Emerging Markets | Europe | US
US
Summary
- NFP to show tight labour market still.
- Services PMI likely to show small recovery.
Fed
The Fed has been balancing the risk that supply-driven disinflation may not continue and that demand slowdown is required against the risk of a slowdown. Recent data has given more prominence to the slowdown risks.
This week’s Fed communications fuelled the market rally with Waller, a (formerly?) leading FOMC hawk, stating that he is increasingly confident policy is tight enough and that several months of disinflation could lead to rate cuts. In addition, the Beige Book was unusually clear and the most negative since the pandemic.
Pre-FOMC, there is still one NFP and one CPI print that could change the FOMC assessment of the balance of risks but not change their decision to stay on hold. That is, a strong NFP could get Powell to tone up warnings that the Fed may not be done hiking yet, but I do not think the market would pay much heed.
The blackout starts on the weekend.
Data
The Atlanta Fed GDP nowcast for Q4 fell to 1.8% from 2.1% a week ago. The Citi economic surprise index fell to 29.8 from 33.1 a week ago. WTIC spot fell to $76/barrel from $76.8/barrel a week ago.
NFP (Friday): The NFP consensus seems reasonable, though I see more upside than downside risk. I am looking for a decline in unemployment because last month’s 10bp increase reflected poor data quality. The consensus forecast for wages, 4% YoY, also seems reasonable as it implies an increase in real wages.
Services PMI (Tuesday): The consensus sees a small rebound following the declines of the past two months, and I agree. It is difficult to find strong reasons to be pessimistic about the US economy when the consumer is so strong. I think the main source of data-driven concern is the recent increase in unemployment, likely to turn out more noise than signal (see Dom’s Quick Take: Consumer Too Strong for Fed Cuts and No Recession, No Fed Cuts in 2024).
U Mich consumer survey (Friday): with low inflation and a strong labour market, the small increase expected by the consensus is plausible.
Consumer credit and Q3 flow of funds (Thursday): the small increase in consumer credit the consensus expects seems reasonable. In the flow of funds, I will be looking for a decline in banks’ share of lending. For all the talk about private credit, I am not seeing it in the Fed data, which makes me wonder to what extent it is getting captured.
Jobless claims (Wednesday): I agree with the consensus that sees a small increase, which is consistent with a tight labour market.
JOLTS (Tuesday): not much potential for surprise here; there will be a further decline in the number of openings per unemployed and a further increase in actual hires relative to openings. The more interesting data will be quits and hire rates, and I am not expecting much change there.
Events/Political Developments
This week, hard-right Republicans stated that they were prepared to accept the level of government spending agreed to by former House Speaker McCarthy (which subsequently led to his removal). This implies an extension of the current CRs when they end in January and February. It is consistent with my view that the window of opportunity for fiscal brinkmanship and meaningful fiscal consolidation has closed as the 2024 campaign is about to start in earnest.
Europe: CB Speakers and Surveys
Summary
- ECB and BoE speakers and surveys will be important to watch. Expect the tone of dovishness to be pared in the ECB after Villeroy’s comments last Friday.
- We are wary of recent BoE hawkishness. The trend continues to point towards normalisation, although December’s labour market correction will be key.
- Final German CPI will provide more detail on the drivers of the recent inflation undershoot.
ECB Speakers and Surveys Could Push Back on Dovishness
Last week ended with a sizeable bid in EGBs on the back of Villeroy’s extremely dovish comments (namely that hikes were done, disinflation has been faster than expected, and they can start to think about cuts in 2024).
While the recent data has provided ample reason for ECB optimism, I expect that Lagarde and de Guindos (speaking on Monday) will opt for a slightly more nuanced overview, leaving the door open to more hikes if needed and pushing back on talk of cuts. They will probably also mention that inflation will likely tick higher in the near term.
Holzmann, speaking on Thursday, is likely to be more hawkish still, but it will be interesting to hear whether his tone has pared at all by the inflation undershoot. Whether he chooses instead to focus on balance sheet optimisation (and the early end to PEPP reinvestments) will be telling.
The ECB’s consumer inflation outlook on Tuesday will provide food for thought. The ECB is concerned about entrenched inflation expectations feeding into wage growth and future inflation. If the recent tick up in 3Y expectation to 2.5% holds, that could provide some hawkish offset (Chart 1).
Be Wary of BoE Hawkishness
From the BoE we will hear from Dhingra on Monday. She is very dovish but has recently warned of the risks of heightened food inflation ahead. On net, we are cautious on reading too much into the recent hawkish shift from the BoE. The more important factor will be the data, in particular the correction to unemployment data due for 12 December.
The week will however present an updated view of the job market (via the S&P, KPMG & REC Job report) as well as inflation outlooks (via the BoE Inflation Attitudes Survey). The trend in surveys on both fronts has been relatively dovish more recently, showing a continued re-anchoring of inflation expectations and an undershoot in wage growth vs ONS AWE numbers (Charts 2 and 3).
Final German CPI to Provide Details
German CPI undershot expectations in November at the preliminary reading, although it was Italy’s outturn that really drove the EZ headline miss.
What will be interesting to see will be what the main driver of the miss was. In particular, whether wage-intensive services momentum has continued to slow (Chart 4). I expect it probably did on the back of accommodation prices, but in December, this trend may begin to reverse.
Emerging Markets
Key Points
- RBI set for a dovish hold at 6.5% on 7 December.
- NBP to remain firmly on hold at 5.75% on Wednesday.
- Disinflation to continue in Hungary.
- South African economy to have stalled in Q3.
- Mexico CPI in focus given Banxico’s data dependency.
RBI Set for Dovish Hold
The Reserve Bank of India is set to deliver a dovish hold at December’s meeting, keeping the repo rate at 6.5%. The policy committee is likely to vote 5-1 again in favor of accommodation withdrawal, which would rule out a rate reduction at the next review in February. With the policy rate gap with the US already the narrowest on record, and depreciation pressures lingering, we doubt the RBI will start easing until after the Federal Reserve starts to cut rates. The central bank may also signal a delay in its plans to sell bonds.
An Uneventful NBP Meeting
A modest drop lower in YoY inflation to 6.5% in November will not shift the current rates on hold stance from the NBP. Uncertainty over the potential reinstatement of 5% VAT on food from January – which would raise NBP inflation forecasts by 0.9pp – is one reason for the MPC to stand pat. Broader uncertainty over fiscal policy with a new government not yet in place is another. More generally, with much less favourable base effects in play and the economy rebounding disinflation will soon stall.
More Good News on Inflation in Hungary
Adjusting NBH forecasts for the earlier undershoot on last month’s inflation points to an expectation for around 8.3% on CPI versus consensus at 8.0%. Earlier guidance for the pace of rate cuts to remain unchanged at 75bps in the coming months removes some of the uncertainty over what the print means for near-term monetary policy. Only a big miss on CPI accompanied by forint weakness would change this.
South Africa Set for Another Weak GDP Print
IP weakness through Q3 and a deteriorating PMI point to minimal, if any, growth in the third quarter. Reduced loadshedding and better electricity production was insufficient to offset weakness across mining and manufacturing, while higher interest rates have also curbed the consumer. As the SARB remain focused on inflation’s return to the target’s mid-point rather than any revival in growth any weak GDP print is unlikely to bring the shift to rate cuts any closer.
Mexico CPI to Inform Rate Cut Timeline
Economic data in Mexico has remained robust, with tight labour market in October and a solid Q3 GDP report. The Q3 inflation report from Banxico was consistent with their guidance that rate cuts could begin next year. Next week the main macro event will be the CPI print for 2nd half of November on Thursday. A number consistent with Banxico’s average inflation forecast of 4.4% in Q4 will likely allow market pricing for the first cut to shift into Q1.
