Monetary Policy & Inflation | US
Markets to Watch This Week: BoE and Fed Policy to Diverge
- By Bilal Hafeez and Ben Ford
- 3 min read
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
US CPI (headline: +0.4% MoM; core: +0.3% MoM) proved lower than expected (headline: +0.6% MoM; core: +0.4% MoM). This was due to an oversized decline in the price of used cars and trucks causing stark USD weakness and US yields to retreat (Charts 1, 2 and 3). However, it followed two months of positive surprises. Despite the negative surprise, the CPI continued to align with Dominique’s big-picture macro view. That is, a stabilisation of core goods inflation (as supply bottlenecks have not disappeared) and accelerating services inflation (due to the tight labour market). She continues to expect a 75bp Federal Reserve (Fed) hike in December and a terminal rate near 8%. Staying on the US, the Democrats retained control of the Senate following the re-election of Catherine Masto in the Nevada Senate race. The successor of the House is yet to be decided.
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We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
US CPI (headline: +0.4% MoM; core: +0.3% MoM) proved lower than expected (headline: +0.6% MoM; core: +0.4% MoM). This was due to an oversized decline in the price of used cars and trucks causing stark USD weakness and US yields to retreat (Charts 1, 2 and 3). However, it followed two months of positive surprises. Despite the negative surprise, the CPI continued to align with Dominique’s big-picture macro view. That is, a stabilisation of core goods inflation (as supply bottlenecks have not disappeared) and accelerating services inflation (due to the tight labour market). She continues to expect a 75bp Federal Reserve (Fed) hike in December and a terminal rate near 8%. Staying on the US, the Democrats retained control of the Senate following the re-election of Catherine Masto in the Nevada Senate race. The successor of the House is yet to be decided.
Across the pond, UK GDP (-0.6% MoM; -0.2% QoQ) bolstered Henry’s view for Bank of England (BoE) dovishness. Meanwhile, on the continent, European Central Bank (ECB) commentary favoured Henry’s expectation of another 75bp ECB hike in December and for quantitative tightening to begin in 2023. Turning to Switzerland, Swiss National Bank Chairman Thomas Jordan said that policy was not yet ‘sufficiently restrictive’ to tame inflation but that they are also ready to sell foreign exchange reserves.
A lot has developed in China over the past week. Rumours of a potential exit from zero-Covid found traction; China’s National Health Commission said several restrictions would ease. And, over the weekend, a 16-point playbook has been produced for the real estate market.
The Week Ahead
In the US, markets will turn their attention to retail sales (Wednesday). The release is set to strengthen Dominique’s case for a 75bp Fed December hike; consensus expects a robust 1% MoM increase, up from 0.0% MoM in September. Neighbouring Canada will see inflation data updated for October. Recall the Bank of Canada expected ‘a more sustained further decrease in the 3-month measures’.
In the UK, inflation (Wednesday) is set to jump given the energy price cap rise. However, Henry expects it to increase less than the BoE forecasted. He sees a +1.4/1.5% MoM increase through October, shy of the market consensus of +1.7% MoM and a large way from BoE forecasts (+1.9% MoM; Chart 1). This should not drive more hawkish pricing. If it does, then it would be a good opportunity to fade it.
There will also be an update on the UK labour market (Tuesday). It is the final pillar of MPC hawkishness left after the retreat of inflation expectations and the paring of fiscal stimulus. Survey hiring intentions suggest employment growth will continue to decline while the declining savings rate suggests the activity rate should begin to grow ahead. If either of these trends appears, it would add to Henry’s dovish view.
Last up is the Autumn Statement (Thursday). With the government looking to cover a ‘black hole’ of £50bn in the statement, the announcement will almost certainly be less stimulative than the BoE’s forecasts assumed.
And in Europe, the final EZ CPI readings are released throughout this week. Henry expects this will confirm momentum from the preliminary readings.
Elsewhere, three key updates will be revealed in Australia: Reserve Bank of Australia (RBA) minutes (Tuesday), Wage Price Index (Wednesday), and unemployment (Thursday). Ben believes they will force the RBA into another 25bp hike in December, which is currently underpriced.
Watch Andrew and Dominique discuss the past week, the week ahead, and the upcoming December FOMC meeting.
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.