Drivers for the Week of November 19, 2023

November 19, 2023

Win Thin

Here's a look at the main drivers in Developed Markets this week.

The dollar saw broad-based weakness on expectations of a more dovish Fed. SEK, NOK, and AUD outperformed while CAD, JPY, and NZD underperformed. Until we get some more data underscoring the U.S. economy’s resilience, the dollar is likely to remain vulnerable. Risk assets should perform well near-term.

AMERICAS

The dovish Fed narrative remains in place. As a result, there is likely to be ongoing downward pressure on U.S. yields and the dollar. The 10-year yield traded as low as 4.38% Friday, down from the late October peak near 5.02% and the lowest since late September, while the 30-year yield traded as low as 4.56% Friday, down from the late October peak near 5.18% and the lowest since late September. Does one month of somewhat favorable inflation data really warrant such a massive move in rates? We think not and yet here we are. We must respect this move while wholeheartedly disagreeing with it.

FOMC minutes will be released Tuesday. At the November 1 decision, the Fed kept rates steady and said that tighter financial and credit conditions continue to weigh on the economy. The Fed reiterated that will assess the extent of additional policy firming needed. It acknowledged that job gains have moderated in early 2023 but remain strong, while economic activity expanded at “a strong pace” in Q3. Chair Powell stuck to the dovish script that prevailed before the meeting. Powell said the Fed was attentive to the increase in longer-term yields and that financial conditions have tightened “significantly.” He stressed that its prior hikes would take time to impact the economy and that we are just now seeing the effects of its 2022 hikes.

The U.S. economy remains robust. The Atlanta Fed’s GDPNow model is tracking Q4 growth at 2.0% SAAR vs. 2.2% previously and will be updated Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking 2.45% SAAR growth vs. 2.51% previously and will be updated Friday. Simply put, the economy continues to grow at or above trend at a time when the Fed is trying to get it below trend in order to lower inflation. Financial conditions will continue to loosen and so there are really no headwinds that will slow growth significantly in Q4.

October Chicago Fed National Activity Index will be reported Tuesday. Headline is expected at 0.00 vs. 0.02 in September. If so, the 3-month average would come in at -0.07 vs. 0.00 in September and would remain well above the -0.7 that signals recession. The continued resilience in the economy is noteworthy and supports our view the Fed still has more work to do in getting to the desired sub-trend growth.

Weekly jobless claims Wednesday will be of interest. That’s because initial claims will be for the BLS survey week containing the 12th of the month and they are expected at 225k vs. 231k last week. Continuing claims are reported with a 1-week lag and so next week’s reading will be for the BLS survey week. This week, they are expected at 1.875 mln vs. 1.865 mln last week. If so, they would be the highest since late November 2021. Bloomberg consensus for NFP stands at 175k but its whisper number stands at 143k.

Preliminary November S&P PMIs will be reported Friday. Manufacturing is expected to fall a tick to 49.9, services is expected to fall three ticks to 50.3, and the composite is expected to fall half a point to 50.2.

Other minor data will be reported. October leading index will be reported Monday and is expected at -0.6% m/m vs. -0.7% in September. October existing home sales will be reported Tuesday and are expected at -1.4% m/m vs. -2.0% in September. October durable goods order will be reported Wednesday and are expected at -3.4% m/m vs. 4.6% in September.

Canada highlight will be October CPI data Tuesday. Headline is expected at 3.2% y/y vs. 3.8% in September. If so, it would be the lowest since June and would move closer to the 2% target. Elsewhere, core trim is expected to fall a tick to 3.6% y/y while core median is expected to fall two ticks to 3.6% y/y. September retail sales data Friday will also be important. Headline is expected at 0.0% m/m vs. -0.1% in August, while ex-auto is expected at -0.3% m/m vs. 0.1% in August. Bank of Canada is expected to keep rates steady in December and January. After that, rates cuts are getting priced in as WIRP suggest 35% odds of a cut March 6, rising to nearly 65% April 10 and fully priced in for June 5.

EUROPE/MIDDLE EAST/AFRICA

Eurozone highlight will be preliminary November PMIs Thursday. Headline manufacturing is expected to rise two ticks to 43.1, services is expected to rise two ticks to 48.0, and the composite is expected to rise four ticks to 46.9. Looking at the country breakdown, the German composite is expected to rise four ticks to 46.3 and the French composite is expected to remain steady at 44.6. Italy and Spain will be reported with the final readings in early December.

Germany reports November IFO survey Friday. Headline is expected at 87.5 vs. 86.9 in October, driven by a rise in the current assessment to 89.5 and a rise in expectations to 85.7.

ECB publishes the account of its October meeting Thursday. At that October 26 meeting, the bank kept rates steady and said that incoming data will determine the level and duration of restrictive policy and stressed that tight policy must be maintained for a sufficiently long time. President Lagarde’s press conference was fairly downbeat. She said the economy remains weak and is likely to remain weak for the rest of the year due to subdued demand and tighter financing conditions. Lagarde stressed that rate cuts were not discussed at this meeting, adding that now is not the time for forward guidance. Of note, WIRP suggests no odds of a rate hike either December 14 or January 25. After that, there are nearly 75% odds of a rate cut April 11 and fully priced in for June 6. Lane, Vujcic, de Cos, and Villeroy speak Monday. Lagarde, Schnabel, and Centeno speak Tuesday. Lagarde, Guindos, and de Cos speak Friday. Nagel speaks Saturday.

U.K. Chancellor Hunt presents the Autumn Statement Wednesday. He will be unable to deliver much fiscal loosening for the time being. October public sector net borrowing will be reported Tuesday and ex-banking groups is expected at GBP14.4 bln vs. GBP14.3 bln in September.

U.K. data highlight will be preliminary November PMIs Thursday. Headline manufacturing is expected to rise two ticks to 45.0, services is expected to remain steady at 49.5, and the composite is expected to fall three ticks to 48.4.

U.K. also reports some minor data. November CBI industrial trends survey will be reported Wednesday and total orders are expected at -24 vs. -26 in October. November GfK consumer confidence will be reported Thursday and is expected at -27 vs. -30 in October.

Bank of England releases its financial stability report Monday. Easing expectations have picked up. WIRP now suggests less than 5% odds of a hike either December 14 or February 1. The first cut is 55% priced in for May 9 and nearly priced in June 20. Bailey speaks Monday and then testifies before Parliament Tuesday.

Riksbank meets Thursday and is expected to hike rates 25 bp to 4.25%. However, the market is split as nearly half the analysts polled by Bloomberg see no change. At the last meeting September 21, the Riksbank hiked rates 25 bp to 4.0% and said rates could be raised further. Since then, CPIF accelerated for the first time since February to 4.2% y/y and moved further away from the 2% target. Despite targeted CPIF inflation remaining stubbornly high, WIRP suggests nearly 20% odds of a hike at the November 23 meeting, rising to nearly 40% February 1.

ASIA

Japan highlight will be October national CPI Friday. Headline is expected at 3.4% y/y vs. 3.0% in September, while core (ex-fresh food) is expected at 3.0% y/y vs. 2.8% in September. If so, headline would move further above the inflation target. Yet for now, WIRP suggest the first cut isn’t fully priced in until June 14.

Preliminary November PMIs and October department store sales will also be reported Friday. The composite reading of 50.5 in October was the lowest since December 2022.

Reserve Bank of Australia releases its minutes Tuesday. At the November 7 meeting, the bank hiked rates 25 bp to 4.35% and said that “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.” This was a subtle shift from previous language from “some further tightening” and suggests a high bar for further hikes. Looking ahead, WIRP suggests no odds of a hike December 5, 10% February 6, and rising modestly to top out near 25% March 19. Governor Bullock and Schwartz also speak Tuesday. Bullock speaks again Wednesday.

Preliminary November PMIs will be reported Thursday. The composite reading of 47.6 in October was the lowest since December 2022.

New Zealand highlight will be Q3 real retail sales data Friday. Sales are expected at -0.8% q/q vs. -1.0% in Q2. If so, it would be the fourth straight quarter of contraction and six of the past seven.

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