Drivers for the Week of October 24, 2021

October 24, 2021
Here's a look at the main drivers in Developed Markets this week.
  • The Fed is ready to taper; September core PCE out Friday is the data highlight for the week; we get our first look at Q3 GDP Thursday; BOC meets Wednesday and is expected to keep rates steady at 0.25%
  • ECB meets Thursday and is expected to keep policy steady; eurozone has a busy data week; U.K. Chancellor Sunak gives his budget speech Wednesday; Sunak is walking a tightrope
  • Two-day BOJ meeting ends Thursday and is expected to keep policy steady; Japan also has a busy data week; Australia reports Q3 CPI Wednesday

AMERICAS

After a push higher during the week, U.S. yields ended on a soft note Friday. The 10-year yield traded just above 1.70% but then closed the week near 1.63%, while the 2-year yield traded near 0.48% but then closed the week near 0.45%. Fed lift-off is now fully priced in for Q3 22, with a second hike fully priced in for Q4 22. U.S. economic data remain firm and so we believe the upward trajectory in rates and the dollar remains intact.

The Fed is ready to taper. At midnight last Friday, the media embargo went into effect and there will be no Fed speakers until Chair Powell’s press conference the afternoon of November 3. If last week’s Fed speakers are any indication, the Fed is ready and willing to announce tapering at the upcoming FOMC meeting. Indeed, Powell himself said Friday that “The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation.” He added that “I would say our policy is well-positioned to manage a range of plausible outcomes. I do think it’s time to taper and I don’t think it’s time to raise rates.”

September core PCE out Friday is the data highlight for the week. The Fed’s preferred measure of inflation is expected to pick up a tick to 3.7% y/y. If so, this would be the highest since February 1991 and the sixth straight month above the 2% target. Personal income and spending will also be reported at the same time and are expected at -0.2% m/m and +0.6% m/m, respectively.

October Chicago PMI will also be reported Friday and is the second broad survey reading for the month. It is expected at 64.0 vs. 64.7 in September. Last week, Markit manufacturing PMI came in at 59.2 vs. 60.5 and 60.7 in September, but services PMI came in at 58.2 vs. 55.2 expected and 54.9 in September. As a result, the composite PMI rose to 57.3 from 55.0 in September to the highest level since July.

Regional Fed manufacturing surveys for October will continue to roll out. Dallas reports Monday and is expected at 6.2 vs. 4.6 in September. Richmond reports Tuesday and is expected at 5 vs. -3 in September. Kansas City reports Thursday and is expected at 19 vs. 22 in September. So far, Empire survey came in at 19.8 vs. 34.3 in September and Philly Fed survey came in at 23.8 vs. 30.7 in September. Most of these readings have been at historically high levels and so some moderation is to be expected.

We get our first look at Q3 GDP Thursday. Consensus sees growth of 2.8% SAAR, down sharply from 6.7% in Q2. The Atlanta Fed’s GDPNow model is tracking a measly 0.5% SAAR for Q3, down from 1.2% previously. The next update to the model will be this Wednesday. While the NY Fed has temporarily suspended its Nowcast model due to pandemic-related volatility in the data, its Weekly Economic Index suggests upside risks to Q3 growth. Of note, Bloomberg consensus sees growth picking up to 4.8% SAAR in Q4 before falling back a bit to 4.0% in Q1 and 3.6% in Q2. These are still enviable rates of growth.

Weekly jobless claims will be watched closely. That’s because the continuing claims data are for the BLS survey week containing the 12th of the month. These are expected at 2.41 mln vs. 2.481 mln the previous week. Last week, initial claims for the BLS survey week came in at 290k vs. 296k previously. This week, they are expected to remain at 290k. Both are at pandemic lows and support our view that the labor market continues to heal. Of note, the consensus forecast for October NFP stands at 390k currently vs. 194k in September.

Other minor data round out the week. September Chicago Fed National Activity Index will be reported Monday and is expected at 0.20 vs. 0.29 in August. August S&P CoreLogic home prices, September new home sales (2.2% m/m expected), and October Conference Board consumer confidence (108.5 expected) will be reported Tuesday. September advance goods trade (-$88.3 bln expected), wholesale and retail inventories, and durable goods orders (-1.0% m/m expected) will be reported Wednesday. Pending home sales will be reported Thursday. Q3 Employment Cost Index and final October University of Michigan consumer sentiment will be reported Friday.

Bank of Canada meets Wednesday and is expected to keep rates steady at 0.25%. A final round of tapering seems likely but markets will be looking for any perceived shift in forward guidance. Updated macro forecasts could hold some clues. Last week, September CPI came in at 4.4% y/y, more than double the 2% target and well above the 1-3% target range. Retail sales and jobs data have also come in strong lately, which has led the market to reprice BOC tightening expectations. Swaps market is pricing in nearly 100 bp of BOC tightening over the next twelve months, which is clearly at odds with current forward guidance for H2 22 liftoff. August GDP (0.7% m/m expected) will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank meets Thursday and is expected to keep policy steady. Madame Lagarde has already flagged this meeting as a placeholder, with the difficult decision on QE to come at the December 16 meeting. That said, there will clearly be a lively debate about inflation (transitory or something more sustainable) and policy. Even here, markets seem to be getting overly bulled up regarding tightening. Swaps market is pricing in nearly 10 bp of ECB tightening over the next twelve months. While that seems miniscule, it was enough for to push back against this last week. ECB forecasts imply no liftoff before 2024 at the earlier. 2024 forecasts will be added at the December meeting and are likely to imply no liftoff before 2025.

Eurozone has a busy data week. Eurozone reports September M3 Thursday, which is expected to slow to 7.5% y/y vs. 7.9% in August. If so, this would be the slowest since March 2020 and suggests that the ECB’s monetary stimulus is close to running its course. This would also be an argument to keep QE going beyond March, when PEPP is set to end. Eurozone then reports October CPI and Q3 GDP data Friday. Eurozone headline inflation is expected at 3.2% y/y vs. 2.9% in September, while core is expected to remain steady at 1.9% y/y. GDP is expected to grow 2.1% q/q vs. 2.2% in Q2. Ahead of that, Germany reports October CPI Thursday, with EU harmonized inflation expected at 4.5% y/y vs. 4.1% in September. France reports October CPI Friday, with EU harmonized inflation expected at 3.1% y/y vs. 2.7% in September.

Elsewhere, member countries report some key data too. Germany reports October IFO business climate survey Monday and is expected at 98.0 vs. 98.8 in September, with both current assessment and expectations seen dropping around a point each to 99.4 and 96.6, respectively. German GfK November consumer confidence will be reported Wednesday and is expected at -0.5 vs. 0.3 in October. French October consumer confidence will also be reported and is expected to fall a point to 101.

U.K. Chancellor Sunak gives his budget speech Wednesday. In an interview over the weekend, Sunak acknowledged that “The risk of inflation and interest rates is one that we can see already today, and there might be other things that we don’t know about. I have to think about what might happen to us in the future, and build into our plans some resilience to cope with that uncertainty or the potential adverse shocks that come our way.” This suggests Sunak will announce a cautious budget that begins to rein in the large-scale budget deficits sooner rather than later.

Sunak is walking a tightrope. Too much fiscal tightening to go along with expected monetary tightening is a huge risk to the economy, especially with trade tensions building with its biggest trading partner. In another weekend interview, Sunak promised to support families hurt by rising energy and food costs, stressing that “I want you to know, we will continue to do whatever it takes, we will continue to have your backs -- just like we did during the pandemic.” Reports also emerged that Sunak will announce a GBP5.9 bln boost in funding to the National Health Service.

ASIA

Two-day Bank of Japan meeting ends Thursday and is expected to keep policy steady. Updated macro forecasts will be released. Reports have emerged that the BOJ will lower its inflation forecast for FY21 to around 0% from 0.6% due to re-basing of the CPI. FY21 growth forecast will reportedly be cut too, but FY22 would be raised. Overall, we expect the updated forecasts to signal a dovish hold that suggests no liftoff before FY24 at the earliest. FY24 will be added with the April 2022 Outlook Report and is likely to show inflation remaining well below the 2% target, which would mean no liftoff until FY25 at the earliest.

Japan also has a busy data week. September department store sales will be reported Monday. Retail sales will be reported Thursday and are expected to rise 1.5% vs. -4.0% in August. September IP, labor market data, housing starts, and October Tokyo CPI will all be reported Friday. IP is expected to fall -2.5% m/m vs. -3.6% in August, while the unemployment rate is expected to remain steady at 2.8%. Headline inflation is expected to pick up a tick to 0.4% y/y, while core (ex-fresh food) is expected to pick up two ticks to 0.3% y/y. If so, that would be the highest for core since July 2020 and would bode well for the national reading, which came in last week at 0.1% y/y for August.

Australia reports Q3 CPI Wednesday. Headline inflation is expected at 3.1% y/y vs. 3.8% in Q2, while trimmed mean inflation is expected at 1.8% y/y vs. 1.6% in Q2. PPI will be reported Friday, along with September retail sales. Last week, RBA minutes maintained forward guidance of steady rates until 2024. The market did not believe it and tested the bank’s YCC by pushing the yield on the targeted April 2024 bond up to around 0.17%. The RBA responded with intervention that pushed the yield back below the 0.10% target. Swaps market is still pricing in nearly 50 bp of RBA tightening over the next twelve months. Next policy meeting is November 2 and we believe the bank will push back against market expectations rather than validate them. New macro forecasts will be released then and will be a big part of the forward guidance.

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