24 November 2023 Emerging Markets | Europe | Global | US

Key Events: Powell to Give Pre-Blackout Hints

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

Powell is likely to hint at no hike in December and say he is not confident the Fed is done hiking.
PCE is likely to show slower October core services inflation.

Fed

The minutes made it clear that the Fed is not confident it is done tightening and that tighter financial conditions had played a big role in the decision to stay on hold at the November meeting.

The Beige book will get published on Wednesday and is likely to give its usual very nuanced picture of the economy.

Next week’s speakers include Powell, Waller, Mester and Goolsbee. The pre-meeting blackout starts on the weekend, so Powell is likely to give hints on the December meeting and I do not expect him to hint at a hike. At the same time, he is likely to state that future hikes are possible.

Data

The Atlanta Fed GDP nowcast for Q4 rose to 2.1% from 2.0% a week ago. The Citi economic surprise index fell to 33.3 from 37.4 a week ago. WTIC spot fell to $76.8/barrel from $75.9/barrel a week ago.

PCE (Thursday): I agree with the consensus, but the breakdown between goods, housing and non housing core services will be more important to the Fed than the overall number. I expect the same pattern we saw with the CPI, namely lower core services, largely because of lower energy prices in October.

Consumption and income (Thursday): I agree with the consensus that implies no major change in the savings rate. I will be looking for continued strength of durables consumption because it is a sign of consumer confidence.

Manufacturing PMIs: ISM (Friday), Dallas Fed (Monday), Richmond Fed (Tuesday), Chicago MNI (Thursday): I agree with the consensus that generally sees an improvement. The UAW strike ended on 30 October, and the November PMIs will give us a first look at the state of manufacturing unbiased by the strike.

House prices (Monday): I agree with the consensus that sees further increases, in line with lack of supply that in turn reflects a combination of mortgage lock-in effect and strong employment growth.

Jobless claims (Wednesday): I agree with the consensus that sees a small increase, which is consistent with a tight labour market.

Events/Political Developments

Former President Trump is widening his lead over President Biden in the polls. So far this has not elicited a policy response from the administration.

Europe: Eurozone Disinflation Can Continue… For Now

Key Points

Eurozone November inflation will be the main release of the week. We expect that the recent normalisation in core and services inflation can continue for now, but ECB policymakers will not take too much positivity from this.
Accommodation inflation has tended to rise back around December, its disinflation has masked high inflation elsewhere in wage-intensive services.

Eurozone Inflation

The latest Eurozone final inflation print for October confirmed headline inflation at +2.9% YoY, with core inflation at +4.2%. This week will provide updates on both in the preliminary results for November.

Recent European outturns have been relatively dovish in the core and headline readings – with both trending back towards normality (Charts 1 & 2). We expect this normalisation will continue in the November data, but the underlying detail may become less dovish into the end of the year.

Services inflation is an important driver of core inflation, and (as the stickiest component) is one of the most important factors that the ECB is watching. Lagarde’s recent comments (that goods price deflation is fading and the stickiness of services was a worry) aligns with our feeling that we could get an uptick in services inflation into the YE.

The recent PMIs suggest that services firms are increasingly passing cost rises (wage driven) to shop prices. The important question is whether this falls on customer-facing services, or remains limited to B2B firms. Wage-intensive services inflation (the sectors most exposed to wages) suggests the trend is dovish (Chart 3). This is certainly the case for Italy and Germany, for France less so. But importantly, the driver of much of the recent fading wage-intensive inflation has been accommodation prices (Chart 4). The sector has been more volatile since COVID, and (versus SA pre-COVID) has tended to bottom out in negative deviation in November, after which it rises back up. We expect this to be the same again this year, which suggests the dovish trend may fade soon.

The ECB is understandably cautious about the recent disinflation. January and March see large amounts of core-sector repricing. They will want to see normalisation there before they can declare job done. Similarly, they will want to see wage negotiation normalise for Q1. That suggests they won’t be able to cut in April. We see value fading pricing for that.

$-Bloc and Rest of G10 Europe

Key Points

Australia: October CPI indicator unlikely to prove that important in the grand scheme of things.
Canada: Labour market loosening likely to continue. Wages outturn could help dovish pricing further.
New Zealand: RBNZ to keep OCR at 5.50% but room for a surprise.
Sweden:

Australia

The past week saw a bundle of speeches while Governor Bullock will be speaking again next week. Most repeated the same message we have heard several times, albeit with Bullock overlaying a more hawkish tone than we had seen previously. Still, we continue to expect an RBA pause in December.

Bullock also gave us some more information on incoming changes to the RBA. We have summarised them below with notes where needed:

A move to eight Board meetings a year, starting from February 2024.
Longer Board meetings.

Meetings will start on Monday afternoon. This will involve presentations and discussions. They should last around 3.5 hours (~twice as long as is current).
Board then reconvenes on Tuesday to consider the policy decision. They will also have to decide on how they convey the policy decision collectively as they switch to Board messaging rather than Governor messaging.

An internal staff meeting at the beginning of the Board cycle that Board members would be able to attend.

This will be the first step. Board members will attend a ‘policy issues meeting’ around 10 days before each Board meeting.

Board oversight of the research agenda.
Changes to communication, including the post-meeting statement being issued by the Board, rather than the Governor, and media conferences after each meeting.

Presser to be held one hour after the meeting.
SoMP to be released at the same time as the decision every other meeting.

Turning to the week ahead, the October CPI indicator will be widely watched. Markets are expecting it to decline to +5.2% YoY from +5.6% YoY. In reality, we’ll be watching the rents details as the services side of the details won’t really be available until the next inflation release (10 January) which comes out only three weeks prior to the quarterly release (31 January). So, unless there is a major shock from +5.2% YoY, expect little reaction from the market on the RBA.

Canada

The BoC are waiting for a stronger downturn in core inflation momentum and for wages to recede. The former is yet to happen – the October data showed a marginal slowing but failed to take us away from our recent range – while we’ll get an update on the latter this week (Chart 5).

In general, the labour market has been loosening (Chart 6). Gains have been driven by part-time employment while survey data continues to recede. This week may only show a continuation of the trend – that’s what has been pencilled in. Markets will continue to watch wages outturn. A strong downside surprise would help dovish pricing continue – we have seen cycles out wages outturns over the past couple of years, which could continue.

New Zealand

Finally, a government appears to have been formed. The one stand-out here is that they’re likely to go after the RBNZ mandate. Specifically, the National Party (lead party of coalition) want to remove the employment specification, removing labour’s change from 2018, and making it just about inflation. Apparently, they’re also considering proposing changes to the specifications of the inflation side of the mandate, too.

What does this mean? Well, the labour market side of things are a dovish weight on the RBNZ outlook. That’s returned to the levels the RBNZ had deemed as MSE. Removing that side of the argument inherently means higher for longer. Moreover, a lot of the worry from the RBNZ has been focused on non-tradables inflation – that continues to inch away from forecasts.

Overall, the forming of the new government could likely mean the RBNZ cut later than they probably should do. That’s because they’ll have to focus on core inflation outturns alone.

Turning to this week, we’ll likely see the RBNZ leave the OCR at 5.50% (market: 0bps; econs: all 26 for pause). The ‘likely’ pays respect to the tone the RBNZ can use; Q2 GDP was stronger-than-expected (+0.9% QoQ vs +0.5% QoQ), seeing a recession be revised away, too. Other data, however, were dovish. Latest labour market data suggests it is back to MSE while new monthly inflation indicators (Stats NZ have begun publishing an additional 17pp of the quarterly CPI outturn every month) suggest a weaker outturn than forecasted.

This leaves room for a surprise either way. If they focus on dovish details, they could easily revise the OCR forecast down to 5.5%. At the same time, focusing on better-than-expected growth and still-high inflation expectations could help them inch it higher.

Sweden

We were wrong on the Riksbank. We had expected a 25bp hike – they paused! Why did they pause? The risk we had talked about (concentrating on the pace of core inflation momentum) has realised: ‘In recent months, consumer prices have increased at a slower pace than before’. This was likely pushed by Gov Thedeen.

Going forward, given the trend in core inflation and happiness to pause today, we think it’s more likely the Riksbank leave the policy rate unchanged in February than hike. Elsewhere, they could up the pace of QT. However, on that side, it’s the relative pace of QT (i.e., Riks vs ECB) that matters. We still have the potential of ending PEPP reinvestments to go on that side.

Turning to this week, it will be a busy Wednesday morning and a must watch on Friday morning. Wednesday will see GDP, retail sales, the economic tendency survey (ETS), and Jansson (Hawk) speak!

The ETS has been declining as of late and suggests GDP YoY will continue to decline, in line with expectations (-1.4% YoY). The updated ETS figure will remain important. And on Jansson will speak on CRE. There have been a lot of headlines on CRE issues, but the Riksbanks’ take has continuously been of the stance that ‘we won’t help’, with low worry given that the story is driven by marginal players rather than it being a common factor, while they are seeing it have little impact on banks. Thus, the reason Jansson’s speech will be of any interest is if he strays from the status-quo! At that stage, it would be time to worry and be short SEK.