UPCOMING EVENTS:
Monday: EZ Flash CPI.
Tuesday: RBA Policy Decision, US ISM Manufacturing PMI.
Wednesday: FOMC Policy Decision.
Thursday: BoE Policy Decision, US ISM Services PMI.
Friday: US NFP.
This week will be a big one. Besides having the FOMC Policy Decision on Wednesday, we will get the most market moving economic reports, that is US ISM PMIs and US NFP.
Monday: Inflation in Eurozone doesn’t seem to be improving after seeing the latest reports from Germany, France and Italy coming all very hot. The expectations are for the HICP Y/Y to show a decline to 9.8% from 9.9% and HICP ex Food, Energy, Alcohol and Tobacco Y/Y staying unchanged at 4.8%.
This inflation report is coming right after last week’s ECB Policy Decision in which the Governing Council seemed rather dovish considering the inflation prospects. In fact, not only they changed the line “raise interest rates over the next several meetings” to “raise interest rates further”, but also stating that they “made substantial progress in withdrawing monetary policy accommodation” while having the deposit rate at 1.50%...ok. After the ECB decision the market repriced rates expectations lower but a hot inflation report should see the market to price more on the rates side for the ECB.
Tuesday: The RBA is expected to raise the cash rate by 25 bps with some expecting a more aggressive 50 bps move after the higher-than-expected inflation report.
The RBA surprised last time with a lower-than-expected hike citing the deterioration in the global economy. They will still remain data dependent for future rate hikes but looks like central banks are starting to switching to a less aggressive tightening stance in light of worse and worse global economic conditions.
The US ISM Manufacturing PMI is expected to ease a bit to 50.0 from the prior 50.9 reading. The S&P Global PMIs showed the US manufacturing falling into contractionary territory at 49.9 from 52.0. New orders component decline, which is seen as the leading component, was the sharpest since May 2020. Although, the two indicators are not tightly correlated, it points to further declines going forward amid tighter monetary conditions and worsening global economic environment. The prices paid sub-index will have the market attention as pretty much everything regarding inflation does. A weak overall report may cause a bid in risk sentiment as the market is currently cheering the expectations for a less aggressive pace of rate hikes.
Wednesday: The FOMC is expected to hike by 75 bps, bringing the Fed Funds to 3.75-4.00%. There’s a growing expectation that the Fed wants to slow the pace of hikes and debate about it in this meeting. These expectations were kicked from the recent Fedwatcher Nick Timiraos’s article saying, “Federal Reserve officials are barrelling toward another interest-rate rise of 0.75 percentage points and whether to signal a smaller hike in December” and Fed’s Daly commenting on the need to step down the pace of tightening.
This looks like a reasonable move to make in light of tumbling leading indicators but a wrong move considering market expectations. I’m inclined to think that if they communicate such a strategy with CPI reports not showing signs of meaningful easing (Core CPI still rising and Headline CPI remaining very high), the market may even cheer a bit in the aftermath but fearing a high inflation for longer if the Fed doesn’t remain resolute in bringing inflation back to target no matter what.
This fear is also highlighted in the Timiraos’s article when he writes “They won’t want to dramatically loosen financial conditions if and when they hike by 50 bps.” In fact, following the WSJ article long-end inflation breakevens spiked with lower nominal yields and real yields accompanied by a pick-up in risk sentiment with stocks bid, USD offered and, icing on the cake, cryptocurrencies up quite a bit.
Timiraos further adds “One possible solution would be for Fed officials to approve a half-point increase in December, while using their new economic projections to show they might lift rates somewhat higher in 2023 that they projected last time.” So, the likely outcome is for the Fed to push back against market pricing of the incoming “pivot” citing little progress on inflation and a full commitment on bringing it back to target even if economic conditions worsen. On a final note, The Cleveland Fed Inflation Nowcast doesn’t give the Fed much confidence in signalling a “pivot” given another expected hot report the next week.
Thursday: The BoE is expected to hike the Bank Rate by 75 bps as inflation remains in the double-digit territory and the core metric keeps on rising.
This more aggressive move will also serve as a remedy to their weak response in September when they hiked by an underwhelming 50 bps and the market fear of a central bank not fully committed to bring inflation back to target. Less hawkish than expected outcomes won’t be taken good by the market, especially if the FOMC delivers on the hawkish side and pushes back against market expectations of a less aggressive stance going forward.
The US ISM Services PMI is expected to ease a bit to 55.2 from the prior 56.7 reading. The S&P Global PMI showed a contraction to 46.6 from 49.3 previously as further signs of deteriorating conditions. The market will focus on the prices paid sub-index that keeps on moderating but remaining high. Again, market reaction will be based on the FOMC decision. If we see a less aggressive Fed and this report comes weaker than expected, the risk sentiment will see a bid, on the other hand if the Fed stays the course and this report doesn’t show a worse picture, we should see risk aversion.
Friday: We conclude the week with the US Labour Market report. The consensus is for 220K increase in jobs, down a bit from the prior 263K result. Unemployment rate is seen picking up a bit to 3.6% from the prior 3.5% in light also of possibly returning workers as the soaring cost of living forces people to search for more jobs to increase their income. The increase in participation rate would be a testimony of that. Wages are seen moderating as the economy slows down and a wage price spiral looks less likely now.
Looking at the leading indicators, the NAHB Housing Market Index fell more than expected to 38 from the prior 46 reading. This index generally leads unemployment rate by 6-12 months as shown in the picture below. We should start to see unemployment picking up in the next few months.
NAHB Index (inverted) vs. Unemployment Rate
This article was written by Giuseppe Dellamotta.
