Key Events: Labour Market Defies Waller

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US

Summary

• Fed on hold, markets unlikely to heed guidance on more rate hikes still possible.
• Downside risks to core CPI.

Fed

The Fed has already announced it would stay on hold, which I think reflects that disinflation has happened faster than expected in the September SEP. I expect Powell’s forward guidance to stick to his 1 December speech: ‘It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease’. And I expect the market to pay no heed.

I have changed my 2024 Fed call to no cuts from previously two hikes. This is based on expectations of energy prices remaining around current levels and therefore inflation remaining near but above the Fed’s 2024 benchmark.

Data

Payrolls were higher than expected, and unemployment fell 20bp to 3.7%. The Atlanta Fed GDP nowcast for Q4 fell to 1.3% from 1.8% a week ago. The Citi economic surprise index fell to 11.7 from 25.6 a week ago. WTIC spot fell to 69.3/barrel from $74.1/barrel a week ago.

Key data by order of importance:

CPI (Tuesday): I see a downside risk to the consensus for MoM core, i.e., 0.3%, based on a fall in energy prices in November.

PPI (Wednesday) and import prices (Thursday): the consensus expects a small PPI rebound and continued import price deflation, which seems reasonable.

Retail sales (Thursday): the 0.2% consensus on the control group (used to compute consumption in the GDP data) and the 0.1% consensus on headline CPI imply positive real growth in retail sales, which is consistent with a resilient consumer.

Small business survey (Tuesday): I will be looking for the survey’s hard part (as opposed to the opinion part) to confirm the services PMI reading, namely that the US economy is humming along.

November budget deficit (Tuesday): the August-September deficits have created a misleading impression that fiscal consolidation was underway because each month’s deficit was about $300bn below a year ago. In reality, this reflects the September 2022 student debt forgiveness and the August 2023 cancellation of this forgiveness. Once these are stripped out, there is no improvement in the budget balance.

PMIs and manufacturing (all Friday): S&P manufacturing and services PMIs, US wide manufacturing production, NY Fed “Empire” manufacturing survey. Consensus is for PMIs to move sideways, and for the NY Fed survey and for IP to improve, which seems reasonable.

Jobless claims (Thursday): I agree with the consensus that sees no significant change, which is consistent with a tight labour market.

Events/Political Developments

Ambassador Haley has surged to second place in the polls for the Republican nomination, displacing Governor De Santis. However, she remains far behind former president Trump who is leading with 61% against Haley 14%.

Europe

Key Points

• The ECB on Thursday is likely to leave rates unchanged (4.0% depo), and to signal the beginning of discussions to end PEPP reinvestments in 2024. I expect the tone will match Schnabel’s recent comments, with forecasts adding to the dovish picture. However:
  • Given the near-term data uncertainty, I think the market has gone too far pricing Q1 cuts, I will watch for opportunities to receive EUR short-end post-ECB.
  • I like looking for European credit widening (BTP and KfW vs Bund).
• The BoE on Thursday is likely also to leave rates unchanged (at 5.25%). Without updated unemployment data they will have a hard time changing the tone just yet.
  • I continue to like to receive May 2024-dated SONIA, with the likelihood being that they will be able to cut rates earlier than the market is pricing.
• Data releases include:
  • UK labour market numbers (Tue) – expect continued reduction in vacancies, continued strong wage growth (albeit probably lower than previous).
  • UK monthly GDP (Wed) – expected to see a small decline MoM.
  • Preliminary December PMIs (Fri) – expected to see some more positivity across services. Indications of inflation pass through to consumers will be key.

ECB to Keep Rates Unchanged – But There May Be Limits to Dovishness

I expect that the ECB will keep its interest rate policy unchanged at its policy meeting on 14 December (deposit rate at 4.0%). The tone will meanwhile likely remain largely consistent with Schnabel’s recent speech: that inflation has undershot, but it is too early to declare victory.

Otherwise, I expect:

• Their updated forecasts will show a lower growth trajectory near-term, with a downward revision to inflation across their trajectory. The amount taken out of 2024 will be important.
• On PEPP, a high chance that they signal that discussions on its early winddown have begun, but there is little rush for them to provide much more information so long before policy framework revisions are completed in the Spring.
  • Ultimately, a full end to PEPP reinvestments is likely before end-2024, which will put more pressure on next year’s heavy EGB net supply .

The market is already pricing 38bp of cuts by April, only a short way from being fully priced for a cut in both March and April. The change in tone from probably the most important hawk at the ECB (Schnabel) should not be underestimated, but there are always nuances to the situation.

Recall that it was only at the end of August that the market was badly wrong-footed reading too much into Schnabel’s comments at that time which they perceived as dovish. In fact, they were just more balanced in line with a general agreement not to give hints one way or another on next policy move.

Lagarde leans a lot on Schnabel’s opinion, and it seems likely that her comments will roughly reflect the above at the presser. However, first and foremost it seems unlikely that she will want to give forward guidance, and there are data related issues with cutting in April or earlier:

1. If the ECB still cares about wage growth as much as Schnabel seems to, they will not yet have Q1 negotiated wage data by then.
2. They will not have the full picture of Q1 inflation either by then – when a lot of repricing activity tends to be seen.
3. Changing trajectory in accommodation prices (as we have started to see in Germany) could sap some of the dovishness from near-term core and services CPI.

In my view the market is now priced to the limits of reasonability with regards to cuts (almost two by April). Unless there is a strong change in tone to justify this at the ECB I would look for opportunities to fade the move.

In the meantime I continue to like European credit wideners (BTP and KfW vs Bund).

BoE to Pause Again: Hard to Change Tone Without Correct Labour Market Data

I expect the BoE will leave rates and tone unchanged at their Thursday meeting. With the ONS having delayed the correction of their labour force survey data, the BoE will be reliant on experimental data which looks like it under-emphasises the degree of labour market loosening underway.

A drop in wage growth on Tuesday could add to the feeling (although it has overshot surveys for so long that it is hard to have much conviction on it falling back sharply).

Without any more recent CPI (next release 20 December) or corrected labour market data to lean on, there is limited room for hawkishness to build either. That is one reason why I believe the recent more hawkish pricing (versus other central banks) is largely unfounded.

I continue to like to receive May 2024-dated SONIA, with the likelihood being that they will be able to cut rates earlier than the market is pricing. I see value positioning for relatively more BoE than Fed easing in 2024.

$-Bloc and Rest of G10 Europe

Key Points

• Australia: Look for signs of resilience in NAB Survey. Labour force survey is walking tightrope.
• Norway: Core CPI to miss forecast and Norges Bank to pause. We expect a revised policy path, too.
• Sweden: A higher-than-forecasted core inflation isn’t hawkish (for once). That’s because it’ll come with weakening core inflation momentum.

Australia

The NAB survey (Tueday) and LFS (Thursday) will be the big data points this week. In the former we’ll be watching for continued signs that businesses are seeing robust demand via the forward orders {NABSFORD Index}, trading conditions {NABSTRAD Index}, and profitability {NABSPROF Index} sub-indices. On the latter, the market is pencilling in a higher unemployment rate (3.0% vs 3.8% previously). This would align with the softer survey data we continue to see. There continues to be room for large surprises either way with part-time employment supporting employment gains since July (Chart 1). Bases in the unemployment rate followed by growing dominance in the part-time growth rate suggests an incoming increase to the unemployment rate.

Norway

Core inflation and Norges Bank this week. Consensus is for core inflation to decline to 5.9% YoY from 6.0% YoY (equivalent to ~+0.4% MoM, when rounded to 2dp), which suggests for core inflation momentum to return to above pre-Covid levels. We think an outturn closer to 5.8% is more likely as that would reflect that October was more of a one-off than a return in trend to higher core inflation momentum.

And even if the market is proven right, we think it is unlikely that Norges Bank deliver their pencilled-in December hike. That’s because a plethora of other data is gunning for a pause; the domestic economy has proven weaker than expected while the regional network survey points to a softer future, too. Lower oil prices and a shift in global central bank pricing helps, too.

Instead, we think they leave the policy rate at 4.25% and signal that they are unlikely to deliver any further tightening. Furthermore, they could move forward their forecasted first cut (Chart 2).

Sweden

All eyes on core inflation. That’s what most the board are worried about still. They don’t want to see any surprise creep higher in core inflation. And, as it stands, markets are expecting a reason to worry as they are forecasting a core inflation rate of +5.9% YoY – higher than the +5.7% YoY forecasted. Or so you would think. That’s because it isn’t twinned with high core inflation moment. Quite the opposite in fact (Chart 3). That leaves worries to remain on the economy and whether the Swedish economy can handle the current policy rate much longer – this argument has been led by Jansson.

Emerging Markets

Key Points

• Czechia disinflation to resume.
• South Africa CPI to edge down from recent hights.
• Philippines central to stay on hold.
• Brazil central bank to cut 50bps.
• Dovish hold from Banxico.
• China data preview: price declines, but rebounding industrial production and strong car sales.

Czechia Disinflation to Resume

The temporary rise in YoY inflation last month should end with now more favourable base effects in play. The CNB’s expectations may be slightly higher than the 7.1% published forecast given the 0.2pp miss on October CPI. An inflation print below 7% would support our view of the first interest rate cut at the 21 December policy meeting. A reading around 7.1% would leave it as a close call. But core inflation will also matter for the timing of the first rate cut with the October reading of 4.2% YoY below the CNB forecasts.

South Africa CPI to Edge Down From Recent Highs

After several months of rising inflation the SARB should get some comfort from a renewed downturn in YoY CPI. A move back towards the target’s midpoint (4.5%) remains some way off. But the combination of a relatively stable currency and lower energy prices should bring CPI down from last month’s 5.9%. The SARB don’t meet again until late January so will have another CPI release before deciding next on rates. But that said, policy rates are probably on hold until at least Q2 next year.

Philippines Central to Stay on Hold

BSP is likely to leave interest rates unchanged on Dec. 14 at 6.5%. Since its last meeting in November, PHP has strengthened and headline CPI fell to 4.1% in November. We don’t expect the central bank to signal easing until the Fed has clearly signalled its intention to stay on hold.

Brazil Central Bank to Cut 50bps

BCB’s last MPC meeting for this year will be held on Wednesday, at which we and the market expect a cut of 50bps, bringing rates to 11.75%. This is in line with BCB’s guidance at the last meeting, where the central bank noted that cuts of 50bps was an appropriate pace. We believe the central bank will be less hawkish given more benign inflation behaviour – inflation should close this year below the upper band of the target for the first time since 2020.

Dovish Hold From Banxico

Banxico is likely to hold policy rate at 11.25% on Thursday. We look for further dovish details in the statement for any forward guidance on when the easing cycle may begin. The minutes for November meeting showed most MPC members were willing to cut in 1Q24.

China Data Preview

CPI: High Frequency pork and fuel prices point to deeper price declines in November. The market is expecting an unchanged CPI (-0.2% y/y)

IP: High frequency data point to a rebound in industrial production in November, in line with market expectations. The rise in the HF indicator is mainly driven by an increase in capacity utilization in upstream chemical production..

Retail sales: The HF car sales number shows that November sales could be the strongest so far this year. Together with low base data for car sales, fuel prices, and restaurant spending last November, we expect November’s year-on-year figure to be as high as April’s, which is in line with the market.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Ben Ford is a Researcher at Macro Hive. Benjamin 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.

Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.

Mirza Baig is a Senior Macro Strategist at Macro Hive, specializing in EM research. He has been researching and trading global FX & rates products for over 19 years, boasting affiliations with Morgan Stanley, BNP Paribas, Deutsche Bank, and Point 72.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)