- Rates remain under downward pressure around the world as a result of the Bank of England’s dovish surprise; October jobs data will be the highlight; Canada also reports October jobs data; Peru stepped away from the brink of another political drama yesterday as the cabinet won a confidence vote
- Eurozone reported weak data; BOE decision is worth discussing; a December hike is not a done deal by any stretch
- RBA released a dovish Statement on Monetary Policy; PBOC has shifted (at least temporarily) to a more accommodative gear; Philippines reported better than expected October CPI
The dollar remains firm ahead of the jobs report. DXY is nearing the cycle high from last month near 94.561, with the September 2020 high near 94.742 right around the corner. After that, there really aren't any major chart points until the June 2020 high near 97.802. A similar dynamic holds for the euro. If it breaks below last month's cycle low near $1.1525, there aren't any major chart points until the June 2020 low near $1.1170. Sterling is nearing the September low near $1.3410 and after that, there are no major chart points until the December 2020 low near $1.3135, when Brexit fears were flaring up ahead of the last minute deal. USD/JPY remains stuck below 114 but should eventually fully participate in the dollar rally as U.S. rates move higher. The 2-year U.S.-Japan differential is currently around 54 bp, down from the 60 bp peak earlier this month.
Rates remain under downward pressure around the world as a result of the Bank of England’s dovish surprise. The decision shouldn’t have had that much impact globally given the small size of the U.K. economy and gilt market, and yet here we are. The U.S. 2-year yield fell to as low as 0.39% yesterday while the 10-year yield fell as low as 1.51%. Both have rebounded slightly today but remain at the lower end of recent trading ranges. What happens in the U.K. should stay in the U.K. and so we expect U.S. yields to decouple pretty quickly, perhaps as soon as today if we get a strong jobs number. The U.S. economy remains strong, the Fed is removing accommodation, and wage and price pressures remain high.
October jobs data will be the highlight. Consensus sees 450k jobs added vs. 194k, with the unemployment rate expected to fall a tick to 4.7%. Average hourly earnings are expected to accelerate to 4.9% y/y from 4.6% in September. All the usual clues point to upside risks to NFP. Weekly jobless claims continue to fall to pandemic lows, supporting the outlook for an improving labor market. Yesterday, initial claims came in at 269k vs. 275k and a revised 283k (was 281k) the previous week, while continuing claims came in at 2.105 mln vs. 2.150 mln and a revised 2.239 mln (was 2.243 mln) the previous week. September consumer credit will also be reported and is expected at $16 bln vs. $14.4 bln in August.
Canada also reports October jobs data. Consensus sees 41.6k jobs added vs. 157.1k in September, with the unemployment rate expected to fall a tick to 6.8%. October Ivey PMI will also be reported, which stood at a whopping 70.4 in September. With the economy remaining strong, it’s not a surprise that the Bank of Canada delivered a hawkish hold last week by moving up potential liftoff to Q2 22 from H2 22 previously. Market expectations for tightening have ratcheted up. Swaps market is pricing in 100 bp of hikes over the next twelve months. While down from 125 bp earlier this week, this pricing is still at odds with the updated forward guidance. Next policy meeting is December 8 and no change is expected then. However, the bank may find it necessary to push back a bit against market expectations then.
Peru stepped away from the brink of another political drama yesterday as the cabinet won a confidence vote. The motion received 68 votes in favor of the cabinet against 56 opposing. The vote came about after President Castillo replace the previously radical Prime Minister (who was pushing for nationalization of the gas industry) with the more moderate Mirtha Vasquez. As seen by the recent price action of Peruvian bonds, political risk is far from over due to heightened talk of constitutional reforms. CDS prices have been trapped in a roughly 80-100 bp range, up from around 60 bp early in the year.
Bank of England decision is worth discussing. It kept rates steady at 0.10%, as expected, but it was an overly dovish hold. Even though the analyst community and swaps market were split nearly evenly down the middle between no hike and a 15 bp hike, the price action suggests many were caught wrong-footed. Adding fuel to the fire was the fact that the 7-2 vote to hold rates steady wasn’t even close. If the vote were 5-4, one could say it was a close call but the hawks lost the argument. The two dissents were Ramsden and Saunders, and Bailey was nowhere to be found after saying last month that “We have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging.” Mann was the surprise as she went along with these other two to pare back QE to GBP855 bln, as she has been firmly in the dove camp.
Markets must now come to grips with the fact that a December hike is not a done deal by any stretch. WIRP now suggests a 50-50 chance of December 16 lift-off, down from over 100% pre-decision. However, February 3 liftoff is fully priced in. Elsewhere, the swaps market is now pricing in about 75 bp of tightening over the next twelve months, down from 125 bp pre-decision. The bank has gone back to the transitory inflation theme, and Governor Bailey warned that market expectations for BOE tightening was “overdone” without acknowledging the bank’s role in the runup to the decision. Indeed, Bailey had his Lagarde moment when he said it’s “not our job” to steer markets on the rate outlook. Actually, that’s what forward guidance is all about. Not to belabor the point but the BOE guidance turned out to be simply awful. One can argue that sterling should be a few big figures lower just on the loss of BOE credibility, on top of the less-supportive rates story. The 2-year gilt yield fell 21 bp yesterday and the and has tacked on another 4 bp drop today, while the 10-year yield fell 14 bp yesterday and an additional 4 bp today.
Eurozone reported weak data. Headline September retail sales were expected to rise 0.2% m/m but instead fell -0.3%. However, August was revised up to 1.0% m/m vs. 0.3% previously. Elsewhere, Germany reported September IP. It was expected to rise 1.0% m/m but instead fell -1.1%. August was revised up to -3.5% m/m vs. -4.0% previously. France also reported IP and it fell -1.3% m/m vs. flat expected 1.0% in August. The readings point to downside risks for the eurozone-wide IP reading next Friday, which is expected to rise 0.2% m/m vs. -1.6% in August. Eurozone data, and Germany in particular, have been softening significantly and so these reports should get the attention of policymakers as the QE debate continues. Of note, the swaps market is pricing 10 bp of ECB tightening over the next twelve months, just about where it was ahead of last Thursday’s decision. Lagarde’s pushback against market expectations last week was viewed as lukewarm and so these efforts should continue. ECB’s Holzmann, Guindos, Centeno, and Panetta all speak today.
Reserve Bank of Australia released a dovish Statement on Monetary Policy. The bank said that based on its central scenario, liftoff is likely in 2024, adding that it’s “prepared to be patient” with regards to hiking rates. This is a very dovish stance and perhaps a bit surprising given that the RBA just abandoned Yield Curve Control this week. We believe some were looking for liftoff to be moved up but that didn’t happen. However, the RBA said that in its upside scenario, unemployment would fall to 3.25% and lead to rising wages that would push inflation above 3% by end-2023. The bank wrote “If this were to eventuate, an increase in the cash rate in 2023 could be warranted.” AUD remains under pressure and has retraced nearly half of its October rally, and a break below 0.7315 would set up a test of the September 29 low near .7170.
The PBOC has shifted (at least temporarily) to a more accommodative gear. The yield on the 10-year government bond fell to 2.90%, about 10 bp lower over the last couple of weeks. Officials ramped up its short-term cash injections to RMB50 bln earlier this week and then again overnight to RMB100 bln. We think China will continue with a multi-pronged approach to supporting growth and confidence in the financial system without inflating credit too much.
Philippines reported better than expected October CPI. Inflation came in at 4.6% y/y vs. 4.9% expected and 4.8% in September, reinforcing the BSP’s narrative of transitory price pressures. Core nudged higher to 3.4% y/y. Headline CPI has fallen for over the last two months after reaching a high of 4.9% y/y, but it’s been above the BSP’s 2-4% target range for 10 straight moths. The next few readings should continue to benefit from base effects and the still lukewarm economy, ensuring that the central bank is not about to change its accommodative policy outlook. That said, we think it’s highly unlikely that they will cut rates further. Next policy meeting is November 18 and rates are expected to remain steady at 2.0%.