Emerging Markets | Europe | Global | US
Key Events: Fiscal Brinkmanship Is Over
- By Dominique Dwor-Frecaut, Henry Occleston, Ben Ford, Caroline Grady and Mirza Baig
- 6 min read
US – Europe – $-Bloc and Rest of G10 Europe – Emerging Markets
US
Summary
- Fed minutes to state that the Fed is prepared to hike further if disinflation stalls.
- Durable goods orders to show continued real decline in capital goods orders.
Fed
Fed speakers this week broadly echoed Chair Powell’s view that more hikes could be needed if disinflation stalled or growth remained strong. They did not comment directly on this week’s CPI print.
On Thursday, the Fed released the October print of its own FCIs. Unsurprisingly, it showed tightening (i.e., financial conditions became stronger headwinds to growth in October). Based on current market trends, the November prints that will be released in mid-December, are likely to show FC turning into growth tailwinds from the current headwinds.
In a reply to written questions from Senator Rick Scott, a staunch critic of QE, Cook, Jefferson and Kugler stated that QT had further to run but did not specify when it might end.
The Fed is releasing its minutes on Wednesday and they are likely to stress that disinflation continuation is not a done deal; that the Fed will not hesitate to hike more if disinflation stalls; and that decisions on future hikes will be taken meeting by meeting.
There are no speakers next week, which is Thanksgiving week.
Data
The CPI was lower than expected. The Atlanta Fed GDP nowcast for Q4 rose to 2.2% from 2.1% a week ago. The Citi economic surprise index fell to 34.2 from 49.6 a week ago. WTIC spot fell to $73.6/barrel from $77.2/barrel a week ago.
This is a data light week due to Thanksgiving.
Durable goods order (Wednesday): I agree with the consensus. The consensus on capital goods orders implies a contraction in real terms that is consistent with the trends in equipment capex in the GDP data. Since the pandemic most of capex growth has come from software and facilities building.
Existing home sales (Tuesday): I agree with the consensus that sees a continuation of the downtrend since Q1. This downtrend in turn reflects the mortgage lock in effect.
S&P PMI (Friday): I agree with the consensus that sees the PMIs moving sideways.
Jobless claims (Wednesday): I agree with the consensus that sees a small increase, which is consistent with a tight labour market.
Events/Political Developments
The laddered Continuing Resolution put together by House Speaker Johnson was voted for by the House and Senate and postponed the next episode of fiscal brinkmanship to early 2024. However, by that time the election season will be in full gear, which reduces the risk of further brinkmanship due to its risk to Republican electoral prospects.
Europe: Will the ECB End PEPP Reinvestments Early?
Key Points
- UK Chancellor’s Autumn Statement will likely provide a slightly more positive outlook than we got in Spring, although expectation is relatively limited for a generous give-away, but the risk is probably skewed to the more generous side.
- PMIs are expected to be a bit more positive. It’s the detail that matters – particularly whether services firms are passing costs onto end-consumers.
- ECB speakers will be important to watch in the wake of recent comments around bringing the end of PEPP reinvestments forwards. The last meeting minutes should provide more colour on whether any timeline was agreed for such a discussion.
UK Autumn Statement
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. Nevertheless, there are headwinds ahead from funding the BoE’s APF debt, and likely raised uncertainties on the collection of (higher) tax on interest payments which many millions of people will be paying for the first time. 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.
PMIs Expected to be More Positive
The release of preliminary November PMIs (Thursday) are expected to show some modest recovery across the board from recent negativity. We will be watching for signs of broadening redundancies, and whether there has been any change in the rate at which services firms are passing higher costs onto consumers.
More ECB and BoE Speakers
We get to hear from another slew of ECB and BoE speakers again this week.
From the ECB we hear from Vujcic, de Cos and Villeroy (Mon), Schnabel, Centeno and Lagarde (Tue), Lagarde, De Guindos and De Cos (Fri). The tone from last week’s comments was relatively hawkish. Wunsch (hawk) on Friday pushed for discussion of PEPP reinvestments ending soon, Nagel and Kazaks reiterated that the peak rate may not have been reached. Holzmann agreed, pushing back on market pricing for cuts. Villeroy struck a more cautious tone, backing pausing hikes here, de Guindos struck a little more of a hawkish-neutral tone (data dependence, upside risks to inflation), while Centeno was unsurprisingly dovish, playing up the fact that rates will eventually need cutting.
The big risk right now is that the ECB talks up probabilities of an earlier end to PEPP reinvestments. We see a high risk that such talk will become more prevalent, and ultimately PEPP reinvestments will end in 2024. This would be a very negative situation for BTPs. We see value looking to short them vs Bunds once the near-term Moody’s ratings risk is out of the way.
The release of the minutes for the October meeting (Thu) could be informative on this front. Lagarde was adamant at the last meeting that there was no discussion of ending PEPP at that time. It will be interesting to see if there are any suggestions that this was not quite the case (e.g. a time agreed when they would discuss the changes).
For the BoE, we get to hear from Bailey on Monday and Tuesday. Recent UK data has continued to show a weak household. Retail sales last week emphasised the negativity of the outlook (Chart 1). 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. Similar tone was seen from Mann (arch hawk) and Greene (surprising, slightly muddled hawk). Surprising comments from Ramsden included that unemployment may not have risen as fast as expected – which was presumably a comment on the likelihood of unemployment being revised down in December (when data is corrected) not that the path of rise had undershot MPR forecasts (which remain highly dovish, see: Chart 2).
We continue to see the UK as among the weakest economies in the G7. We like to be long gilts vs OATs and to fade the relative hawkishness priced into BoE action vs that of the Fed.
$-Bloc and Rest of G10 Europe
Key Points
- Australia: Governor Bullock’s speeches will be watched for her take on recent labour market data.
- Canada: It looks like we’ll get another month of zero progress in core inflation momentum, again.
- Sweden: We expect a Riksbank 25bp hike. Market pricing 20% chance and economists marginally in favour of a hike.
Australia
We need another labour market print. While employment (+55.0k) was much stronger than expected (+24.0k), we note that AGAIN it was driven by part-time employment. The past five months have seen full-time employment move sideways in a volatile fashion while part-time has staged +157.8k of gains. So, while unemployment has ticked higher (to 3.7%), and to the top of its recent range, it is doing so on much weaker footing. Overall, this is unlikely to alter the RBA’s stance on the labour market ‘it remains tight’ but will raise the hurdle for further hiking.
We also had WPI come out. And while the YoY surprised to the upside, this will do little to worry the RBA. The wage agreements were known back in the summer while the survey and liaison data shows pressures lowering.
Turning to this week, we’ll have the minutes (Tuesday) with speakers dotted around, too. The minutes are unlikely to be market moving, with the main word changes already known around monetary policy, i.e., the change to ‘Whether further tightening’ from ‘Some further tightening’. As such, it’ll be Governor Bullock’s appearances (Tuesday and Wednesday) that’ll likely matter most. She is likely to comment on the labour market, which will give us context on the recent labour market updates.
Canada
The market has gone to fully pricing a cutting cycle for the Bank of Canada. However, when it happens remains a hard question to answer. That’s because the BoC remain focused on the fact that core inflation isn’t budging (Chart 3). As it stands, market expectations for core inflation (median and trim: +3.6% YoY) will do little to change the equation. It will see core inflation momentum trickle 9bp lower (on average) but still above the bottom of its near year-long range.
New Zealand
Another boring week here. We’ll have Q3 retail sales outturns which will likely reflect the continued slowdown we have seen in the monthly card spending data.
Norway and Sweden
This week will be dominated by the Riksbank. Do they hike or pause? The market is pricing only a 20% chance of tightening while even economists are split. We fancy a 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.
Across the border, we’ll have Q3 GDP. Nothing too exciting there, the market is expecting +0.2% QoQ vs a Norges Bank forecast of +0.3% QoQ. It is unlikely to move markets too given inflation has already fallen short of forecasts.
Emerging Markets:
Key Points
- Bank Indonesia is likely to hold rates unchanged.
- The NBH recently preannounced another 75bps cut for November leaving low likelihood of any surprises.
- South African CPI the day before the SARB meeting leaves some uncertainty on the decision. But rates on hold looks the most likely outcome.
- Banxico will publish minutes from the November policy meeting, which unexpectedly shifted to an easing bias.
BI to Stay Unchanged
Bank Indonesia will probably leave rates unchanged after October’s surprise hike. The rupiah has regained ground against the dollar in recent weeks, thanks to signs the Federal Reserve is done tightening.
Korea Advanced Trade
Korea will publish its partial (20-day) export and import data on 21 November. We do not forecast this data, but it feeds into our view on the global business cycle. The recent trend has been for Korean exports to surprise on the upside, thanks to recovery in semi-conductor prices and exports.
NBH Easing to Continue at an Unchanged Pace
Deputy Governor Virag announced an unchanged pace of easing for the next several months, making a 75bps cut to 11.5% a done deal for this week’s policy meeting. October inflation at 9.9% was below NBH projections, oil prices have dropped 10% in the past month, and the forint is at its strongest level since July. We expect the statement will reiterate commitment to a careful and data-driven approach going forward.
SARB on Hold Again
The SARB’s 23 November policy meeting comes a day after the October inflation release. Less favourable base effects since August will continue to push up YoY CPI from the July low. But headline inflation is expected to remain within the target range and inflation momentum is slowly declining. Inflation expectations have also peaked with the Q3 survey showing a fairly significant decline in the third quarter.
Since the last SARB policy meeting in September the rand has broadly strengthened, barring a brief spike in early October, inflation remains within the target range – albeit with disinflation temporarily halted – and fiscal risks have eased with a well-received budget update. These factors should be sufficient for another rates-on-hold decision and leave a less hawkish tone than in recent meetings.
Mexico: Stable Growth, Banxico Minutes
In Mexico, upcoming data and GDP revisions (24 November) are expected to indicate continued economic growth. Inflation is likely to remain stable in early November, with limited scope for further slowdown this year. November’s central bank meeting minutes (23 November) will likely reveal a readiness to maintain current interest rates short-term, with openness to cuts next year if data aligns with the base-case scenario.
