall that it finished last month around 3.78%. We continue to look for a test on the JPY150.00-JPY151.00 area. The Australian dollar fell for the fifth consecutive session yesterday. It approached $0.6700, which it has not traded below since mid-September. Yesterday's low is holding today, and the Aussie is consolidating mostly below $0.6740. A break of $0.6700 now could target $0.6620-$0.6645. A sell-off in the yen and rising US rates helped lift the greenback to almost CNY7.10 yesterday. It held today, and the dollar found bids slightly below CNH7.07. Above CNH7.10, the dollar has near-term scope toward CNH7.14-CNH7.15. The PBOC set the dollar's reference rate at CNY7.0742 (CNY7.0568 yesterday). 

Europe

The economic diary from the eurozone is light for the next several days. Next Tuesday, aggregate industrial production for August will be reported, and after strong gain in Germany and France, it could have risen the most since the end of last year. The largest rise this year took place in March (0.5%). Later today, French Prime Minister Barnier will present details of his budget. He seeks to reduce the budget deficit to 5% of GDP next year. This year's shortfall may be a little above 6%. The left attempted and failed to topple the government earlier this week. The key is Le Pen, which does not seem keen on being blamed for the financial turmoil that may result in the collapse of the government. The French 10-year premium over Germany is near 76 bp now. It was less than 50 bp before President Macron called for snap elections. The highlight next week is the ECB meeting. The softer CPI readings boosted speculation of an October cut in addition to the one that had been expected in December. Tomorrow, the UK reports August GDP. A small rise is expected after stagnation in June and July. Disappointment would likely weigh on sterling through the interest rate channel. The swaps market has a quarter-point cut at the November 7 meeting nearly fully discounted and is nearly evenly divided over the outlook for the last meeting of the year (December 19). Meanwhile, Chancellor of the Exchequer Reeves is expected to deliver a tight budget at the end of the month,  

The euro consolidated near the trough seen after the US jobs report Monday and Tuesday before breaking down yesterday. It fell to nearly $1.0935 yesterday after having been turned back from its approach of $1.10 on Tuesday. It has yet to find solid support and neared $1.0925 in the European morning. The next area of chart support is in the $1.0880-$1.0900 area. The US two-year premium over Germany rose above 175 bp yesterday for the first time since late July. Sterling also struggles to sustain even modest upticks. It recorded a low in late Asia Pacific trading yesterday near $1.3055 and that is holding today. It could not regain the $1.31 level and returned toward the lows in the North American afternoon. A convincing break of $1.3050 targets $1.30, last month's low, and possibly $1.2960.

America

The September US CPI dominates today's North American session. The median forecast in Bloomberg's survey anticipates a 0.1% increase, which would follow 0.2% increases in July and August. The three-month annualized rate would be 2.0%. The six-month annualized rate would be about 1.4%. While the headline rate may slow to 2.3% from 2.5%, the core is stickier and may be unchanged at 3.2%. Still, such a benign report is unlikely to move the Fed's needle, and we do not think the September jobs report did either. This leaves the Fed still on track remove more of the policy restriction in November and December. Tomorrow, the US reports September producer prices, and economists will use it with the CPI to fine tune estimates for the PCE deflator. Even though the Fed formally targets it, when explaining the 50 bp cut, both Fed Chair Powell and Governor Waller (who some tip as the next chair) cited the CPI as consideration that pushed it toward the 50 bp cut, while maintaining the focus has shifted to the labor market mandate. The FOMC minutes showed that there was more opposition to the half-point cut than the final decision show (with one, Governor Bowman's dissent). Canada reports September jobs data tomorrow. A disappointment will fuel speculation of a 50 bp cut at the October 23 central bank meeting. The swaps market has slightly less than a 55% chance of a half-point move discounted. 

The US dollar is extending its advance for the seventh consecutive day against the Canadian dollar and reached CAD1.3735 in Europe. The momentum indicators are getting stretched and the greenback settled above its upper Bollinger Band (~CAD1.3680) for the first time since late July. Initial support may be in the CAD1.3690-CAD1.3700 area. On the upside, the next technical objective is around CAD1.3750, then CAD1.3800. Some of the US dollar buying in the past two sessions may be related to the $1.2 bln options at CAD1.3650 that expire today. Mexico's September CPI (headline and core) were a little softer than expected, but the short-term interest rate market did not seem to notice. The peso weakened like most emerging market currencies but a handful of currencies from Asia. In fact, the three weakest emerging market currencies were from Latam (Brazil real -1.1%, Mexico peso (-0.6%) and Peru Sol (-0.60%). Follow-through buying today has lifted the greenback above MXN19.50, where options for almost $505 mln expire today. Nearby chart resistance is near MXN19.55 and then MXN19.65-70 area. The greenback held support last week at the lower end of the recent trading range near BRL5.40. It recovered to test the upper end of the range near BRL5.60 yesterday and settled above the downtrend line connect the August and September highs. It came in around BRL5.5575. Last month's high was near BRL5.6760. 

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