After an intense week behind us the week ahead of us will give us time to digest new information and make informed decisions. Weak ahead of us will feature RBA meeting, a 25bp rate hike is expected and preliminary Q3 GDP reading from the UK.
USD
ISM manufacturing PMI for the month of October slumped deeper into contraction to 46.7 from 49 in September. Employment and new orders components fell hardest with former dropping into contraction. Additionally, prices paid component rose indicating that inflation is not defeated. Positives are drop in inventories and increase in new export orders.
Fed meeting brought us no change as expected. The rate is still in the range of 5.25-550%. The statement showed almost no changes to the September one, it was emphasized that economic activity in Q3 expanded at a stronger pace and that “tighter financial and credit conditions” will put some brakes on the economy. Chairman Powell stated that Fed is proceeding carefully, adding that economy expanded well above expectations and that full effects of monetary policy are yet to be felt. He reiterated that they are data dependent and that decisions will be made on meeting-by-meeting basis. During the press conference he stated that they are aware of moves in the longer-term yields and that they can have implications on monetary policy but they need to be persistent. Powell stated that there are not thinking nor talking about rate cuts.
The Treasury lowered estimate for Q4 borrowing to $776bn from $852bn as was suggested in July. Additionally, Quarterly Refunding Announcement showed that they have altered the duration as they will be issuing more shorter-term bonds. This report combined with impression of Fed being done with rate hikes and Powell’s perceived dovish tones led to jump in bonds and risk assets and drop in USD.
After a long streak of beating the expectations NFP finally succumbed in October and came in at 150k vs 180k as expected. The unemployment rate ticked higher to 3.9% while participation rate ticked down to 62.7%. Wages were mixed as they rose 0.2% m/m vs 0.3% m/m as expected and 4.1% y/y vs 4% y/y as expected, but they were lower compared to September reading. Overall, this report shows that Fed’s tightening is producing results and that there is no need for future rate hikes.
ISM services PMI for the month of October recorded a significant miss as it came in at 51.6 vs 53 as expected and down from 53.6 in September. Employment index barely managed to avoid falling into contraction while new export orders plunged heavily as they fell from 63.7 in September to 48.8. Prices paid eased negligibly while new orders posted a healthy gain representing positives to the otherwise weak report.
The yield on a 10y Treasury started the week and year at around 4.84%, rose to around 4.94% level, then fell to 4.48 post NFP and finished the week at around 4.53%. The yield on 2y Treasury reached the high of 5.10%. Spread between 2y and 10y Treasuries started the week at -17bp then widened post NFP and finished the week at -35p as curve inverted further. The 2y10y is has now been inverted for over a year. FedWatchTool now sees the probability of a 25bp raise at December meeting at around 10% while probability of no change is at around 90%.
EUR
Preliminary October inflation data for the Eurozone saw it dropping to 2.9% y/y vs 3.1% y/y as expected and all the way down from 4.3% y/y in September. Headline inflation is now at the lowest level in two years as base effects caused inflation to plunge. Core CPI came in at 4.2% y/y as expected and down from 4.5% y/y the previous month. Spain CPI 3.5% y/y as expected and unchanged. German inflation dropped to 3.8% y/y from 4.5% y/y while expectations were for a drop to 4% y/y. Monthly reading was flat. Price drops are due to base effects in energy and food, but there are also drops in tourism and hospitality sectors which reflect drop in demand now that summer holidays are over. French inflation dropped to 4% y/y as expected from 4.9% y/y with food and energy prices leading the way in declines.
Preliminary Q3 GDP for the Eurozone showed a contraction of 0.1% q/q. German Q3 GDP came in at -0.1% q/q vs -0.3% q/q as expected and -0.3% y/y. French Q3 GDP came at 0.1% q/q as expected and 0.7% y/y. Household consumption grew 0.7% in Q3 vs being flat in Q2. Net exports were the biggest drag on French Q3 GDP reading with inventories also contributing negatively. Spanish GDP was a bright spot, rising 0.3% q/q while Italian was flat.
GBP
BoE has left the rate unchanged at 5.25% as was expected. The vote was 6-3 with three members (Greene, Haskel and Mann) voting for a 25bp rate hike. The statement showed that rates will need to be restrictive for a prolonged period of time. Projection is for Q3 to be flat and to print 0.1% in Q4. Governor Bailey stated that inflation is still too high and that there is still a long way to go on taming inflation. Regarding GDP, he stated that incoming weaker than expected readings will not have impact on monetary policy decisions. There was a push back on rate cuts, as Governor Bailey commented that it is “too early” to talk about rate cuts, same as Powell stating that “monetary policy will need to be sufficiently restrictive for sufficiently long”.
This week we will have preliminary Q3 GDP data.
Important news for GBP:
Friday:
GDP
AUD
All three of the official PMI data for the month of October from China missed expectations and came in lower than previous month. Manufacturing even fell back into contraction as it printed 49.6. Non-manufacturing declined to 50.6 and helped keep composite in expansion with 50.7 but down from 52 in September. Caixin manufacturing also dropped into contraction with 49.5 reading. Weaker foreign demand has caused new export orders to plunge. Caixin services managed to come at 50.4 vs 50.2 in September, but they were much weaker than expected (51.2). This has caused composite to barely stay in expansion with a 50 reading. New orders increased at the weakest pace in last ten months, foreign demand weakened with business optimism continuing to decline. Prices paid increased as companies are passing higher costs to consumers.
This week we will have RBA meeting as well as trade balance and inflation data from China. RBA is expected to raise interest rates by 25bp, even IMF has urged them to do so.
Important news for AUD:
Tuesday:
RBA Interest Rate Decision
Trade Balance (China)
Thursday:
CPI (China)
NZD
Business confidence posted a huge jump in October as it printed 23.4 vs 1.5 in September. Export, investment and employment intentions all recorded big jumps with employment showing a big drop in construction but big jump in manufacturing. Inflation expectations remain unchanged and at a very high levels of almost 5%. Q3 employment report was a soft one as it showed employment change declining 0.2% q/q and the unemployment rate jumping to 3.9% from 3.6% in Q2. Participation declined to Q1 level of 72%. Hourly wages rose by 6.7% compared to 6.9% increase in Q2 indicating that wage-price spiral is missing and that RBNZ is not in the rush to continue raising interest rates.
CAD
Employment report for the month of October showed employment change of 17.5k vs 22.5k as expected. The unemployment rate jumped to 5.7% from 5.5% previous month while participation rate was unchanged at 65.6%. Wages are showing signs of cooling as they increased 5% y/y compared to 5.3% y/y in September. Additional weakness can be found in composition of jobs added as all of the jobs added are part-time jobs (20.8k) while full-time jobs recorded a decline of (3.3k) jobs. August GDP came in flat vs 0.1% m/m as expected. July GDP was also flat and preliminary data indicates that September GDP number will also be flat. That will make Q3 GDP flat as well.
JPY
On Monday Nikkei reported that BoJ is considering tweaking Yield Curve Control so it allows the yield on 10y JGB to go above 1%. This gave JPY a boost as it strengthened over 50 pips in five minutes against all majors. Then at the BoJ meeting it was stated that 1% will formally be the upper bound for 10y JGB yield. Markets were not happy with this, as they saw it for what it is, a continued monetary easing policy by BoJ and USDJPY quickly returned above the 150 level. There was no change to the rate, it remained at -0.10%. Inflation forecast has been revised up and it now stands at 2.8% for Fiscal Year (FY) 2023, it was at 2.5% in July, 2.8% for FY 2024, it was at 1.9% in July and 1.7% for FY 2025, it was 1.6% previously. GDP projection was improved to 2% for FY 2023 from 1.3% in July while FY 2024 was downgraded to 1% from 1.2% in July. GDP forecast for FY 2025 was left unchanged at 1%. BoJ announced they will stop with daily fixed-rate bond purchases. This should give more room for markets to the decide the rate, perhaps even letting yield rise above 1% before he bank steps in.
At the press conference BoJ Governor Ueda reiterated bank’s readiness to ease further if necessary and mentioned that sustainable price increases are not there. He emphasized importance of next spring’s wage negotiations (Shunto) for inflation outlook and stated that he does not believe that yields on long-term bonds will breach 1% level. The yields on 10y JGB reached the high of 0.965%.
CHF
SNB total sight deposits for the week ending October 27 came in at CHF472.1bn vs CHF478.8bn the previous week. This is the second consecutive week of falling deposits and they are now back at the levels seen six weeks ago. SNB has announced changes to sight deposit remuneration scheme. The main goal of the change is to bring and maintain Swiss Average Rate Overnight (SARON) to the monetary policy rate which currently sits at 1.75%. Headline inflation for October was unchanged at 1.7% y/y while core CPI rose 1.5% y/y vs 1.3% y/y in September. The increase in core can be a bit of concern but both readings are well bellow targeted 2%.
