Key Events: Prof. Powell Tries to Set His Students Straight

US – Europe – $-Bloc and Rest of G10 Europe – Emerging Markets 

US

Summary

• More upside than downside risks to core services CPI.
• Fed speakers to highlight that the December FOMC is live.

Fed

Chair Jerome Powell gave a hawkish speech, where he stated that the FOMC would hike again if inflation was not on a sustainable path back to the 2% target and that December was a live meeting. Markets sold off but likely did so more due to a poor 30yr auction as market pricing of a December rate hike barely changed. The limited reaction could be because Powell has been saying for a year that every meeting was live but hiked only four times.

This week’s other Fed speakers either restated their hawkishness (Bowman, Walker, Logan) or dovishness (Bostic, Barkin) views, or that they did not want to prejudge December (Goolsbee, Kashkari).

Speakers next week include Goolsbee, Jefferson, Barr, Mester, Williams, Collins, and Daly. After this week’s worse than expected U Mich inflation expectations, I expect them to highlight that the December FOMC is live.

Data

Consumer confidence was worse than expected with an increase in both short-term and long-term inflation expectations. The Atlanta Fed GDP nowcast for Q4 was 2.1%. The Citi economic surprise index fell to 49.6 from 51.2 a week ago. WTIC spot fell to $75.7/barrel from $83.2/barrel a week ago.

Key data by order of importance includes:

CPI (Tuesday): I agree with the consensus of 0.3% for core MoM. For the Fed, the most important part of the release will be housing and supercore services. I do not expect much downside to either.

PPI and import prices (Wednesday and Thursday): I agree with the consensus that sees a recovery in the PPI excluding energy.

Retail sales (Wednesday): I agree with the consensus for a 0.2% MoM in the control group as it is consistent with high frequency data such as Opportunity Insights.

IP, NY ‘Empire’, Philly, and KC Feds manufacturing PMIs, small businesses ‘NFIB’ survey (Wednesday and Thursday): the consensus for further weakness seems too pessimistic. I am looking for a recovery in the hard components of the NFIB survey.

Residential real estate data: NAHB index (Thursday), building permits and housing starts (Friday): I agree with the consensus that sees the data moving sideways.

TIC (Thursday): I agree with the consensus.

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

Events/Political Developments

17 November, the end of the current Continuing Resolution (CR), is fast approaching and House Speaker Johnson has yet to present his strategy for funding the government. An announcement is expected early next week.

Europe: UK Inflation to Fall Sharply

Key Points

• UK inflation to drop sharply. Watch for offset from rental price revisions – fade any hawkish reaction if they cause a beat.
• UK labour market data – incomplete release once again. Focus on the vacancies number and the HMRC data for wages.
• EZ inflation – watch for signs of rising wage-intensive services inflation.
• ECB speakers are likely to reiterate Lagarde’s recent pushback on cutting in the near term (we see value paying April-dated EUR OIS).
• BoE speakers will be important to listen to for indications of the thinking of the more marginal members (Green and Breeden in particular).

Next week, we get a lot of information on the state of UK and European inflation and plenty of opportunities to hear from central bank speakers.

UK Inflation and Labour Market Data

UK inflation (Wed) will probably be the most important release of the week. There is expected to be a sharp drop to below 5% YoY (from 6.7% in Sep) on the back of household energy price reductions. The month will also have seen quarterly rental revisions, which could provide a slight offset to this decline. If we get that, we would see value in fading any hawkish reaction on the basis that rental inflation is a sign of monetary policy pass-through, not a demand or cost pressure.

UK labour market data (Tue) will (again) be incomplete, with only an experimental estimate for the labour force survey employment and unemployment numbers. Wage growth will be important to watch from the release, as will vacancies (which are showing continued loosening). The BoE is wary that wage growth is being overstated in the ONS numbers, but they nevertheless still seem to play a large role in their forecasts. It will be interesting to see if they drop the way HMRC data did for Sep. Ultimately, we expect that December’s ONS LFS correction will see confirmed signs that the labour market is loosening faster than the BoE predicts.

Watch the Detail of the EZ Inflation Release

EZ final October inflation (Fri) is expected to confirm core YoY at 4.2%. We will be watching the detail. While we do not expect the ECB will be able to cut by April, whether they end up needing to hike again will be partly based on what wage-intensive services (and wages) do in the near term. We will get more information with this release on the former. We expect to see a bounce in wage-intensive services inflation ahead as accommodation disinflation fades.

ECB Speakers to Keep Pushing Back on Cuts

We expect the tone to continue that cuts are not on the agenda anytime soon, and that there is upward risk to inflation in the near term. Schnabel, in her comments at the start of the month, set out this tone, and other speakers have since largely fallen in line.

Lagarde, speaking last Friday, further added to the tone stating that the ECB would not start cutting rates in the ‘next couple of quarters’. We see this as likely to play into our view that the ECB will not cut in April, and that there is value paying April-dated EUR OIS.

The recent interview with de Guindos meanwhile focused on the risks of de-anchoring expectations and the possibility of wage-price spiral. The ECB’s recent consumer expectations survey saw 1Y inflation expectations jump back up; this will no doubt weigh heavy on policymakers that are hoping for wage negotiations to fall away.

Meanwhile, Germany’s recent tax subsidy announcement for industry will likely keep the hawks worried about fiscal policy rise, and the need for monetary tightening to offset that.

Monday: de Guindos (neut)

Tuesday: Lane, Villeroy (dove)

Thursday: Lagarde, Knot (hawk), de Cos (neut), de Guindos (neut)

Friday: Lagarde, Villeroy, Holzman (hawk), Vujcic (hawk), Nagel (hawk), Wunsch (hawk)

BoE Speakers

There is a decent slew of BoE speakers this week. OF most interest perhaps will be Breeden (who we have not heard from before) and Green (who has voted for hikes at both of her meetings, in a surprisingly hawkish stance). Reactions to inflation and wage data will be important to watch for.

Monday: Mann (hawk), Breeden (unknown)

Tuesday: Dhingra (dove), Pill (neutral-dove)

Wednesday: Haskel (hawk)

Thursday: Ramsden (neutral-hawk)

Friday: Ramsden (neutal-hawk), Green (hawk)

$-Bloc and Rest of G10 Europe

Australia

The upcoming week is packed. We will have the NAB Business Survey (Wednesday) precede the Q3 WPI release (Thursday) before we finish the week on the October Labour Force Survey (Friday).

The first of the three is a regular in the RBA’s alternative data sources – i.e., one released by an organisation other than the ABS or RBA. In September, it showed rebounding demand vis-à-vis forward orders and a reversal of price pressures (Charts 1 and 2).

Understandably, the RBA will want to see this continue (albeit unlikely over the medium-term). This would boost their confidence in their latest forecasts which saw GDP forecasts revised higher alongside better expectations for a labour market downturn.

Out of the two labour market releases, the LFS will be the most important. That is because the WPI is practically old news; the RBA have begun to track alternative measures for wages while the wage agreements that would show up were known back in June/July.

So, turning to the LFS, we will concentrate on the makeup of any gains found in the labour market. Consensus is expecting a 24.5k MoM in employment. However, the recent makeup has been in favour of part-timers as we head into the Australian summer (Chart 3). Elsewhere, consensus have pencilled a tick-up (return) in the unemployment rate to 3.7% from 3.6% (3.56% to 2dp). This would leave it 0.1pp shy of the H2 RBA forecast.

Canada

The calendar is thin. Only second-rate data is scheduled while no speakers are due, either. That comes after the Summary of Deliberations and Dep Gov Rogers speech. The former aligned with our suspicions we held going into the last meeting: namely, core inflation was stickier than they liked, wage growth was too high for their liking, and corporate pricing behaviour remains skewed to higher prices (despite some normalisation). This has led to greater debate amongst policymakers to consider whether a higher policy rate is needed, though they are weighing this up with tighter FCIs and whether the argument is a pace or level issue (i.e., do they need to wait or hike again?). One big area of unknown remains the fixed-payment mortgage rollover, not just for policymakers, but for households and businesses too.

New Zealand

The past week was far from troublesome. We saw medium-term inflation expectations tick lower (Chart 4), albeit the most important release there is still to come (mean two-year consumer expectations; Chart 5). Given recent dovish news on the labour market side, the RBNZ’s job is becoming even easier.

This week, we will have card sales data – we look at this ahead of the ever slowly released retail sales – which have worsened as of late (Chart 6). There is little reason to expect much of a change. As such, we continue to see reason for NZD/CAD to trade down to 0.80.

Norway

We saw core inflation take markets by surprise, us included. We had expected that core inflation momentum, which had been on a downwards path, would continue to trend lower. As a result, there would be little chance core inflation would return to forecast. We were wrong. At +0.71% MoM (SA), this is the largest core outturn since last September, taking core inflation back to forecast!

Given Norges pencilled in a hike, we now reverse our call of a pause in December and call for a 25bp hike to 4.5%.

Looking forward, we are monitoring NOK/SEK even closer. Following the release, it broke through 0.98 but struggled to hold the level. We want to turn long, more on that in our next G10 FX weekly.

Sweden

Norway had it’s go at a larger-than-expected core inflation outturn and now it’s the turn of Sweden. Markets are expecting core inflation to drop to +6.3% YoY from +6.9% YoY. That would leave it 0.3pp above forecast and with Riksbank hawkishness in the driving seat. It should help confirm a November Riksbank hike. Further afield, the strength of core Swedish inflation should continue to fade as momentum reverts to historic norms (Chart 7).

Emerging Markets

Key Points

• China will be a big focus next week. The Xi-Biden meeting and PBoC’s MLF decision set the stage.
• We expect BSP to hike rates by 25bps vs consensus on hold.
• GDP data in Poland and Hungary are expected to show ongoing weakness in domestic demand, but with growth dynamics improved from Q2.
• Poland’s final CPI release for October, and the subsequent core release, should confirm continued improvement in inflation momentum, for now.

Big Focus on China Next Week

The meeting between Biden and Xi is expected to be one of the most closely watched moments of the week. The two leaders will meet on the sidelines of the summit. However, the Chinese government has not confirmed a one-on-one meeting. Market expectations are low, as are ours, but the event risk is high.

PBoC’s MLF decision is due on Monday. Consensus expectations are for a hold, and we agree. However, the risk is for small rate cut, and a cut to RRR is possible considering recent tightening of liquidity. The CPI and PPI data for October were soft and continued to point to very weak demand.

Monthly data on FAI retail sales and FX settlement will be released after the PBoC meeting.

India – Wider Trade Deficit, Slower CPI

India’s trade deficit likely widened in October due to higher oil imports as crude prices surged after the Israel Hamas war. Prices have dropped more recently, so we see this as backward-looking data.

India’s CPI data will likely show inflation slowing to 4.8% year on year in October from 5.0% in September, thanks to government measures to cool prices. Food export bans are raising domestic supplies, and subsidies are lowering costs of cooking fuels. State-owned oil companies are absorbing higher crude prices.

Don’t Rule Out BSP Hike

We expect BSP to hike rates by 25bps on 16 November, vs market consensus on hold. The BSP’s off-cycle hike on 26 October received considerable pushback from the government, with the finance ministry saying ‘there’s no justification for higher interest rates’. And the PHP has strengthened since the hike, with further support likely from seasonal increase in remittances. However, we think BSP would prefer to take the medicine up front rather than react to another round of volatility on the peso. The decision is a close call.

Brazil Fiscal Target Debate

Congress will likely finalize the debate over the primary fiscal target for 2024, with a final decision expected for the week after.

Poland GDP Volatility to Continue

The exceptional swings in Polish GDP over much of the past two years look likely to continue through Q3. After the -2.2% QoQ decline in the second quarter, growth is expected to flip back into positive territory, but driven largely by volatile inventories. The economy remains fragile, with the IP contraction deepening through the quarter and retail sales growth bottoming. Domestic demand is likely to remain weak, ex inventories, with net trade (weak imports rather than strong exports) providing some offset.

Hungary to Exit Recession

Hungary’s unprecedented four-quarter-long recession should end in Q3. Retail sales remain weak but are no longer posting double-digit declines, while the IP decline has also largely bottomed, with some help from the export-orientated EV sector. Looser monetary policy, albeit with weak passthrough, and lower inflation should also help. The YoY rate will improve from the -2.4% in Q2, but quarterly growth may not be enough to get back into positive territory.

Poland’s Final October CPI to Confirm Ongoing Disinflation

Revisions between the flash and final CPI releases in Poland are rare, so we expect the 6.5% YoY reading to be confirmed. The components will, however, be interesting as the decline in fuel prices reported in the flash release was at odds with the weekly petrol price data. And with Friday’s inflation releases in Czechia (+0.1% MoM) and Hungary (-0.1% MoM), Poland’s +0.2% MoM is the highest in the region leaving the details, and the confirmation of core inflation dynamics, important for the inflation trajectory from here.

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.)