Drivers for the Week of October 31, 2021

October 31, 2021
Here's a look at the main drivers in Developed Markets this week.
  • FOMC is expected to announced tapering when its two-day meeting ends Wednesday; reports suggest House Democrats are aiming for possible floor votes Tuesday on both of President Biden’s fiscal packages; October jobs data Friday will be the data highlight; Canada also reports October jobs data Friday
  • Markets are still digesting last week’s ECB meeting; Norges Bank meets Thursday and is expected to keep rates steady at 0.25%; BOE meets Thursday and is expected to keep rates steady at 0.10%
  • The ruling LDP appears to have won a majority in parliament; RBA meets Tuesday and rates are expected to remain steady at 0.10%

AMERICAS

To say this is a pivotal week for the U.S. would be an understatement. Not only does the FOMC meet, but we also get key U.S. data for October. The ultimate fate of the two fiscal packages may also be determined. That said, all of these events are likely to generate dollar-positive outcomes. Bottom line: the U.S. economy remains strong, wage and price pressures remain high, and the Fed is ready to begin removing accommodation.

The FOMC is expected to announced tapering when its two-day meeting ends Wednesday. At this point, the Fed has managed expectations perfectly in terms of preparing the markets for what is likely to be speed tapering. Most officials seems to agree that it’s better to get tapering over as quickly as possible in order to leave the Fed maximum flexibility to hike rates when needed. The most likely path for tapering has already been flagged by the Fed, which would reduce asset purchases by $15 bln per month ($10 bln UST and $5 bln MBS) so that QE effectively ends mid-2022.

The market has taken that process a step further and is pricing in 55% odds for liftoff in Q2. Q3 liftoff is already fully priced in, followed by another hike fully priced in for Q4. This is much more aggressive than what the Fed itself anticipates, at least in the Dot Plots. We suspect the Fed will try to push back a bit against such aggressive tightening expectations, but we are not sure that the market will listen. Next forecasts and Dot Plots will come at the December meeting.

Reports suggest House Democrats are aiming for possible floor votes Tuesday on both of President Biden’s fiscal packages. Ahead of that vote, the tentative schedule includes a meeting of the House Rules Committee Monday. The bipartisan $550 bln infrastructure bill has already been passed by the Senate but was blocked again last week by House progressives until a final deal has been hammered out for the more contentious “human infrastructure” bill that is currently seen at $1.75 trln. Of note, Senator Sanders called on his Senate colleagues to first craft a compromise before the House floor votes, putting pressure on Manchin and Sinema to fall in line so as to avoid an embarrassing fail.

October jobs data Friday will be the data 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. Ahead of that, ADP reports its private sector jobs data Wednesday and is expected at 400k vs. 568k in September. Weekly jobless claims continue to fall to pandemic lows, supporting the outlook for a solid October NFP number. This Thursday, initial claims are expected at 275k vs. 281k the previous week, while continuing claims are expected at 2.136 mln vs. 2.243 mln the previous week.

ISM PMI readings for October will also be reported. Manufacturing PMI will be reported Monday and is expected at 60.5 vs. 61.1 in September. Keep an eye on the employment component, which was 50.2 in September. Services PMI will be reported Wednesday and is expected at 62.0 vs. 61.9 in September. Here, the employment component stood at 53.0 in September. Of note, the Fed regional manufacturing surveys were mostly stronger in October, while the Chicago PMI came in at a whopping 68.4 last week, the highest since July.

Other minor data will be reported. September construction (0.4% m/m expected) will be reported Monday, followed by October auto sales (12.5 mln annual rate expected) Tuesday. September factory orders (flat m/m expected) will be reported Wednesday, followed by October Challenger job cuts, Q3 Unit Labor Costs (6.9% SAAR expected), and September trade (-$79.9 bln expected) Thursday. September consumer credit will be reported Friday.

Canada also reports October jobs data Friday. Consensus sees 35.0k jobs added vs. 157.1k in September, with the unemployment rate is expected to fall a tick to 6.8%. Ahead of that, Canada reports October Markit manufacturing PMI Monday, September building permits (3.0% m/m expected) Tuesday, and September trade data (CAD1.6 bln expected) Thursday. October Ivey PMI will also be reported Friday.

After the Bank of Canada’s hawkish hold last week, market expectations for tightening have ratcheted up. Swaps market is pricing in over 125 bp of hikes over the next twelve months, which is at odds with the updated forward guidance for likely liftoff in Q2 2022. Next policy meeting is December 8 and no change is expected then. However, the bank may find it necessary to push back against market expectations then.

EUROPE/MIDDLE EAST/AFRICA

Markets are still digesting last week’s ECB meeting. Did Madame Lagarde capitulate to the hawks? Or did she make a crafty deal that puts the doves on top in December? Stay tuned. The euro reversed Friday to give up all of Thursday’s gains and then some, suggesting the markets realized that ECB hawkishness may have been overplayed. There will be plenty of ECB officials speaking this week to help clarify the outlook. Enria and Elderson speak Tuesday, followed by Elderson again, Centeno, and Lagarde Wednesday. Lagarde, Elderson, and Schnabel speak Thursday, followed by Holzmann, Elderson, Centeno, and Panetta Friday. Of note, the swaps market is pricing 18 bp of tightening over the next twelve months, up from 10 bp ahead of last Thursday’s decision. While the euro is trading weaker, ECB officials won’t be happy with the recent rise in peripheral spreads and may push back against rising eurozone rates in general.

Eurozone data releases are limited. Final October manufacturing PMI readings will be reported Tuesday, followed by final services and composite PMI readings Thursday. September PPI will also be reported Thursday and is expected to accelerate to 15.4% y/y from 13.4% in August. September retail sales will be reported Friday and are expected to rise 0.2% m/m vs. 0.3% in August. Real sector data have been coming in on the weak side of late, while inflation data have been coming in on the high side.

Elsewhere, Germany reports a lot of key September data. Retail sales will be reported Monday and are expected to rise 0.4% m/m vs. 1.2% in August. Factory orders will be reported Thursday and are expected to rise 2.0% m/m vs. -7.7% in August. Lastly, IP will be reported Friday and is expected to rise 1.0% m/m vs. -4.0% in August. German data in particular have been softening and so these reports will be key. France also reports IP Friday and is expected flat m/m vs. 1.0% in August.

Norges Bank meets Thursday and is expected to keep rates steady at 0.25%. The bank started the tightening cycle September 23 with a 25 bp hike to 0.25%. The bank said then that the next hike was “most likely” in December, adding that their forward guidance was for a “slightly” elevated trajectory for the policy rate than it signaled in June. The new rate path saw the policy rate at 0.1% at end-2021, 0.9% at end-2022, 1.4% at end-2023, and 1.6% at end-2024. Governor Olsen has suggested in the past that the bank could hike rates 25 bp per quarter, which was much more hawkish than what this rate path would suggest and so we look for a much steeper path to be released at the December 16 meeting. Of note, the swaps market is pricing 100 bp of tightening over the next twelve months.

Bank of England meets Thursday and is expected to keep rates steady at 0.10%. However, the market is split as nearly half the analysts polled by Bloomberg expect the BOE to start the tightening cycle with a 15 bp hike to 0.25%. Of note, the swaps market sees around 45% odds of a hike this week and so the market truly is split. Conviction has wavered in recent days, as a hike was pretty much fully priced in last month. That said, a hike at the December 16 meeting is fully priced in now and so it’s really just a matter of timing for the markets. Of note, the swaps market is pricing 125 bp of tightening over the next twelve months. New macro forecasts will be released at this meeting.

U.K. data releases are limited. Final October manufacturing PMI reading will be reported Monday, followed by final services and composite PMI readings Wednesday and construction PMI Thursday. For the most part, recent U.K. data have disappointed and so that is perhaps why liftoff expectations have calmed somewhat.

ASIA

The ruling LDP appears to have won a majority in parliament. As of this writing, the LDP looks to have won 261 seats, giving it an outright majority in the 465-seat Diet. Coalition partner Komeito increased its total by three to 32 seats, giving the LDP an even bigger cushion to push through new legislation. Main opposition Constitutional Democratic Party won 96 seats, down from 109 previously, while conservative party Ishin nearly quadrupled its seats to 41, becoming the third largest party in parliament. Prime Minister Kishida has won a mandate to govern, but he will remain under pressure to deliver results quickly with regards to the pandemic and the economy.

Reserve Bank of Australia meets Tuesday and rates are expected to remain steady at 0.10%. However, it appears that the markets may force the bank to formally abandon Yield Curve Control and adjust its forward guidance. The RBA did not intervene to maintain the 0.10% yield on the targeted April 2024 bond, instead allowing it to close out the week near 0.72%. If YCC is abandoned, then the RBA will also have to acknowledge that liftoff is likely to come before the current guidance for 2024. In turn, AUD would likely strengthen and so the economy will face a double whammy of higher interest rates and a stronger currency. Of note, the swaps market is pricing 75-100 bp of tightening over the next twelve months. The bank will release its Statement on Monetary Policy Friday, which will contain new macro forecasts.

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