After a very turbulent week we should arrive into calmer waters with US inflation and retail sales as well as preliminary Q3 GDP from the UK and Japan and employment data from the UK and Australia as highlights of the week ahead of us.
USD
Donald J Trump has become 47th President of the United States. He has won 312 electoral votes while Kamala Harris won 226 votes. Senate has remained in the hands of Republicans while House is still up for grabs but Republicans have an upper hand. USD has strengthened massively after Trump win with EURUSD having its biggest one day decline in almost a decade. Bitcoin has surged as well reaching new all time highs above $81 000. New all time highs were seen in stock indices such as S&P 500 and Dow Jones.
ISM Services came in at 54.4 in October after a 54.9 print in September. New orders declined while new export orders plunged from over 60 in September to contraction in October. Employment component also dropped into contraction, most likely influenced by hurricane. The most worrying part of report is prices paid component which jumped to 70.7 initiating fears that inflation could accelerate.
Fed has reduced policy rate by 25bp as was widely expected. New range for the federal funds rate is 4.50-4.75%. The decision was unanimous. Statement showed that economy continues to expand at solid pace with inflation coming down, although staying elevated while “Job gains have slowed, and the unemployment rate has moved up but remains low”. Fed will maintain its data dependent and meeting-by meeting approach.
At the press conference Powell has acknowledged effect of strikes and hurricane on weak October NFP reading. Risks to achieving both targets of mandate are broadly balanced. Rate cut will enable better GDP and support labor market while keeping inflation rate down. He assessed policy as well positioned adding that if labor market declines further or inflation declines faster than expected they are prepared to act more aggressively. On the other hand, if inflation remains strong they are prepared to slow down pace of rate cuts. Highlight of the press conference was when asked whether he would step down if asked by the new President, Powell calmly said No. He declined to comment on results of election and economic policies of new administration adding that in the near-term election will have no influence on the Fed’s decisions. Powell declined to provide new forward guidance as he thought it would stifle future Fed decisions. Overall, the tone of the press conference was dovish as Chair Powell plans to stay on the rate cutting path.
The yield on a 10y Treasury started the week at 4.40%, rose to 4.47% and finished the week at around 4.30%. The yield on 2y Treasury started the week at 4.22%, reached the high of 4.32%. Spread between 2y and 10y Treasuries started the week at 14bp and finished the week at 4bp as curve remained upward slopping. The 2y10y was inverted for over two years. FedWatchTool sees the probability of a 25bp rate cut at December meeting at around 75%, while probability of a no cut is around 25%.
This week we will have inflation data, headline expected to tick up while core remains the same and retail sales data expected to continue growing at a healthy pace.
Important news for USD:
Wednesday:
CPI
Friday:
Retail Sales
EUR
Final October manufacturing PMI ticked higher and came in at 46 vs 45.9 as previously reported. German reading was revised higher while French was unchanged. Spanish reading posted a beat and moved further into expansion while Italy missed and fell deeper into contraction. Recent catastrophic floods in Valencia, Spain will cause disruptions to the reading in the coming months. Eurozone reading showed slower pace of declines in production and new orders with overall environment remaining deflationary. Services improved to 51.6 from 51.2 as preliminary reported. The report expected new business component to recover in the coming months. Composite was lifted to the 50 level, thus escaping from contraction reported in the preliminary reading.
Germany had political turmoil of its own as Chancellor Scholtz fired Finance Minister Lindner. This led to Lindner’s party LDP leaving governing coalition thus causing government to collapse. A vote of confidence will be brought to the German parliament on January 15 and if this vote results in a loss, which is very likely, the federal president would have to call snap elections within two months. End of March has already been rumored as a date for snap elections. Political uncertainty will bring down consumption and deter any potential investments.
GBP
BoE has delivered a 25bp rate cut as was widely expected with a 8-1 vote thus bringing the rate to 4.75%. Catherine Mann was the only dissenter as she wanted to keep rates at 5%. The statement shows that there has been a continued progress in disinflation but it is expected that inflation will rise to around 2.5% by the year end as base effects in energy prices go out of calculation. Effects of Autumn Budget should boost GDP by around 0.75% in a year’s time. A gradual approach to removing policy restraint remains appropriate as “Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”
BoE Governor Bailey stated that disinflationary process is developing faster than expected but emphasized importance of services inflation coming down. He warned of wage pressures on inflation and clarified that effects of Autumn Budget on inflation are yet to be seen. He added that they do not have a specific equilibrium level of rates and declined to specify what “gradual” means for rate cuts path thus leaving room for maneuvering.
This week we will have employment data and preliminary Q3 GDP reading.
Important news for GBP:
Tuesday:
Payrolls Change
Unemployment Rate
Thursday:
GDP
AUD
RBA has left rates unchanged at 4.35% as was widely expected. The statement shows that inflation has fallen substantially but underlying inflation remains uncomfortably high with projections showing that it will not sustainably return to the midpoint of targeted range (2.5%) until 2026. Aggregate demand remains above economy’s supply which causes high inflation. Growth in output has been weak while labor market remains tight and wage growth easing. Monetary policy remains restrictive and uncertainties around economic outlook are high. RBA remains data dependent. New projections see lower GDP (2.3% for 2025 vs 2.5% previously), household consumption and both CPI and core inflation. Overall it is a hawkish sounding statement with dovish projections for growth and inflation.
RBA Governor Bullock stated at the press conference that rates need to stay restrictive as there are still upside risks to inflation. She added that policy is right at the moment and clarified that if economic conditions worsen by more than projected, they will be ready to act.
Caixin services PMI jumped to 52 in October from 50.3 in September. The report shows continuing improvements in business activity, new orders and new export orders. Employment, backlogs and input prices all increased slightly while future expectations jumped indicating high business optimism. Composite printed 51.9 making it twelve months above 50. The last time composite was in contraction was in December of 2022. Services are doing the heavy lifting as they are outperforming manufacturing and lifting composite up. Trade balance data for the same month saw widening of trade surplus to $95.27 on the back of surge in exports, 12.7% y/y, while imports declined -2.3% y/y. Drop in imports is very concerning for the world economy as it indicates weak domestic demand from China.
This week we will have employment data from Australia as well as industrial production and retail sales data from China.
Important news for AUD:
Thursday:
Employment Change
Unemployment Rate
Friday:
Industrial Production (China)
Retail Sales (China)
NZD
Q3 employment report showed abysmal situation in New Zealand jobs market. Employment change showed job losses at a rate of -0.5% q/q, bigger losses than expected and plunge from 0.4% q/q increase seen in the second quarter. The unemployment rate rose to 4.8% from 4.6% in the previous quarter with participation rate dropping down to 71.2% from 71.7% in Q2. Wages in private sector have risen by 3.2% after increasing by 3.6% in the second quarter. After this report RBNZ will stay firmly on the rate cutting path in order to protect the jobs market. RBNZ has stated geopolitical tensions as key risks to the economy adding that economic conditions remain challenging.
CAD
BoC minutes from October meeting revealed that members see upside risks to inflation subsiding which in turn means that monetary policy does not need to be this restrictive, thus a 50bp rate cut. Consensus among members was that a 50bp rate cut is more appropriate although there were voices opting for a 25bp rate cut. Economy is running in excess supply and members feel that this state of economy will pull inflation down.
October jobs report showed economy added 14.5k jobs vs 25k jobs as expected. The unemployment rate remained at 6.5% due to tick down in participation rate at 64.7%. If participation rate was unchanged the unemployment rate would tick up to 6.6% as was expected. Wages growth continued to increase printing 4.9% y/y vs 4.5% y/y in September. Composition of jobs saw 25.6k full-time jobs added while part-time jobs saw a loss of 11.1k. It is a mixed report that showed weakening in job creation but on the other hand all of the jobs created were better paying full-time jobs. Markets are still pricing in a 50bp rate cut at the next meeting.
JPY
Minutes from the last week’s BoJ meeting showed that members are looking for economy to evolve as forecast in order to continue with rate hikes. Members see economy recovering moderately as was forecast in the July outlook with wages and consumption continued growth. BoJ members warned that path of rate hikes will also be influenced by events from overseas particularly from the US. Labor cash earnings for the month of September rose 2.8% y/y while real earnings, nominal minus inflation, came in at -0.1% y/y, declining for the second consecutive month. It is hard for BoJ to see inflation sustainably reaching 2% if real wages are declining. Rumors are that wage increases are coming after new sets of negotiations and those increases should keep real wages positive. Household spending declined by 1.1% y/y in September, second consecutive month of falling spending, adding more worries to inflation sustainably reaching 2% target.
This week we will have preliminary Q3 GDP reading.
Important news for JPY:
Friday:
GDP
CHF
Total sight deposits for the week ending November 1 came in at CHF456.6bn vs CHF457.4bn the previous week. With inflation falling faster and further than expected we could see SNB start to utilize sight deposits as a way to intervene in the market, buying foreign currencies and thus depreciating Swissy.
