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US NFP Surprise Could Further Rile Markets
- By Dominique Dwor-Frecaut, Ben Ford and Henry Occleston
- 12 min read
US – Europe – $-Bloc and Scandies – China/Japan
US
Summary
- A positive NFP surprise could further rile markets.
- Courts to decide whether to let lawsuits against the administration debt forgiveness plans proceed.
Fed
Fed speakers last week remained hawkish. They downplayed the impact of UK markets volatility for the US, which is consistent with my view that only systemic instability to get the Fed to pause.
This week Bostic, Williams, Logan, Mester, Daly, Evans and Cook are speaking. I will be paying particular attention to Cook, who is one of the most dovish FOMC members.
A key item of discussion among FOMC members is likely to be when to slow/pause hikes to assess the extent to which policy tightening has already impacted the real economy (please see The Fed Is Pumping The Brakes But The US Is Not Slowing). I will be on the look out for hints of how that conversation is proceeding.
Data
This was another week of strong data with core PCE and consumption increasing more than expected and initial job claims and households savings rate making new lows. The economic surprise index increased further.
The most important data this coming week is Friday’s NFP. In view of the falling jobless claims and the rebound in consumer perceptions of the labor market, I see scope for a positive surprise relative to the 250k forecast. I also expect no change in participation or unemployment, along with the consensus.
I will be looking for an increase in hourly wage, though the measure is less reliable than the Atlanta Fed median wage, released by the second Friday of the month, or the quarterly ECI (Employment Cost Index) that will be released on 28 October.
Other key data include:
- ISM PMIs (manufacturing on Monday, services on Wednesday): I agree with the consensus showing a sideway move.
- Consumer credit (Friday): I will be looking at continued credit expansion as a sign that the household savings rate is still falling.
- Trade balance: I agree with the consensus expectations of a decline in the deficit, the US economy is going through reshoring.
- JOLTS: I will be looking for a continued low ratio of actual hires to job openings and high ratio of job openings to unemployed.
- Jobless claims, factory orders, car sales, construction spending and wholesale inventories.
Events/Political Developments
As expected a continuing resolution extending government funding until mid-December cleared Congress on time to avoid a government shutdown.
Six Republicans states have sued the administration over its student debt forgiveness plans but it is not clear whether the courts will allow the suit to proceed. Current administration plans are to start implementing the forgiveness this month, ahead of the 8 November mid-term elections.
Polls continue to show that the democrats are somewhat likely to keep the Senate and the Republicans are likely to win the House.
Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS
Europe
Data – Final PMIS
It is scheduled to be a much quieter week ahead in Europe. The final September PMIs (Monday and Wednesday) will be the main release for much of Europe. There, it is expected that sentiment remains strongly negative. For Europe, much of this will stem from the energy situation, which is likely to return to the fore ahead in the wake of the sabotage of the Nord Stream pipelines. Into winter, Europe will face an increased need to significantly curtail its gas usage. If this does not begin to fall more on households (which have been insulated by price cap legislation) the risk of controlled blackouts will continue to rise. To us, the damage to the Nord Stream pipelines reiterates the threat of broadening the scope of the conflict with Russia to include non-Russian energy sources to Europe.
ECB Minutes and BoE Survey
In central bank comments, important aspects to watch will be the release of the BoE’s Decision Makers Panel survey (likely Monday), and the release of the ECB’s September meeting minutes.
The September DMP survey (which would have been conducted after the government’s announcement of the energy price cap freeze [EPCF]) will be important to look at for signs of hiring weakness (i.e., signs that the labour market tightness is continuing to fade even with a stable labour force) and signs that inflation expectations are falling. Given it will be from responses post-EPCF announcement and businesses will also be benefiting from the price cap, it may see a significant moderation in price growth trajectory. The offset is that, given this is a survey of CFOs, the larger impact on consumer price expectations may not show yet.
The ECB’s September meeting saw them hike by 75bp and Lagarde drop all pretense that the neutral rate would be where they would stop (something we had been pushing against for some time). At this stage talk of QT is premature, but it will be important to get a gist of how much discussion there was on the topic. Also important will be how heavily Chief Economist Lane caveated his forecasts. The evidence right now is pointing towards the ECB members focusing more on current inflation. A somewhat surprising shift in rhetoric, particularly from the doves, has been the focus on fiscal prudence recently, as opposed to anti-fragmentation. Signs of how worried the ECB is getting on debt sustainability will be key, as would be any signs that they are willing to accept wider fragmentation between EGBs in order to sustain their hawkishness. This certainly seems to be the case.
$-Bloc and Scandies
Central Bank Watch
Reserve Bank of Australia
The Australia Bureau of Statistics has begun releasing monthly CPI prints. Deputy Governor Bullock had already said the release was unlikely to influence the RBA on Tuesday, where we expect them to raise the policy rate to 2.85% (+50bp). In short, while the headline number has slowed to 6.8% YoY in August (from 7.0% YoY in July), due to a fall in fuel prices, core inflation has picked up the pace to 6.2% YoY in August (from 6.1% YoY in July). There are a few key details:
- New dwelling inflation might be slowing, prices were up 20.7% YoY in August (from 22.0% YoY in July), but it should still support an elevated trimmed mean inflation.
- Rent inflation continues to accelerate, prices were up 2.4% YoY in August (from 2.1% YoY in July).
- Food inflation has accelerated, drastically too (+18.6% YoY in August from 14.5% YoY in July).
Going forward, the data point will be released monthly, and with much more information than today’s release, though still only a subset (62-73%) of the full CPI basket. Moreover, the data point will just be an indication; quarterly CPI will continue to be Australia’s key measure of inflation. Elsewhere, retail sales remained strong through August (+0.6% MoM) while job vacancies fell through the second quarter (-2.1% QoQ).
We continue to expect the RBA to hike the cash rate to 2.85% (+50bp) on 4 October. Further afield, we envision an RBA terminal rate of 3.5-3.6%.
Bank of Canada
GDP (+0.1% MoM vs -0.1% MoM) proved more resilient than markets had first expected, though the lack of pace in the expansions proves that the rapidly rising interest rate is weighing on the economy.
We continue to point toward three key remaining data points for the next meeting (26 October): consumer (16 October) and business expectations (17 October), as well as Sep CPI (19 October). At this juncture, we continue to see the BoC hiking by 50bp.
Reserve Bank of New Zealand
The last meeting saw the Reserve Bank of New Zealand (RBNZ) hike the Official Cash Rate (OCR) to 3% (+50bps) and forecast a ~4.1% terminal rate. In the interval, official data has been sparse. You could make a case, domestically, that a significantly higher forecasted terminal rate is little needed. Survey data backs a strong labour market while the NZD TWI is far weaker than expected. It provides partial support to the additional 80bps markets that have priced into the implied RBNZ terminal rate, though global factors likely play a large role.
We continue to expect the RBNZ to hike the OCR to 3.5% (+50bp) on 5 October and then to 4% (+50bp) on 23 November. We think the RBNZ is unlikely to stop there and will hike again in 2023.
Norges Bank
Unemployment inched up to 1.6%, remaining near the historic lows – Norges Bank expect it will reach 2.3% by 2024.
At this juncture, we expect a further 25bp of hiked over November and December, meaning the policy rate will end the year at 2.75%. A further 20-50bps will follow in 2023.
Riksbank
The Riksbank minutes proved that the board is split. In short, they all agreed that inflation expectations appear anchored. However, going forward, some members want to see the impact of rate hikes while others want to be certain that a wage-price spiral does not start.
We expect that the Riksbank is likely to follow with (at least) 50bp in November and 25bp in February. This would take it to the forecasted 2.5%.
Calendar Preview
Here are the key events to watch:
Australia
- RBA Decision (Tuesday, 04:30 GMT +1:00): We expect the RBA to hike the cash rate to 2.85% (+50bp).
- Melbourne Institute Inflation MoM (Monday, 01:00 GMT +1:00): It printed negative for August and a consecutive negative print would damage the market’s hawkish expectations. Going forward, this release will likely start to mean even less given the ABS has begun releasing monthly measures.
Canada
- Labour force update (Friday, 13:30 GMT +1:00): Unemployment jumped to 5.4% (from 4.9%) and helped ease hawkish market expectations for the BoC. They expect it remains at 5.4% in September.
New Zealand
- RBNZ Decision (Wednesday, 02:00 GMT +1:00): We expect the RBNZ to hike the OCR to 3.5% (+50bp).
Norway
- GDP Mainland MoM (Friday, 07:00 GMT +1:00): I agree with the consensus which expects mainland GDP to increase by +0.4% MoM.
Sweden
- Flodén speech (Monday, 12:00 GMT +1:00): The Governor was neutral to dovish in the minutes. The speech is on current monetary policy and will give more depth to his view.
- Nobel Prize: It does not concern markets, but the brightest humans in the world will be recognised next week for their achievements. There will be an award in physics (Tuesday) and literature (Thursday), as well as the Nobel Peace Prize. If you are interested, an equivalent in mathematics is the Fields Medal – it was last won by James Maynard, a Professor at the University of Oxford.
China/Japan
The BoJ Kuroda is speaking this week.
Key data releases this week include China’s FX reserves, PMIs and domestic credit as well as Japan’s PMI.
Links to BOJ Rinban , BOE OMO
Due to the administration declaring the end of the pandemic I am ending my Covid monitoring for now.