China | Emerging Markets | Europe | Global | Monetary Policy & Inflation | US
RBNZ to Accelerate into Thanksgiving
- By Dominique Dwor-Frecaut, Ben Ford and Henry Occleston
- 12 min read
US – Europe – $-Bloc and Scandies – China/Japan
US
Summary
- Fed minutes could convey that hikes will slow but the terminal FFR will rise.
- Capital goods orders could surprise on the upside.
Fed
After 10 Fed speakers this week, the OIS implied FFR for June 2023 is up 20bp and the GS FCI is roughly unchanged over last Friday. The speakers confirmed that the terminal FFR would be lifted in the December SEP from the current 4.5 to 4.75%. Daly, a dove, argued for a terminal FFR between 4.75% and 5.25% while Bullard, a hawk, argued that 5% would only get the FFR at the bottom of the ‘sufficiently restrictive zone’ that ,in his estimation, had 7% as an upper bound.
Waller, a hawk, stated that he was comfortable with slowing to 50bp in December but that his final decision would depend on the data ‘including the next PCE inflation report and the next jobs report’.
The Fed is publishing its minutes right before Thanksgiving and I expect them to repeat the message that a slower pace of rate increases will be accompanied by a higher terminal FFR.
As of this writing speakers this coming week (that effectively end Wednesday since Thursday is Thanksgiving) are Daly, Mester, George, and Bullard.
Data
Retail sales exceeded expectations, which is consistent with my bullish views on growth and inflation.
The most important data of the week is durable goods orders, that tend to correlate with capex. The consensus for non-defense capital goods orders excluding aircraft is 0.1% YoY, which seems to me on the low side, based on a pick up in capex at listed companies. This pickup in turn could reflect that fears of impending recession have proven misguided and that the dollar, on a trade weighted basis, is down from its late September peak.
Other key data include:
- S&P PMIs, always difficult to interpret since S&P releases only limited data.
- Jobless claims: I agree with the consensus that expects both initial and continuing claims to continue to hover near historical lows.
Events/Political Developments
The results are in, the Senate remains blue, ahead of a runoff in Georgia that could add to the Democratic majority. The House has turned red, with the GOP likely to command a majority of 3 seats.
Democratic leaders have announced their intention to raise the debt ceiling during the lame duck (i.e., before the end of the current Congress). This would remove a major GOP leverage to impose stringent fiscal consolidation next year.
In an emergency appeal, the administration has asked the Supreme Court to let it proceed with its student loan forgiveness program, currently on hold due to lower courts litigation.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe: Is There Upside for November PMIs?
Key Points
- November PMIs – expect a bearish picture, but perhaps with some upside for European manufacturing.
- Plenty of CB speakers including the BoE watcher’s conference. We are watching MPC speakers for reactions to the Autumn Statement. A near-term move higher in pricing for BoE hikes is a risk right now.
Could Europe See Some Support at the PMIs?
France, Germany, and the UK will all see preliminary November PMIs released on Wednesday. While the expectation is for continued negativity, the recent paring in European gas and electricity prices and the re-opening of China may provide some upside to European manufacturing. For now, our expectation remains that the Eurozone slowdown will be insufficient to cap inflation, and significantly more ECB tightening will be needed.
We continue to expect another 75bp ECB hike in December, alongside the board moving towards a consensus for a 2023 start to QT.
Near-term Risk to BoE Outlook
I had expected the week just gone to produce more concrete evidence of the BoE’s dovish pivot. However, despite a fall in employment (which aligned with my expectation that the labour market may be in turning over) and continued weakness in retail sales, the Autumn Statement produced a more supportive fiscal picture in the near-term than I had expected (Chart 1). Meanwhile, the surprise spike in October food inflation added credibility to a BoE profile that I would otherwise consider to be overly hawkish.
In such an environment, while I continue to expect the BoE to pivot dovishly ahead, there is a strong risk of more BoE hiking being priced in in the near-term. This conviction is added to by the fact that the market is currently pricing for a Fed pivot, which we do not think is credible. If this pricing was to fade, it would likely feed into a more generic hawkish rates move.
The week ahead will provide an insight into more BoE policy maker thoughts, with Cunliffe (Mon), Pill (Wed), Ramsden and Mann (Thu) all speaking. For me, the most important aspect of this will be in understanding more around how they view the Autumn statement outturn for inflation. Previously, Mann’s comments have focused on inflation expectations (which are now re-anchoring, Chart 2) and sterling weakness (which on a trade weighted basis is down only 4.5% YTD after recent strength).
As we set out last week, ECB speakers are increasingly sounding in favour of 75bp at December, as well as a 2023 start to QT. We expect to see this trend continue in the week ahead. We continue to expect EGB weakness ahead.
The final EZ CPI readings are released throughout this week. We expect this will confirm the strong momentum from the preliminary readings.
$-Bloc and Scandies
Central Bank Watch
Reserve Bank of Australia
The labour market has likely peaked. While the unemployment rate ticked lower (3.4%, prev 3.5%), an array of survey employment indicators suggest strength has been fading recently as the number of applications per job ads has increased, cyclical strength is fading and as the number of migrants returns toward previous levels (Charts 3, 4, 5 and 6).
Q3 wages data was also released. Wages grew +3.1% YoY (+1.4% QoQ) with private wages (+3.4% YoY; +1.2% QoQ) growing faster than public wages (+2.4% YoY; +0.6% QoQ). The stronger-than-expected print came at the historically strongest period for wage increases (Averages: Q1 = +0.49% QoQ; Q2 = +0.38%; Q3 = +0.90%; Q4 = +0.51%), on the back of a big lift in the Annual Wage Review (of between 4.6-5.2%) and a record tightness in the labour market (Charts 7 and 8). Meanwhile, with firms awarding a larger-than-usual amount of the increase to bonuses, it insinuates an even lesser chance of a wage-price spiral.
Additional (publicly available) wage indicators the Board considers (NAB and AIG Business Surveys, SEEK Advertised Salary Index) show that while the upside is likely to continue (RBA expects wage growth to end 2023 at ~3.9% YoY), wage pressures are alleviating (Chart 9).
We continue to expect a 25bp hike from the RBA in December and a terminal rate between 3.25-3.60%. And on trades, perhaps I exited the short AUD/NZD trade too early. We exited as we turned optimistic about a China rebound and wanted to move out of the way of any adverse change in market direction.
Aside, the RBA posted their review of forward guidance. It was an interesting read. They claimed that markets were wrong to interpret wages as a target. This is despite them including some variation of the following in previous policy statements:
‘The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.’
Anyway, here is what you need to know from the review:
‘forward guidance will generally be flexible and conditionality will likely focus on the Board’s policy objectives – namely, inflation and unemployment – rather than the drivers of these variables (e.g. wages). It will typically focus on the short term and be narrative in nature.’
Bank of Canada
Over the past week, Canadian inflation behaved; three-month measures provided ‘a more sustained further decrease’ as the Bank had been looking for – read our October BoC review. We also released a new note that shows Fed cuts are mispriced versus the BoC. And on our trades, we still like being long Canada 2Y vs US 2Y and believe USD/CAD will ultimately trade higher, it has inched higher over the past week.
Reserve Bank of New Zealand
This week, we wrote a note that found Fed cuts are mispriced versus the RBNZ. Next week, we expect the RBNZ to hike by 75bp on Wednesday – preview to follow next week – though this is less of a consensus than one might expect.
Norges Bank
The Q4 expectations survey pointed to higher inflation expectations and stronger wage growth than Norges Bank had forecasted. We continue to wait for an update to the labour force (12 December) and the region network report (6 December), but pressure is mounting for a larger move in December. For the time, our base case remains a 25bp hike.
Over the past week, our long EUR/NOK has traded well and is well on the way to re-test year highs, as we expected.
Riksbank
CPIF (9.3% YoY & -0.1% MoM) undershot Riksbank forecasts (9.8% YoY), down from 9.7% YoY in September. However, this belittles the higher-than-forecasted core-CPIF (7.9% YoY vs 7.4% YoY).
The Riksbank is due to meet next Wednesday (23 Nov) with a 50bp or 75bp up for discussion. We are leaning toward a 50bp move, but the argument is balanced. While core-Core-CPIF has pushed above forecast, SEK is weaker than expected, unemployment has seemingly bottomed, but the business survey was on-balance better for the doves than the hawks of the board.
We are tilting toward a 50bp hike on Wednesday – preview to follow – and a 25bp hike in February.
Calendar Preview
Here are the key events to watch:
Australia
- Governor Lowe is scheduled to speak on Price Stability, the Supply Side and Prosperity at the 2022 Annual CEDA Dinner at 18:00 AEDT (07:00 UK) Tuesday – you can listen here.
Canada
- Retail sales (Tuesday, 13:30 GMT).
New Zealand
- We a leaning toward a 75bp hike on Wednesday – preview to follow.
Norway
- A quiet week here.
Sweden
- We are leaning toward a 50bp hike on Wednesday – preview to follow.
China/Japan
Key data releases this week include Japan’s PMIs and China’s industrial profits.
Links to BOJ Rinban , BOE OMO
Due to the administration declaring the end of the pandemic I am ending my Covid monitoring for now.