Key Events: Why the Shutdown May Drag On! 

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

US

Summary 

• NFP to show continued labor market tightness.
• Government shutdown to start on the weekend and could last about 10 days.

Fed  

There was some disappointment that Powell did not discuss the tightening of financial conditions at this week Fed listens event.  Imho this reflects that the Fed put is unintentional.  It just happens that QE that works through the portfolio balance effect ie through boosting risky asset prices, even though the Fed is targeting aggregate demand rather than financial markets. Similarly, when financial stability is under threat and the Fed puts in place measures to support it, markets tend to like those measures. So, with high inflation and a stable banking system (though aided by a solid infusion of Fed liquidity) the Fed is unlikely to respond to the selloff. 

This week the hawks (Kashkari, Bowman) stressed the risk of a further hikes, while the doves expressed their faith in a soft landing (Goolsbee, Williams) or in data dependency (Barkin). 

Speakers next week include: Powell, Harker (voter, dove), Williams (voter, dove), Mester (non-voter, hawk), Bowman (voter, hawk), Goolsbee (voter, dove), Bostic (non-voter, dove), and Daly (non-voter, dove). 

Data   

GDP was revised up 10bp annually on average during 2017-22 and mom core PCE was 10bp lower than expected. The Atlanta Fed nowcast of Q3 GDP was unchanged at 4.9%.    The Citi economic surprise index fell to 45.1 from 54.9 a week ago. WTIC spot fell to $90.8/barrel from $91.3/barrel a week ago. 

Key data by order of importance includes: 

NFP (Friday):  I agree with the consensus showing payroll around 170k as well as small decrease in unemployment and increase in wage growth. 

PMIs: Manufacturing (Monday) and services (Wednesday):  I see scope for a positive surprise since the consensus sees manufacturing moving sideways and services falling when other surveys e.g. small businesses suggest an uptrend since about Q1. 

JOLTS:  I agree with the consensus but don’t see openings as a reliable indicator of labor demand as actual hires are only a small fraction of advertised openings.  Nevertheless, the ratio of openings to unemployed is a key data for the Fed and consensus on openings and unemployment implies an increase in openings per unemployed i.e. a tighter labor market. 

Jobless claims (Thursday): I agree with the consensus that is consistent with a tight labor market. 

Consumer credit (Friday):  I agree with the consensus that shows a continued increase. 

Events/Political Developments   

The shutdown is likely to start over the weekend.  My expectations is that it could last about a week to 10 days and that we will likely get the NFP but likely not the on October 6^th but not the CPI on October 12 (see Government shutdown could last about 10 days).  

Europe: ECB Dovishness Can Grow Post Inflation Miss 

Key Points 

• After last week’s surprise Eurozone core inflation drop, there is room for dovish tone to build amongst ECB policymakers. 
• Final September PMIs will likely add to the bearishness of the tone in the UK and Europe. 
• We are watching for an opportunity to fade recent BTP selling. 

ECB Dovishness Can Build on PMIs and Policymaker Comments 

Last week saw Eurozone inflation surprise to the downside in both headline and core. We had seen upside risks from the degree of repricing typically seen in the month of September, but if anything, this looks to have counted against us. At +4.5% YoY in the core measure, core inflation is actually undershooting the ECB’s core expectations for Q3 – in stark contrast to our expectations. 

While more information on the exact composition of the core inflation decline will be important to understand, the outcome is undoubtedly dovish. We are careful not to read too much into single outturns, but the release will be an easy scoring point for the doves in the week ahead. 

September PMIs released this week will likely add to the bearishness in the Eurozone economy, as too will the industrial orders numbers. The most important thing to watch will be the comments of policymakers, of which we have a great deal. 

Our expectation is that dovish comments can continue to build ahead, with the “persistence” argument for holding rates stable continuing to gain traction in both the UK and Europe. 

Understanding how the hawks view recent events will also be important. We hear from the BoE’s arch-hawk, Mann on Monday, and ECB hawk Nagel on Thursday. 

In markets we flagged in our last rates weekly that long BTP trades could end up being profitable at these levels. Italian troubles are never far from the headlines, and the announcement that Italy’s 2024 fiscal deficit would likely overshoot initial assumptions had provided a headwind. However, the levels are looking more attractive. 10Y BTP is now at 190bp spread over 10Y Bund, close to the highs seen in May, while outright it is at higher yields now than it has seen in a decade.  

The bull tightening that BTPs saw on Friday suggest that the market is not overly concerned by the fiscal outlook (and indeed, it is probable that some of the more extreme spending hopes will be quashed), so it may soon be time to play into the dovishness and fade the recent rates sell-off. 

$-Bloc and Rest of G10 Europe

Emerging Markets – Week of 2 October  

Key Points 

• The NBP will hold its last policy meeting before Poland’s general election. With CPI down almost 2pp in YoY terms and the zloty fairly stable we expect a 25bps cut to 5.75%.  
• Turkish inflation on Tuesday could provide some gauge of further tightening by the CBRT. CPI is expected to rise back above 60% but with monthly momentum decreasing.  
• We expect Reserve Bank of India to hold rates at 6.5% and retain tightening bias.  
• China composite PMI is set to beat consensus expectations. 
• CPI prints from Indonesia, Korea, Thailand and Taiwan. 
• Mexico’s remittance data to shed light on MXN inflows. 

Another Pre-Election Rate Cut from the NBP 

September flash CPI at 8.2% YoY, down from 10.1% in August, should mean another 25bps rate cut from Poland on 4 October. This was 0.3pp below the NBP’s projection and the -0.4% MoM reading was the lowest since early 2016. Governor Glapinski said recently there was now reduced space for rate cuts which presumably rules out another surprise 75bps cut similar to last month. With PiS doing everything they can to woo voters ahead of the 15 October vote and Glapinski’s term running until 2028 we see no reason for the NBP to wait to push through another rate cut.     

Turkish Inflation to Rise Above 60% 

Currency weakness since the May election alongside higher food and energy prices should continue to push Turkish inflation higher in September. The projected 61.6% YoY rate would be the highest since December and with further increases to come over the next several months. The cumulative 2150bps in rate hikes is not enough to rein in price pressures in the near term with both core and non-core price pressures still elevated. But assuming the worst of the FX weakness is now done and higher rates start to curb domestic demand inflation should top out in H1 2024.  

China PMIs on track to beat expectations. High frequency indicators such as capacity utilization in core industries indicate a solid pick-up in manufacturing PMI back into expansion territory. Other indicators such as coal consumption in Southern provinces and traffic congestion also indicate a broader recovery, on the back of which we expect a beat to market’s expectation of 52 in the composite PMI.  

Reserve Bank of India on hold.  

We expect the RBI to be on hold at 6.5% on 6^th October, in line with consensus, and retain a tightening stance. The food inflation shock in July was reversed in August, on the back of which YoY headline CPI could drop to low 6% handle. Core CPI has been softening, but with food being over 50% of CPI index, the RBI cant ignore the volatility. Meanwhile the economy is holding up well with strength in domestic demand partly offsetting weak external demand. While we are not expecting further tightening from RBI, we would not rule it out completely. Risks are contingent on inflation expectations, idiosyncratic weather conditions and external factors like the Fed and oil prices.  

Mexico remittances: Remittance data for August is due on 2^nd October. While do not forecast this data, steady growth in remittances has remained a source of support for MXN. YTD inflows are tracking 9% above same period last year. Remittances remain a pillar of domestic consumption and external balance of payments, providing a boost of 4% of GDP to the current account.  

Mexico – Central bank economist survey: We are watching inflation expectations component. Last month, the 12mth inflation expectation came at 4.3% for headline and 4.2% for the core. There is an upside risk on both due to the increase in government spending announced in 2024 fiscal budget. 

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.

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