Drivers for the Week of November 21, 2021

November 21, 2021
Here's a look at the main drivers in Developed Markets this week.
  • More Fed officials are tilting hawkish; FOMC minutes Wednesday will be one of the major highlights this week; President Biden’s choice for Fed Chair should become known early this week; October core PCE deflator Wednesday will be the data highlight; regional Fed manufacturing surveys for November will continue to roll out; weekly jobless claims will be reported a day early Wednesday and will hold some interest
  • The eurozone has a quiet week; eurozone October M3 data will be reported Friday; The U.K. also has a quiet week; the debate about BOE policy continues to rage; Riksbank meets Thursday and is expected to keep rates steady at 0.0%.
  • Japan reports some key data this week; RBNZ meets Wednesday and is expected to hike rates 25 bp to 0.75%


More Fed officials are tilting hawkish. Bullard has set the gold standard but others seem to be moving in his direction. Last week, Vice Chair Clarida that it may be appropriate to discuss speeding up the taper pace in December due to higher inflation and increased job gains. He noted “I’ll be looking closely at the data that we get between now and the December meeting.” Governor Waller took a more hawkish position that’s very similar to Bullard, saying the “The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.” Bullard has explicitly called for faster tapering and two hikes in 2022. There are no Fed speakers this week.

FOMC minutes Wednesday will be one of the major highlights this week. At the November 2-3 meeting, tapering was official announced and subsequently began last week. The minutes are often revealing in helping to flesh out the policy debate and to figure out what to expect in the coming meetings. Who are the hawks? Who are the doves? While public comments have helped reveal the likely grouping, we believe the minutes will help markets figure out just how high the bar may be with regards to a potential hawkish acceleration of the tapering pace, which in turn begs the question of a possible earlier liftoff. As things stand, market expectations have been remarkably stable with liftoff in Q3 and a second hike in Q4 fully priced in for some time. The uncertain has been regarding potential Q2 liftoff, which we believe is too early but with market odds swinging between 50-60%.

President Biden’s choice for Fed Chair should become known early this week. Ahead of that, the dram continues. Senator Manchin last week asked to meet with Governor Brainard, while two other Democratic Senators (Whitehouse and Merkley) have said they would oppose a second term for Powell. Reports suggest most Republican Senators are lining up against Brainard and so the consensus appears to be Powell, and perhaps just barely. This process has taken much longer and is much closer than it should have been, as it’s clear to the markets that Powell deserves a second term. Period. In related news, reports suggest the White House will have more information about the other Fed vacancies early this week. Besides the decision on appointing the Chair, President Biden has to fill one opening on the Board of Governors and another one to replace Vice Chair Clarida, whose term on the Board expires early next year.

The fiscal outlook remains up in the air. The House passed President Biden’s “human infrastructure” bill last week by a narrow 220-213 vote. One Democrat and all Republicans were opposed. However, it’s not clear if it can pass in the Senate. All 50 Democratic Senators must vote in favor, and we do not yet know the status of Senators Manchin and Sinema yet.

October core PCE deflator Wednesday will be the data highlight. It is expected to pick up to 4.1% y/y vs. 3.6% in September. If so, it would be the highest since January 1991 and more than double the Fed’s 2% target. It would also be the seventh straight month above the target. Of note, base effects for both October and November are low, which poses upside risks to the y/y readings. Personal income and spending will be reported at the same time and are expected to rise 0.2% m/m and 1.0% m/m, respectively.

Regional Fed manufacturing surveys for November will continue to roll out. Richmond Fed reports Tuesday and is expected at 11 vs. 12 in October. Last week, Empire survey came in at 30.9 vs. 19.8 in October, Philly Fed came in at 39.0 vs. 23.8 in October, and Kansas City Fed came in at 24 vs. 31 in October. These are the first readings for November and overall, they suggest that the US manufacturing sector remains strong despite ongoing supply chain issues. Markit also reports its preliminary November PMI readings Tuesday. Manufacturing PMI is expected at 59.1 vs. 58.4 in October, while services PMI is expected at 59.0 vs. 58.7 in October. If so, this should push the composite higher from 57.6 in October.

Weekly jobless claims will be reported a day early Wednesday and will hold some interest. That’s because the continuing claims data are for the BLS survey week containing the 12th of the month, and are expected at 2.052 mln vs. 2.08 mln the previous week, which would be a new pandemic low. Initial claims are expected at 261k vs. 268k the previous week. That last reading was for the BLS survey week and was a new pandemic low as well. All signs point to continued healing in the labor market. Consensus sees 500k jobs added this month vs. 531k in October, with the unemployment rate seen falling a tick to 4.5%, also a new pandemic low.

We get our second look at Q3 GDP Wednesday. Growth is expected to be revised up to 2.2% SAAR vs. 2.0% previously. Still, this is old news. Looking ahead, the U.S. economy is rebounding quite nicely in Q4. The Atlanta Fed’s GDPNow model is tracking 8.2% SAAR growth and will be updated Wednesday. Elsewhere, Bloomberg consensus sees 4.8% SAAR growth in Q4, slowing to 4.2% in Q1 and 3.9% in Q2.

Otherwise, it’s mostly minor data in a holiday-shortened week for the U.S. October Chicago National Activity Index (0.10 expected) and existing home sales (-1.8% m/m expected) will be reported Monday. October advance goods trade data (-$95.0 bln expected), wholesale and retail inventories, durable goods orders (0.2% m/m expected), new home sales (flat m/m expected), and final November University of Michigan consumer sentiment (66.9 expected) will all be reported Wednesday.


The eurozone has a quiet week. Preliminary November PMI readings will be reported Tuesday. Headline manufacturing PMI is expected at 57.3 vs. 58.3 in October, services PMI is expected at 53.5 vs. 54.6 in October, and the composite PMI is expected at 53.0 vs.54.2 in October. Looking at the country breakdown, the German composite is expected to fall a full point to 51.0, while the French composite is expected to fall slightly more than a point to 53.5. November German IFO business climate and French business confidence will be reported Wednesday. December German GfK consumer confidence will be reported Thursday. We see growing downside risks for the eurozone data in Q4 as the fourth virus wave sweeps over the continent. So far, Austria and Germany have been the hardest hit but Italy is also coming under stress.

Eurozone October M3 data will be reported Friday. It is expected to remain steady at 7.4% y/y. This is the slowest since February 2020 despite the fact that ECB asset purchases have remained fairly high since the September meeting, when it announced a “moderately slower pace” for Q4. With the economic outlook darkening, we are getting more confident that the ECB will announce some sort of extension for QE at the upcoming December 16 meeting.

The U.K. also has a quiet week. Preliminary November PMI readings will be reported Tuesday. Manufacturing PMI is expected at 57.3 vs. 57.8 in October, services PMI is expected at 58.2 vs. 59.1 in October, and the composite PMI is expected at 57.5 vs. 57.8 in October. Elsewhere, the CBI releases its November industrial trends survey Wednesday, followed by its distributive trades survey Friday. So far in Q4, the data have been decidedly mixed, making it even more difficult for markets to get a read on where monetary policy is headed.

Indeed, the debate about Bank of England policy continues to rage. Over the weekend, Governor Bailey said that risks to the U.K. economy are “two-sided” right now. This echoed similar comments Friday from Chief Economist Pill. Bailey and other BOE officials have blamed the market for misinterpreting official comments, but we find this to be disingenuous at best. It’s the job of central bank officials to clearly set forward guidance so that markets are not taken off guard. Failure to do so is on the bank, not the markets. Of note, WIRP continues to suggest 50-50 odds for liftoff at the next policy meeting December 16. Swap market sees 100-125 bp of tightening over the next twelve months, which strikes us as way too aggressive.

The Riksbank meets Thursday and is expected to keep rates steady at 0.0%. We expect the bank to extend its flat rate path by another quarter to Q4 2024. Macro forecasts will be updated and 2024 will be added for the first time. At the last meeting September 21, it delivered a dovish hold. Inflation forecasts were tweaked higher but the bank said it welcomes inflation above 2% for some time as this would help to “more clearly anchor price and wage expectations in a way that is compatible” with its inflation target. Lastly, the bank stressed that “The risks with reducing stimulation measures too early are therefore still judged to be greater than the risks of retaining them too long.” The Riksbank clearly stands out as one of the most dovish central banks right now and is likely to remain on hold for the foreseeable future. Swaps market is pricing in nearly 50 bp of tightening over the next twelve months, which we view as highly unlikely.


Japan reports some key data this week. Preliminary November PMI readings will be reported Tuesday. October department store sales will be reported Thursday. November Tokyo CPI will be reported Friday. Headline is expected to pick up to 0.4% y/y from 0.1% in October, while core (ex-fresh food) is expected to pick up to 0.3% y/y vs. 0.1% in October. Last week, October national CPI came in mixed, with headline a tick lower than expected at 0.1% y/y and core steady as expected at 0.1% y/y. Japan has so far been able to dodge higher inflation and so it’s clear that the BOK will likely be the last to remove accommodation. Next policy meeting is December 16-17 and no change is expected then.

Reserve Bank of New Zealand meets Wednesday and is expected to hike rates 25 bp to 0.75%. At the last meeting October 6, the bank started the tightening cycle with a 25 bp hike to 0.5%. It stated that “The current Covid-19 restrictions have not materially changed the medium-term outlook for inflation and employment.” Looking ahead, “The committee noted that further removal of monetary policy stimulus is expected over time.” WIRP suggests a 25 bp is fully priced in and a 50 bp hike is nearly 50% priced in. Subsequent 25 bp hikes are fully priced in for every meeting through August, with some odds for 50 bp moves, which would take the policy rate up to 2.5% if the bank delivers 50 bp this week. Of note, the bank’s expected rate path will be updated at this meeting. At the last update August 18, the path showed the OCR rising to 0.6% by end-2021, 1.6% by end-2022, 2.0% by end-2023, and 2.1% by Q3 2024, the end of the forecast period. While a more hawkish path is expected, we do not think it will validate the market’s very hawkish pricing.

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