Europe | Monetary Policy & Inflation | UK | US
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
The European Central Bank (ECB) hiked the deposit facility rate to 1.5% (+75bp) on 27 October, as expected. However, the market has taken President Christine Lagarde’s comments as an indication that a deceleration may be on the cards for the December meeting (i.e., a 50bp hike). This was despite ECB ‘officials’ subsequently walking this back. Quantitative tightening was largely side-stepped, with discussion (but probably no start date) due in December. Henry continues to expect a 75bp hike in December (taking the deposit rate to 2.25%), and the market has pared expectations for tightening too much. Given the CPI beats last week and net-supply picture, there is value in fading recent European Government Bond strength.
Next door in the UK, the Conservative Party concluded its race for its fifth prime minister since 2010. Rishi Sunak took over on 24 October, providing much-needed strength to GBP (Charts 1 and 2). The party’s second overhaul this year has wider implications; the Office for Budget Responsibility Economic and Fiscal Outlook has been delayed from 31 October to 17 November.
Across the Atlantic, US data continued to back Dominique’s broad macro view, namely that growth could have bottomed out in Q3 and that resource pressures remain strong. Extraordinary fiscal consolidation ended in Q3 and is unlikely to resume, if at all, until the middle of next ear. Personal income and spending suggest economic momentum could rebound in Q4 while the employment cost index remained inconsistent with 2% inflation. Focusing on equities, Q3 earnings have been mostly solid so far. However, Facebook (Meta) took headlines as earnings per share missed expectations by 11.3% ($1.64 vs $1.89)! Shares plunged 19% in extended trading on Wednesday. John reveals the macro trends emerging from earning reports.
The Week Ahead
The Federal Reserve (Fed) is due to headline a busy two weeks for G10 central banks. The FOMC meets on 2 November to determine interest rates amid high inflation and growing recession risks. Having hiked rates by 75bp at the last three meetings, some are calling for a pivot to a slower pace. Dominique thinks a pivot is unlikely as it would lead to a marked easing of financial conditions – the opposite of what the Fed wants when inflation is high and persistent. The Fed will likely remain dependent on the latest inflation data to inform its decision, implying another 75bp hike on 2 November and at the subsequent meeting in December. As a result, the recent US dollar weakness, and bond and risk asset rallies, could reverse after the November FOMC meeting.
The Bank of England (BoE) will meet the day after (3 November). Henry has been arguing the BoE will need to pivot dovish for some time. Despite market pricing consistently moving the opposite way, the hard evidence has continued to build. The BoE may still undergo a nuanced dovish pivot in November, despite the recent hawkish shift among Monetary Policy Committee members. This is because the three pillars that justify hawkish action (fiscal stimulus, inflation expectations, and tight labour markets) are beginning to fade. As such, Henry sees the BoE hiking 75bp (with a tail risk of 100bp) to immediately quash the medium-term inflation effect of fiscal policy. Overall, Henry believes the BoE will hike strongly now but rebuff terminal pricing.
Elsewhere, Ben expects the Reserve Bank of Australia (1 November) and Norges Bank (3 November) to hike their policy rate by 25bp. On the former, there is a risk of a larger (50bp) hike.
Watch Andrew and Dominique discuss the upcoming week, why economic growth may strengthen from here, and why the Fed may continue with 75bp hikes!
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.