Please let me clarify, I suggested the C72 because of its buffering, not for the differential output.  Yes, it would be ideal to use the C72 with the C46.  It has helped many clean encoder signals.  The C46 will also help isolate the encoder signals, which many times end up being common with the mains of the motor.

Arturo Duncan
https://cnc4pc.com

Per Arturo's suggestion I changed the frequency from 40 HZ to 20 HZ.  it did not change anything.  I have not tried any other frequency yet, it's been a crazy busy month.
I took the encoder off the lathe and hooked it up at a 5V power supply then measured the outputs of the A, B, and Z channels.  A and B fluctuate as the spindle turns, but Z stays at a constant 3.9 V as the spindle turns.  Is that normal?  I have not changed the pin to Pull Down yet, when I get a minute I will try that.

Can someone please explain prescaling to me?  I read the ESS article on prescaling here https://documentation.warp9td.com/Hardware/ESS/33_Inputs__Encoders.htm
but I don't understand it.  All I know is that my encoder has a resolution of 2000 ppr..  Can someone please explain how to configure the prescaling for an encoder of that resolution?