ECB and BoC meetings, coupled with preliminary Q3 GDP from the US and preliminary October PMI data from the Eurozone and the UK as well as inflation data from the US and Australia will highlight the busy week ahead of us. Additionally, we will get Q3 earnings from Microsoft, Alphabet, Meta and Amazon.
USD
September retail sales report was a strong one and reminder that we should never underestimate the strength of American consumer. All four key readings beat expectations and previous month’s readings were revised up. Headline number came in at 0.7% m/m. Ex autos category as well as ex autos and gas and control group, which excludes all volatile categories and is used for GDP calculation all increased by 0.6% m/m. Retail sales have been increasing for the past 6 months and they will give boost to Q3 GDP reading next week. Additionally, they will cause Fed to consider whether monetary policy conditions are tight enough.
Fed Chair Powell stated that economy is resilient and has consistently surprised to the upside. He added that rise in yields might lower the need for future rate hikes. Basically bond market is doing Fed’s job and tightens financial conditions by raising yields. On the rising yields he commented that the rise does not appear to be due to expectations for higher inflation or further Fed rate hikes. “It’s really happening in term premiums, which is the compensation for holding long-term securities, and not principally a function of the market looking at near term fund rates,” Fed is completely data dependent and in wait and see mode. Markets interpreted his speech as dovish leaning.
The yield on a 10y Treasury started the week and year at around 4.62%, reached the 5% level and finished the week at around 4.91%. The yield on 2y Treasury reached the high of 5.26%, the level not seen since 2006. Spread between 2y and 10y Treasuries started the week at -44bp then tightened to -14bp as curve resumed its bear steepening trend. The 2y10y is has now been inverted for over a year. FedWatchTool now sees the probability of a 25bp CUT at November meeting at around 2% while probability of no change is at around 98%.
This week we will have preliminary Q3 GDP reading which is expected to come north of 4% and Fed’s preferred inflation data, PCE.
Important news for USD:
Thursday:
GDP
Friday:
PCE
EUR
German ZEW survey for October saw current conditions deteriorate less than expected and print -79.9 vs -79.4 in September. Positives can be seen in the economic sentiment which improved to -1.1 from -11.4 the previous month indicating that investors think that worst is behind us and that future will be brighter. Economic sentiment for the Euro area returned into positive territory as it printed 2.3 vs -8.9 in September. Final inflation reading for September was unchanged with headline at 4.3% y/y and core 4.5% y/y.
This week we will have preliminary October PMI data and ECB meeting. This meeting should act as a bridge meeting for December one where we will get new staff projections. Therefore, markets and we see no change to interest rates. Further tightening could be conducted by advancing the end of PEPP reinvestments.
Important news for EUR:
Tuesday:
S&P Global Manufacturing (Eurozone, Germany, France)
S&P Global Services (Eurozone, Germany, France)
S&P Global Composite (Eurozone, Germany, France)
Thursday:
ECB Interest Rate Decision
GBP
We got only partial employment data this week. Payrolls change for September dropped 11k vs flat as expected and August reading was revised down to show a drop of 8k. Wages data showed decline as average weekly earnings for August came in at 8.1% 3m/y vs 8.3% 3m/y and 8.5% 3m/y in July. Average weekly earnings excluding bonus came in at 7.8% 3m/y as expected and a tad weaker than 7.9% 3m/y the previous month. BoE can feel a bit of relief that wages were softer but increases are still very high. September inflation data saw headline CPI remain unchanged at 6.7% y/y while a small drop to 6.6% y/y was expected. Motor fuel prices were the biggest contributor to the reading. There was a decline in food prices making it the first such m/m decline in two years Core CPI did tick down to 6.1% y/y from 6.2% y/y in August, but expectations were for it to drop to 6% y/y. Chancellor of Exchequer Hunt commented on inflation and stated that it rarely comes down in straight line but it is still expected that it should continue declining toward the year end. BoE is primarily interested in services inflation and it ticked up to 6.9% y/y from 6.8% y/y in August. These readings will not sway BoE towards one way or another so we may see one more tight meeting with markets leaning more towards no change.
This week we will have preliminary October PMI readings and remaining jobs data.
Important news for GBP:
Tuesday:
S&P Global Manufacturing
S&P Global Services
S&P Global Composite
Unemployment rate
AUD
RBA minutes from October meeting surprised markets as they showed that board debated between a 25bp rate hike and no change. In the end no change to rate hike prevailed as a stronger case. Minutes also show that upside risks to inflation present a “significant concern” as well as that boar has “low tolerance” for slow return of inflation towards the target. Minutes also showed concern about rising house prices and their potential to spur up consumption which may signal that policy is not restrictive enough. Minutes showed decent amount of concerns that board members had and they overall struck a more hawkish tone.
September jobs report was a weak one. Employment change came in at 6.7k vs 20k as expected. The unemployment rate slid to 3.6% from 3.7% in August but the main culprit was big drop in participation rate to 66.7% from 67% the previous month. Looking further into employment numbers we can see that full-time employment dropped by 39.9k so all of the gains in jobs report were from added part-time jobs.
Q3 GDP number saw economy grow 1.3% q/q vs 1% q/q as expected. On a yearly basis growth was 4.9% vs 4.4% as expected. Economy outperformed expectations but the yearly figure is weaker than it was in Q2. GDP has caused many analysts to revise China’s 2023 GDP higher than previously thought. Industrial production grew by 4.5% y/y in September, unchanged from August reading while retail sales rose 5.5% y/y, up from 4.6% y/y the previous month. Both readings came in stronger than expected. PBOC has left 1-year MLF rate unchanged at 2.5% as was widely expected. Loan Prime Rates (LPR) were also left unchanged with 1-year at 3.45% and 5-year at 4.20%.
This week we will have Q3 inflation data.
Important news for AUD:
Wednesday:
CPI
NZD
In the elections held over the weekend Christian Luxon the leader of the National Party became the new Prime Minister. The party managed to secure enough votes so it can create a conservative leaning government with right-wing ACT party. Q3 CPI data saw quarterly number increase less than expected (1.8% vs 2%) while yearly figure fell more than expected (5.6% vs 5.9%). Q2 has printed 1.1% q/q and 6% y/y. RBNZ sectoral model, their preferred measure of inflation, declined to 5.2% y/y from 5.7% y/y in the previous quarter. Improvement in yearly figure and drop in sectoral model will release some of the pressure on RBNZ to continue raising rates. Although inflation remains very high, ANZ now predicts that next rate hike will come in February of next year instead of November of 2023. GDT auction saw prices increase by 4.3%. This is the fourth consecutive auction of rising prices which could add some tail wind to Kiwi.
CAD
Headline CPI for the month of September declined to 3.8% y/y from 4% y/y in October as it declined 0.1% m/m compared to increase of 0.4% m/m as seen the previous month. Declines were located in some travel-related services as well as in durable goods and groceries. A big decline in prices was seen in airfares. Increases in prices were seen for gasoline. Core measures all recorded declines in inflation with median falling below 4% with 3.8% y/y print, common at 4.4% y/y and trim at 3.7% y/y. Inflation coming down will make BoC reconsider their hawkish stance and may lead them to pause at next week’s meeting.
This week we will have BoC meeting. With inflation cooling down and growth prospects looking weak BoC may opt to leave rates unchanged despite the strong October employment report.
Important news for CAD:
Wednesday:
BoC Interest Rate Decision
JPY
Report in the media showed that Japanese trade union plans to ask for more than a 5% increase at wage negotiations in spring of 2024. This is meant to help workers cope with rising living costs due to high inflation. The yield on 10y JGB reached 0.86% during the week. That level has not been seen in ten years. Trade balance returned into surplus in the month of September as exports rose to highest level in history according to the Ministry of Finance. Exports to the US also printed their highest value ever. Continually declining JPY is a great boost for the exporters, making Japanese goods cheaper and results are clearly seen.
CHF
SNB total sight deposits for the week ending October 13 came in at CHF483.8bn vs CHF479.9bn the previous week. SNB is selling EUR and USD and sight deposits have been rising every week since the start of September.
