- More Fed officials are tilting hawkish; Fed tightening expectations remain elevated; data highlight will be November jobs data; weekly jobless claims are worth discussing; Canada also reports November jobs data; Colombia reports November CPI Saturday
- Eurozone data came in soft; ECB President Lagarde again downplayed a 2022 hike; Turkey reported higher than expected November CPI; Fitch revised its outlook for Turkey from stable to negative
- Reports suggest that the omicron variant will keep the BOJ cautious; Caixin reported weak services and composite PMI readings
The dollar is firm ahead of the jobs data. DXY is up for the third straight day and trading near 96.2, which is pretty much in the middle of this week’s trading range. The euro still feels heavy after being unable to break above $1.14 and is testing support near $1.13, while sterling is edging further below $1.33. With market sentiment improving, USD/JPY is trading back above 113, but EUR/CHF is trading just below 1.04 and hovering near this week’s low for this move near 1.039. We believe the underlying trend for a stronger dollar remains intact as the Fed is moving closer and closer to liftoff sooner than markets previously thought.
More Fed officials are tilting hawkish. Yesterday, Governor Quarles said “I certainly would be supportive of a committee decision to move the end of the taper forward from where people had been expecting it in June.” Bostic also reaffirmed his commitment to a faster taper, while Daly got on board by noting that the Fed might need to taper asset purchases faster than anticipated and added that the "Fed may need to start crafting a plan to think about raising interest rates." This means, Powell, Quarles, Bostic, Daily, and Mester are now all in the faster taper camp. However, as we noted yesterday, Powell’s view carries the most weight and yet it also represents a consensus of sorts. While we have been downplaying the odds of a faster pace announced at the December 14-15 FOMC, the odds are getting much higher. Bullard is the only Fed speaker today. At midnight, the media embargo takes effect and we will get no Fed speakers until Chair Powell’s post-decision press conference December 15.
Fed tightening expectations remain elevated. Fed Funds futures still suggest nearly 80% odds of Q2 liftoff, nearly double what it was at the start of the week. Q3 liftoff and a follow up hike in Q4 remain fully priced in, with some odds of a third hike next year. The 2-year US-German and US-Japan spreads jumped yesterday but have steadied today at 134 bp and 72 bp, respectively. Eventually, heightened Fed tightening expectations should filter through to higher US rates and a stronger dollar. However, it seems we are caught in a holding pattern ahead of jobs data this morning.
The data highlight will be November jobs data. Consensus sees 550k jobs added vs. 531k in October, with the unemployment rate see dropping a tick to 4.5%. The clues are pointing to a strong NFP number. ADP private sector jobs came in at 534k vs. 525k expected, while the employment component of ISM manufacturing PMI came in at 53.3 vs. 52.0 in October. This is the third straight month above 50 and the highest since April. ISM services PMI will be reported after the jobs data and is expected at 65.0 vs. 66.7 in October. Here, the employment component stood at 51.6 in October. Final Markit services (57.0 expected) and composite PMIs will also be reported today, along with October factory orders (0.5% m/m expected).
Weekly jobless claims are worth discussing. Initial claims came in at 222k for last week vs. 240k expected and a revised 194k (was 199k) the previous week. The four-week moving average for initial claims is now 239k, the lowest since March 2020. If we get a couple more readings near 200k, that 4-week moving average will be pulled lower to levels we haven't seen since 2019 and 2020, when the U.S. was last at full employment. Of note, NFP is still 4.2 mln below pre-pandemic levels but a big share of that number is not coming back. Bottom line: we are closer to full employment than we thought and that will start showing up even more in the wage numbers. Average hourly earnings are expected to pick up a tick to 5.0% y/y and will be more important than ever given the Fed's focus on "robust" wage growth.
Canada also reports November jobs data. Consensus sees 37.5k jobs added vs. 31.2k in October, while the unemployment rate is seen falling a tick to 6.6%. Bank of Canada liftoff expectations have remained steady, as WIRP still suggests 50-50 odds of a hike January 26, moving up to being fully priced in for March 2. Elsewhere, the swap market is still pricing in about 125 of tightening over the next twelve months. This seems too aggressive to us, especially given the heightened risks from omicron. Will the BOC push back a bit at its next meeting December 8? Stay tuned. Lower oil prices, if sustained, would be a big headwind to the Canadian economy and should warrant a cautious stance from the BOC.
Colombia reports November CPI Saturday. Headline is expected at 4.96% y/y vs 4.58% in October. If so, it would be the highest since February 2017 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike to 2.0% in September and follow up with a 50 bp hike to 2.5% in October. However, the bank is in danger of falling behind the curve and more needs to be done. Next policy meeting is December 17 and another 50 bp hike to 3.0% is likely, with risks of a hawkish surprise.
Eurozone data came in soft. Final services came in at 55.9 vs. 56.6 expected, while the composite came in at 55.4 vs. 55.8 expected. The German and French composite PMIs fell from the preliminary to 52.2 and 56.1, respectively. Italy and Spain were reported for the first time, with their composite PMIs improving sharply from October to 57.6 and 58.3, respectively. Eurozone also reported October retail sales, which rose 0.2% m/m vs. 0.3% expected and a revised -0.4% (was -0.3%) in September. Elsewhere, U.K. final services and composite PMIs both fell a tick from the preliminary to 58.5 and 57.6, respectively.
ECB President Lagarde again downplayed a 2022 hike. She said it was “unlikely” but stressed the bank would take quick action if necessary and noted that “When the conditions of our forward guidance are satisfied, we will not hesitate to act.” Lagarde said the current spike in inflation was temporary and that it wasn’t appropriate to compare Europe to the U.S. This is an implicit nod that the Fed is moving closer to liftoff. Elsewhere, Knot said that he wouldn’t rule out a rate hike in 2023. Reports have emerged that some ECB officials want to wait until the February 3 meeting to decide about extending QE rather than the December 16 meeting due to uncertainty regarding omicron. That strikes us as too close to the March expiry of PEPP and so we expect Madame Lagarde to push through an extension this month. Chief Economist Lane also speaks today.
Turkey reported higher than expected November CPI. Headline was expected at 20.70% y/y but instead rose 21.31% vs 19.89% in October, while core was expected at 17.50% y/y but instead rose 17.62% vs. 16.82% in October. Headline has accelerated for the sixth straight month to the highest since November 2018. More ominously, PPI surged 54.62%y/y vs. 49.0% expected, suggesting upward pressure on CPI will continue. The central bank cut rates 100 bp to 15.0% last month but hinted that December 16 may see an end to the tightening cycle. While the inflation dynamics should preclude any easing then, we expect another 100 bp cut that would cement even higher inflation and further lira weakness.
Elsewhere, Fitch revised its outlook for Turkey from stable to negative. The BB- rating was affirmed but according to Fitch, “The central bank's premature monetary policy easing cycle and the prospect of further rate cuts or additional economic stimulus ahead of the 2023 presidential election have led to a deterioration in domestic confidence, reflected in a sharp depreciation of the Turkish lira, including unprecedented intra-day volatility, and rising inflation. These developments create risks to macroeconomic and financial stability and could potentially re-ignite external financing pressures.” Of note, Fitch is the most generous of the agencies. S&P is next at B+ and Moody’s is the most pessimistic at B2. With no end in sight for the policy blunders, we expect Fitch to play catchup with the other agencies by downgrading Turkey in early 2022.
Reports suggest that the omicron variant will keep the Bank of Japan cautious. Some bank officials see increased risks of ending or reducing its corporate funding program that is scheduled to end in March. They reportedly view credit conditions for large firms as having improved but are concerned about ending support too early given the uncertain impact of omicron. Reports suggest a final decision may come at the next policy meeting December 16-17, when more will hopefully be known about the variant and its potential impact on the economy. Of course, it is widely acknowledged in the markets that the BOJ will be amongst the last to actually tighten, which is highly unlikely before FY24 at the earliest. Elsewhere, final services and composite PMIs improved from the preliminary readings to 53.0 and 53.3, respectively, both up nearly a full point. With significant fiscal stimulus in the pipeline, the Bank of Japan is on hold for the foreseeable future.
Caixin reported weak services and composite PMI readings. Services PMI was expected at 53.0 but instead came in at 52.1 vs. 53.8 in October. This dragged the composite down to 51.2 vs. 51.5 in October. This is in contrast to the official PMI readings, where improvements in both manufacturing and non-manufacturing pushed the composite up to 52.2 vs. 50.8 in October. While the data have been coming in mixed, policymakers are likely to continue supporting the economy in order to prevent a hard landing.