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The DXY Index rebounded by 2.1% to 102.52 last week, its first weekly increase in five weeks. Following the stronger-than-expected US jobs data last Friday, the futures market rescinded its bet for a second 50 bps rate cut at the FOMC meeting on November 7, opting instead for a reduction of 25 bps. Fed officials speaking this week will welcome September’s nonfarm payrolls rising to 223k from 159k in August and the unemployment rate falling to 4.1% from 4.2%. However, they will caution against reading too much into one month’s data and maintain the path of reducing monetary policy restrictions. Given our view that the Fed Funds Rate will decline another 200 bps through 2025, we see the DXY’s upside limited to around 103 before resuming its depreciation.
This week’s FOMC Minutes should explain the outsized 50 bps cut on September 18 in response to the faster-than-expected rise in the jobless rate above the 4% the Fed projected in June for this year. The Fed now needs the unemployment rate to push above its revised 4.4% projection for 2024 and 2025 before considering another 50 bps cut.
Additionally, the FOMC minutes will highlight the decline of US inflation from a multi-decade high towards the 2% target as the reason to bring the Fed Funds Rate down from the lofty 4.75-5.00%. In August, PCE inflation fell to 2.2% YoY, below the Fed’s projection of 2.3% for 4Q24, while PCE core inflation was 2.7% vs. the Fed’s 2.6% projection.
Hence, pay attention to the US CPI data on October 10. Consensus sees headline inflation slowing to 2.3% YoY (0.1% MoM) in September from 2.5% YoY (0.2% MoM) in August. Although September’s core inflation is anticipated to rise at the same pace of 3.2% YoY in August, its monthly increase should slow to 0.2% MoM from 0.3%. Chicago Fed President Austan Goolsbee saw some signs of inflation declining below the official 2% target.
Meanwhile, Japan’s newly-appointed vice finance minister for international affairs Atsushi Mimura warned this morning that he was watching the JPY with a sense of urgency. Last week’s 4.4% fall in the JPY to 148.70 per USD was the worst weekly plunge since 1999. Prime Minister Shigeru Ishiba, a long-time critic of Abenomics or prolonged ultra-loose monetary policy, surprised markets with his remarks that the economy was not ready for more rate hikes. However, his comment was probably aimed at the snap election on October 27 rather than opposition to the Bank of Japan’s monetary policy normalization plans. At its meeting on October 31, after the election, the BOJ will likely maintain its stance to keep hiking rates if its median forecasts are realised, which is in line with the government’s broader goals of exiting deflation with growth in wages and investments.
Quote of the day
“We must let go of the life we have planned, so as to accept the one that is waiting for us.”
Joseph Campbell
October 7 in history
The Ford Motor Company introduced the first moving vehicle assembly line in 1913.
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