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We standardise WoW price changes across different markets to allow for cross-market comparisons.
Last Week’s Highlights
Rates and USD fall sharply as US inflation comes in weaker than expected. October core and headline CPI were 10bp below expectations. On the headline inflation side, lower gasoline prices contributed. More importantly, on the core side, housing data moved lower as did used car prices and healthcare services. The data remains volatile, so Dominique’s view is that one print is unlikely on its own to give the Federal Reserve (Fed) confidence it has reached the degree of policy tightness it needs.
Euro-area employment is on the rise! The number of employed persons in the Euro-area rose 0.3% from the previous quarter to 168.7 million people and above market expectations for a 0.1% increase. On a YoY basis, employment growth was at 1.4%, picking up from 1.3% in the second quarter. While the industrial sector, and now the housing sector, continues to weaken, a stronger-than-expected labour market will support the European Central Bank’s hawkish stance to keep rates elevated into Q1 next year.
Japanese growth turns negative. Last quarter, Japanese growth rose sharply, driven by stronger-than-expected external demand. Instead, in Q3 Japanese GDP growth fell 0.5% QoQ. What drove this decline? Capex fell another 0.6% in Q3, followed by an already large 1% decline in Q2. Domestic consumption was flat – a positive outcome versus last quarter’s 0.9% decline. Finally, external demand (net exports) fell marginally. What does this mean for the Bank of Japan? Not much in the short term as it shows the continued weakness in the domestic sector. This means seeing persistent wage growth is more important than ever going forward.
UK inflation misses – putting BoE doves in the driving seat. October UK headline and core inflation missed versus expectations. The biggest part of the drop in headline to +4.6% YoY (from +6.7%) was driven by the well-telegraphed reduction in household energy prices. Meanwhile, core inflation dropped to +5.7% YoY (from +6.1%), and services inflation dropped to +6.6% (from +6.9%). All these index outturns are below where the Bank of England (BoE) had forecast in its November MPR. Wage intensive services inflation continues to normalise in line with Henry’s expectations.
The BoE will be careful not to be too positive on the trajectory until they get corrected labour market data in December. We expect that will confirm dovishness and open the way for a May 2024 cut.
Oil’s volatile week – ends the week roughly flat. Brent had a volatile week last week, initially falling $7 from $85 to around $78 on Thursday. Friday saw a rebound at $80 that was reclaimed. The reason for the weakness looks to be driven by shifts in speculative positioning. We saw a large call buying spree following events in the Middle East. This looks to have unwound while several stops got hit along the way. Meanwhile, 2-month riskies are now tilted toward puts and spot vol correlation has flipped back to negative. For now, Viresh thinks the selloff is overdone and sees higher prices in the short run.
What to Watch
Nvidia reports on Tuesday after hours… how large will their backlog be? Arguably the most important stock at the moment will be reporting this week with the market watching closely. The stock has gone from a forward P/E of under 27x at the end of October to over 32x now as lower rates and a workaround on China’s chips exports has been found. For now, the market will want to get a sense of Nvidia’s pricing power, as well as its backlog. A growing backlog is a sign of excess demand – and we already know their backlog as of last quarter went into 2024. Can it deliver again?
Will the UK government expand fiscal policy? The UK Chancellor will give the Autumn Statement on Thursday. Overall, the economy has performed better than was expected at the Spring Budget, and there is more fiscal headroom for the Chancellor to allow some easing. Tax cuts are a possibility, which will please the broader Conservative Party, and would be a welcome change to them from the recent spate of bad news and infighting. Early media reports suggest they will be funded at least in part by benefits cuts. Expectations are relatively limited for changes. We will be watching for anything that may affect BoE policy or gilt issuance.
Sticking with the UK… what will Governor Andrew Bailey tell us about the UK economy? We get to hear from Bailey on Monday and Tuesday. Recent UK data has continued to show a weak consumer. These will come in the wake of Ramsden’s recent comments that the market may be pricing too much by way of cuts next year. A similar tone was seen from Mann (arch hawk) and Greene (surprising, slightly muddled hawk). Will Bailey also push a more hawkish stance?
Will the Riks flip the dovish switch? This week will be dominated by the Riksbank. The market is pricing only a 20% chance of tightening while even economists are split. Ben sees the potential for an additional hike on the back of core inflation remaining above forecasts. It would take a full concentration on core inflation momentum (something that has only really come to a few of the board’s attention) to force a pause.
Oil prices have fallen! How will OPEC respond? On Sunday, we have OPEC’s meeting in Vienna in the aftermath of a sharp oil market decline in recent weeks. Jan 24 Brent is hovering above $80/bbl while the curve is almost flat signalling ample supple. There are a few things on the table for OPEC here. First, will the existing unilateral cuts be extended to next year? We think they will be. Second, will other OPEC countries decide to cut production voluntarily? We think no. Finally, will Saudi Arabia put pressure on the UAE and Iraq to maintain production within their quotas? We think yes. Currently, they are over producing by about 0.5mn b/d (between them). Do not expect much movement in advance. If we do see a rally – it is probably a good opportunity to go short.
The Week Ahead: Watch Dominique and Andrew break down market events from the past week, including how the US consumer is managing. Dominique also pushes back on near-term recession fears while providing a preview of this week’s Fed speakers.
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.
Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process. Before his role at CCLA, Viresh made significant contributions during his three-year tenure as a Consultant at Deloitte, where he was a part of the largest P&C merger in 2016.