Equities | Europe | Monetary Policy & Inflation | US
Markets to Watch This Week: A New PM by the PM?
- By Bilal Hafeez and Ben Ford
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- 3 min read
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
In the US, talk of a Federal Reserve (Fed) pivot has returned. Nick Timiraos, the unofficial outside voice of the Fed, suggested in the Wall Street Journal that a 50bp December hike was more likely than the market had priced. It sparked a 20bp fall in US two-year yields. Dominique continues to expect 75bp hikes at the November and December FOMC meetings.
In the UK, Liz Truss announced her resignation as prime minister despite previously claiming to be a ‘fighter, not a quitter’. She said she could not deliver her mandate. Markets took this positively for GBP/USD as they processed who would take office next. Penny Mordaunt became the first to chuck their name in the hat; Rishi Sunak followed. Our Hive Minds chat favours the latter, and they look to be right.
Chinese President Xi Jinping secured his precedent-breaking third term at the Party Congress. He also packed the new Politburo Standing Committee with loyalists. All but Guangdong party chief Li Xi have worked under Xi and were promoted during or after their time under Xi. Investors took this as a sign of further China market weakness; Chinese equities sold off while USD/CNY has pushed back towards decade highs (Chart 2). We believe USD/CNY will reach 7.50. Elsewhere in Asia FX, the Bank of Japan intervened again. It is estimated that they bought over USD$35bn, which triggered USD/JPY to fall through 150 and land south of 147. It is back above 149. With the currency expected to weaken further, Japan two-year yields have risen further. They are sat shy of 0% (Chart 3).
The Week Ahead
US data will be headlined by Q3 GDP (Thursday) and the Q3 Employment Cost Index (ECI; Friday). On the former, Dominique is okay with consensus expectations for the economy (2.3% QoQ). She expects an acceleration in final sales to domestic suppliers and in GDI. Importantly, while the measure is backward-looking, it will provide a baseline for Fed estimates of capacity pressure. The Fed is looking for H2 growth to fall below their long-term estimate of 1.8%. And on the latter, it is the preferred measure of wage growth from the Fed as it considers changes in the distribution of wages. Dominique disagrees with market consensus for slowing wage growth (exp. Q3: 1.2% QoQ vs Q2: 1.3% QoQ). Instead, she thinks wages are more likely to have accelerated due to the tight labour market and accelerating inflation. Turning to neighbouring Canada, Ben expects the Bank of Canada to hike by 75bp (Wednesday).
Across the pond, the new UK PM will be decided today. Much is uncertain, although the assumption, for now, is that no candidate will seek to significantly upturn the fiscally prudent approach new Chancellor Jeremy Hunt laid out. The bigger risk may be that they delay the 21 October budget. Meanwhile, the Bank of England is in a sticky position. Just as the more neutral voices began to pivot more hawkish, the rug was pulled from under them when Hunt reversed the mini-budget. What is left of the fiscal package remains supportive of the consumer, so all else equal it suggests strong action in November. Just how strong remains to be seen. With energy bills no longer assured beyond six months, there is a good chance that Chief Economist Pill (Thursday) could temper some dovish talk.
In mainland Europe, Henry expects the European Central Bank (ECB) to hike by 75bp (Thursday). The ECB has turned data dependent on inflation, given their forecasts have been poor, and this week’s Eurozone inflation could suggest that this pace of hiking could continue. The other question is how much longer they can sustain the talk of quantitative tightening (QT). Henry believes this may be a premature issue to worry about, but pursuing such a policy dogmatically would inflict serious pain on EGBs. He believes, at this stage, we are probably moving into the risk of the ECB overpromising and paring back later. It means ECB President Christine Lagarde could be burnt again. Until that point, Henry sees value positioning for higher yields.
For further analysis, read our Key Events report where we delve into the week ahead for the US, Europe, $-Bloc, Scandies, China, and Japan!
Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.