- We got a couple of wakeup calls for the market this week in terms of the inflation narrative; Chair Powell joined the Fed’s pushback efforts; others were less forceful; something strange impacted the UST market; Mexico delivered a less hawkish hold
- The monthly U.K. data dump began; U.K. also reported Q3 GDP; reports suggest a U.K. cabinet shuffle is in the works; Norway October CPI ran hot
- RBA released its Statement of Monetary Policy
The dollar is consolidating ahead of the weekend. DXY is trading flat near 105.86 after fourth straight up days and has retraced nearly half of this month’s drop. Key retracement levels come in near 106 and 106.25. The euro is trading higher near $1.0675 while sterling is trading lower near $1.2210 despite firmer than expected data (see below). USD/JPY is trading higher near 151.45 and is about to test the October 31 high near 151.70. NOK is outperforming after much higher than expected CPI data (see below). With the dollar clawing back recent losses, it seems the markets finally realized they were getting carried away with the dovish Fed narrative. The U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon as the market thinks. The Fed hawks continue to push back against the dovish narrative (see below) and if the data remain firm, the Fed doves (and the market) will have to capitulate.
AMERICAS
We got a couple of wakeup calls for the market this week in terms of the inflation narrative. RBA hiked rates after an extended pause, and just released a new set of forecasts today that contained significantly higher growth and inflation forecasts. Also today, Norway reported significantly higher than expected October CPI data that puts a December rate hike back into play. Simply put, we believe markets continue to underestimate the persistence of inflation globally and that in turn leads them to underestimate the likelihood of further monetary tightening. Right now, market pricing is leaning heavily to rate cuts by mid-2024 and we suspect this will have to be rethought in the coming weeks.
Chair Powell joined the Fed’s pushback efforts. He said the Fed won’t hesitate to tighten more is appropriate and added that Fed policymakers are not confident they’ve achieves the stance needed to hit the 2% inflation target. Powell noted that while monetary policy was working in ways it should, some households and businesses are not feeling the impact of higher rates. Lastly, he said the Fed is trying to make a judgment about whether it needs to do more. This is basically what Powell said at his press conference November 1 and yet the FX market is taking this as if he's the second coming of Paul Volcker.
Others were less forceful. In some of her first public comments on policy, interim St. Louis Fed President Paese said “With policy currently exerting modest downward pressure on inflation, and given the balance of risks, we can afford to await further data before concluding that additional policy tightening is appropriate. However, if progress toward achieving 2% inflation stalls, I believe that the committee should act promptly to ensure that high inflation does not become entrenched.” Barkin said “In aggregate, we are still not seeing the full effects of policy.” Bostic said “I think our policy is restrictive, and likely sufficiently restrictive, but I think we’re going to still have bumps along the way.”
Fed tightening expectations are modestly higher. WIRP suggests 10% odds of a hike December 13 vs. 5% at the start of the week, then rising modestly to 20% January 31 vs. 10% at the start of the week. However, the first cut is about 60% priced in for May 1 and fully priced in for June 12 and this is little changed. We continue to believe that this is dovish rate path is very unlikely given how persistent price pressures have been. Logan, Bostic, and Daly speak today, while Bostic speaks again Saturday.
The dollar gained sharply across the board after Powell’s comments. This exaggerated reaction in just goes to show you how dovish the FX market has been leaning in recent days. The 2-year yield shot higher to trade near 5.04%, the highest since November 1. However, Powell had little impact on the long end of the curve. That’s because all the fireworks came about an hour earlier. The 30-year auction was very sloppy, with a high yield of 4.769% and a 5 bp tail. Indirect bidders took 60.1% vs. 65.1% at the previous auction, while the bid/cover ratio was 2.24 vs. 2.35 previously. The 30-yaer yield traded as high as 4.83% before ending the day near 4.76%. It’s trading near 4.78% today.
It turns out that there was something strange going on that impacted the Treasury market. ICBC’s U.S. unit was reportedly hit by a ransomware attack that prevented it from clearing a large amount of trades. The bank had alerted market makers, banks, and brokerages that trading of U.S. Treasuries was being impacted by the attack. If market participants were unable to confirm trades and hedge properly, some may have simply stayed away from the 30-year auction. There was a lot of noise in the market yesterday so let's see how this plays out today, but we do like the movehigher in yields and the dollar.
We believe the U.S. economy remains fairly robust. The New York Fed’s Nowcast model will be updated today. Its Q4 estimate currently stands at 2.41% SAAR. This is slightly above the Atlanta Fed's GDPNow estimate of 2.1% SAAR, which will be updated next Wednesday.
Data highlight will be preliminary November University of Michigan consumer sentiment. Headline is expected to remain steady at 63.8, as an expected increase in expectations to 61.0 would offset an expected decrease in current conditions to 70.3. Still, consumption has been holding up relatively well despite the recent slide in sentiment. 1-year inflation expectations are expected to fall two ticks to 4.0% while 5- to 10-year expectations are expected to remain steady at 3.0%.
Weekly jobless claims are worth discussing. Initial claims came in at 217k vs. 218k expected and a revised 220k (was 217k) last week, while the 4-week moving average rose to 212k vs. 211k last week. Continuing claims came in at 1.834 mln vs. 1.820 mln expected and a revised 1.812 mln (was 1.818 mln) last week and are the highest since mid-April. This suggests there are more job-seekers unable to find employment. There have definitely been some signs of a softening labor market but we don't see a huge drop-off yet. There is no Bloomberg consensus yet for November NFP but its whisper number currently stands at 151k vs. actual 150k in October. The auto strikes are thought to have led to -35k jobs in October and these should come back in November. The end of the actors' strike should also boost November jobs but we haven't seen any estimates yet of the impact.
Banco de Mexico delivered a less hawkish hold. In keeping rates at 11.25%, the bank said they would remain there “for some time” vs. “for an extended period” previously. The bank said progress on disinflation had been made but that the inflation outlook is “still challenging.” With the language still pretty strong, we can't say the bank was that dovish, perhaps just less hawkish. Swaps market is now pricing in some odds of a cut over the next three months vs. steady rates before the decision. However, with only 25 bp of total easing seen over the next six months, the market views the bank remaining very cautious.
EUROPE/MIDDLE EAST/AFRICA
The monthly U.K. data dump began. September GDP, IP, services, construction and trade were all reported. GDP came in two ticks higher than expected at 0.2% m/m vs. a revised 0.1% (was 0.2%) in August, IP came in as expected at 0.0% m/m vs. a revised -0.5% (was -0.7%) in August, services came in two ticks higher than expected at 0.2% m/m vs. a revised 0.3% (was 0.4%) in August, and construction came in at 0.4% m/m vs. -0.5% expected and a revised -0.8% (was -0.5%) in August. Lastly, the trade balance came in at -GBP1.57 bln vs. -GBP2.5 bln expected and a revised -GBP2.7 bln (was -GBP3.4 bln) in August.
U.K. also reported Q3 GDP data. GDP came in at 0.0% q/q vs. -0.1% expected and 0.2% in Q2, while the y/y rate was steady at 0.6%. Miraculously, U.K. GDP hasn’t had a negative q/q reading since Q3 2022. Private consumption came in at -0.4% q/q, government spending came in at -0.5% q/q, and GFCF came in at -2.0% q/q. With all these negative readings, how could headline come in flat q/q? Chalk it up to net exports, as exports rose 0.5% q/q and imports fall -0.8% q/q. With global growth slowing, this is an unsustainable growth mix for the U.K. and so we’ve probably seen the best of it for a few quarters to come.
Reports suggest a U.K. cabinet shuffle is in the works. Talk are ongoing and changes could be seen as soon as next week. Home Secretary Braverman is reportedly on the chopping block for a critical Op-Ed piece regarding protests in London that would coincide with Armistice Day. Prime Minister Sunak’s office saw the piece before publication and requested changes that were ignored by Braverman. We don’t expect any changes to the economic team.
Italy reported September IP. IP came in two ticks higher than expected at 0.0% m/m vs. a revised 0.3% (was 0.2%) in August, while the y/y rate came in at -2.0% WDA vs. -4.2% in August. Eurozone IP will be reported next Wednesday and is expected at -0.8% m/m vs. 0.6% in August. The y/y rate is expected at -6.3% vs. -5.1% in August.
ECB tightening expectations remain subdued. WIRP sees no odds of a hike December 14. After that, only cuts are priced and the first one is 70% priced in for April 11 and fully priced in for June 6. Lagarde and Nagel speak later today and are likely to join other ECB policymakers in pushing back against this dovish rate path narrative.
Norway October CPI ran hot. Headline came in at 4.0% y/y vs. 3.5% expected and 3.3% in September, while underlying came in at 6.0% y/y vs. 5.6% expected and 5.7% in September. Headline accelerated for the first time since May and is now double the 2% target. Norges Bank just delivered a dovish hold last week, as expected. While the bank repeated its September statement that another raise was “likely” at the December meeting based on the economic outlook, it left the door open to another hold if it becomes “more assured that underlying inflation is on the decline.” Updated macro forecasts and expected rate path will come at the December 14 meeting. Of note, WIRP now suggests 80% odds of a hike next month vs. 33% at the start of this week.
ASIA
Reserve Bank of Australia released its Statement of Monetary Policy. The growth and inflation forecasts were revised up significantly. The bank said that “The domestic economy has proved more resilient than previously expected, and the labor market is expected to ease more gradually as a result. The prospect of higher inflation over the year ahead increases the risk of embedding higher inflation expectations in price-setting decisions.” Of note, the central scenario assumes the cash rate will peak around 4.5%. Repeating its policy statement, the RBA stressed 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.” Market expectations have picked up modestly as WIRP suggest no odds of another hike December 5 that rise over the course of H2 to top out near 45% in Q2 vs. 35% before this week’s hike.
