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Last Week’s Highlights
Can anything stop the US consumer?! US personal spending continues to outpace personal income. Personal consumption rose 0.7% MoM vs expectations of 0.5%, while personal income rose 0.3%, slightly lower than the consensus forecast of a 0.4% increase. This means the personal savings rate continues to fall and is now at 3.6%, the lowest since last December. Over time, we expect the savings rate to pick back up, which should slow personal consumption – but it looks like the market is already pricing this in.
Relatedly, the PCE price index rose 0.4% MoM vs expectations of a 0.3% increase. However, core PCE (the Fed’s preferred measure) aligned with market forecasts at 0.3% MoM, which brings the YoY outturn to 3.7%. The market reacted little to the data, with US yields ending the week 8bps lower (Chart 2). A better-than-expected 7-year note auction on Thursday helped.
Big tech earnings fail to lift share prices. Microsoft, Amazon, and Alphabet all reported mixed earnings last week. Microsoft beat across the board and appears the clear winner in the AI cloud space. Intelligent cloud revenues were $24.26bn, versus expectations of $23.61bn. Meanwhile, Alphabet’s advertising revenues were very strong, showing businesses are again beginning to spend to drive product sales (unlike this time last year). However, GCP revenues and margins came in below expectations of $8.6bn at $8.41bn and drove the stock much lower. This tells us how much importance the market is putting on each company’s ability to execute its AI strategy (Chart 1 and 4).
European PMIs suggest economic struggles to continue. Tuesday provided a dire outturn for the French Manufacturing PMI at 42.6, while Services ticked up to 46.1 from 44.4. Private sector employment dropped for the first time since November 2020, while new orders dropped sharply, particularly from abroad. In the manufacturing sector, this was one of the sharpest falls in history.
In Germany, the outturn was little better. The manufacturing PMI rose slightly from super-low levels of 39.6 to 40.7. The services sector was much worse, however, as it dipped into contractionary territory to 48.0 from just above 50 last month. The decline in new orders stood out after falling at the steepest pace since May 2020.
ECB keeps rates on hold – as expected. Henry found the press conference largely uninformative. As expected, Lagarde strongly resisted the idea of near-term rate cuts while leaving the door open to further hikes if needed. Her insistence that PEPP was not discussed seems unlikely. We expect to hear more information on this from other policymakers in the days ahead.
Tokyo CPI comes in hot, pressuring the BoJ. Tokyo inflation climbed to 3.3% YoY in October, but core was what surprised markets. Core CPI excluding fresh food and energy came out at 3.8% YoY vs a revised 3.9% in September, and market consensus of just 3.7%. The hotter-than-expected Tokyo CPI reading will likely warn the Bank of Japan that it must at least adjust its YCC bands soon.
What to Watch
FOMC, NFP, and ECI will dominate market moves this week. While the Fed has already signalled they will pause during Wednesday’s FOMC meeting, Dominique expects Fed guidance is likely to be more hawkish than the market expects.
For NFP, she expects a positive surprise relative to the consensus of 173,000, though it will not change the big picture of a tight labour market with moderate wage growth. She expects the ECI (the Fed’s preferred measure of wage growth) to be in line with market expectations at 1% QoQ.
Expect a dovish pause from the BoE. Henry still thinks the BoE hiking cycle is over and that its next move will be a cut (potentially as soon as late Q1). The data since the last meeting has been mixed. Inflation initially appeared more hawkish, but as we noted, the detail remains dovish. That is what the BoE will likely focus on, helped by YoY core and headline numbers remaining below the August Monetary Policy Report (MPR) trajectory.
Expect further Chinese stabilisation as PMIs should continue to trend higher. China will release its monthly PMIs on Friday. Our China Growth Tracker finds grounds for optimism, as the pickup in mobility indicators would be consistent with the official composite PMI rising to 53.0.
What next for Evergrande? The Hong Kong High Court is due to rule on the wind-up hearing of Evergrande in a widely watched decision. The court has no jurisdiction in Mainland China, so a liquidation order would only apply to the company’s overseas assets.
The Week Ahead: Watch Dominique and Henry break down market events from the past week and the US GDP print. Dominique outlines what investors should expect from the Fed this week, and why another hike in December is still likely.
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.