- October retail sales will be the data highlight; reports suggest President Biden has made his choice for Fed Chair; regional Fed manufacturing surveys for November have started rolling out; BOC Governor Macklem is sounding more hawkish
- U.K. reported solid labor market data; BOE officials presented a balanced view yesterday; Bailey said every meeting is in play in terms of rate hikes; Hungary is expected to hike rates 30 bp to 2.10%.
- RBA released its minutes; Governor Lowe later gave a speech acknowledging that a hike before 2024 was possible; the virtual meeting between Xi and Biden didn’t yield any concrete outcome, yet it’s a positive event in and of itself
The dollar has resumed its rally after a brief period of consolidation. DXY traded today at a marginal new cycle high near 95.622 and there really aren't any major chart points until the June 2020 high near 97.802. Similarly, the euro traded at a new low today near $1.1350 and the next major chart point is the June 2020 low near $1.1170. Sterling is holding up on firm U.K. labor market data (see below). Despite the current bounce off of support near $1.34, we believe it remains on track to test the December 2020 low near $1.3135. USD/JPY continues to struggle to make headway above 114 and is stuck near 114.25. If this pair can break above last month's high near 114.70, there really aren't any significant chart points until the December 2016 high near 118.65. The euro is clearly leading this move higher for the dollar but we expect sterling and the yen to eventually participate fully as the fundamental backdrop favors the dollar (see below).
There is some growing debate about how much higher the dollar can go given what's already priced in for Fed hikes. We think there are still gains ahead, at least to the June high near 97.802 for DXY. That's another 3% move and is quite doable. We think part of the impetus will come from weakness in the rest of the world. Europe is struggling with a fourth wave that is likely to lead to movement restrictions that risk a Q4 contraction. Japan just posted a Q3 contraction, but the outlook is a bit better than Europe due to low virus numbers as well as an upcoming fiscal package.
October retail sales will be the data highlight. Headline sales are expected to rise 1.5% m/m vs. 0.7% in September, while sales ex-autos are expected to rise 1.0% m/m vs. 0.8% in September. The so-called control group used for GDP calculations is expected to rise 0.9% m/m vs. 0.8% in September. Last week, University of Michigan consumer sentiment fell to 66.8, a 10-year low. Yet so far, this weak sentiment has not weighed on consumption, with retail sales posting big upside surprises for both August and September. Will we get another upside surprise this week? Stay tuned. It’s worth remembering that this series calculated nominal sales and so obviously, a portion of the recent gains is due to inflation alone. Fed’s Bullard, Barkin, Bostic, George, and Daly speak today.
Reports suggest President Biden has made his choice for Fed Chair. Senate Banking Committee Chair Brown said he was told by the White House to expect an “imminent” announcements. Other Senators on the committee were reportedly told the same thing. Brown would not speculate as to who the choice is but it’s basically a two horse race. While Brainard has impeccable credentials, we believe Powell remains the best choice. He is battle tested and has won the respect of the markets after a somewhat shaky start. It’s hard to imagine anyone being more dovish, and we are also against politicizing the post of Fed Chair (though that is exactly what installed Powell in the first place).
Regional Fed manufacturing surveys for November have started rolling out. Empire survey came out yesterday at 30.9 vs. 22.0 expected and 19.8 in October. Employment component rose to 26.0 vs. 17.1 in October, while prices received rose to 50.8 vs. 43.5 in October. This is the first reading for November and it's a good one. Despite supply chain issues, the US manufacturing sector remains strong. Both Philly Fed and Kansas City Fed report Thursday and are expected at 24.0 and 30 vs. 23.8 and 31 in October, respectively. In between, October IP will be reported today and is expected to rise 0.8% m/m vs. -1.3% in September. October import/export prices, September business inventories (0.6% m/m expected), and September TIC data will also be reported today.
Bank of Canada Governor Macklem is sounding more hawkish. Yesterday, he said the bank is “getting closer” to hiking rates as slack in the economy dissipates. As it is, the latest forward guidance from the meeting sees slack gone in Q2, up from H2 previously. Does this suggest something perhaps even closer? Note WIRP sees less than 10% odds of a December 8 hike, rising to around 60% for January 26 and over 100% for March 2. This seemed too aggressive to us and yet Governor Macklem seems to be validating current market expectations. Canada reports October housing starts today.
U.K. reported solid labor market data. Unemployment for the three months ending September fell two ticks to 4.3% vs. 4.4% expected, driven by a larger than expected 247k (190k consensus) gain in employment. Jobless claims fell -14.9k in October vs. a revised -85.9k (was -51.1k) in September. The improvements came after the government’s jobs furlough program ended in September, suggesting that many of those 1.1 mln that were on the program went on to find gainful employment. Other data showed that job vacancies rose to a record 1.17 mln in October. While the data overall point to a tight labor market, it’s worth noting that average weekly earnings for the three months ending September rose 5.8% y/y vs. 7.2% previously, while earnings ex-bonus slowed even more to 4.9% y/y vs. 6.0% previously.
Bank of England officials presented a balanced view yesterday. Haskel said uncertainty about Brexit has held back investment. Others testified before Parliament. Saunders said inflation expectations are well anchored now, but warned that without tighter policy, inflation will overshoot. Bailey said “I’m very uneasy about the inflation situation” and added that the labor market “looks tight.” However, he added that growth in the economy has started to flatten out. Pill noted unemployment is set to turn out lower than the bank’s forecasts, while Mann sees “potential softness” in company pricing power.
Bailey said every meeting is in play in terms of rate hikes. However, he cast blame on the markets for misinterpreting his prior remarks, taking his “conditional” statements on monetary policy and turning them into “unconditional views of the world.” We believe he is being disingenuous here, as the role of central bank forward guidance is not only to help form market expectations but also to dissuade them if they are too far off the mark. Expectations for a November hike were running high and so the BOE would have done well to tamp them down a bit ahead of the decision. WIRP currently suggests Bank of England liftoff December 16 is 60-40, up slightly from 50-50 the past week or so. However, February 3 liftoff is fully priced in.
National Bank of Hungary is expected to hike rates 30 bp to 2.10%. However, the market is completely split. Of the 23 analysts polled by Bloomberg, 2 see a 15 bp hike, 2 see 20 bp, 12 see 30 bp, 2 see 45 bp, 1 sees 50 bp, 2 see 70 bp, 1 sees 75 bp, and 1 sees 90 bp. CPI rose a whopping 6.5% y/y in October, the highest since and further above the 2-4% target range. The bank started the tightening cycle with a 30 bp hike in June and followed up with two more 30 bp hikes in July and August. It inexplicably slowed to 15 bp hikes in September and October but with inflation accelerating, the bank needs to hike more aggressively and so we see some chance of a hawkish surprise today.
Reserve Bank of Australia released its minutes. At that meeting, the bank abandoned Yield Curve Control but retained a dovish slant. Indeed, the subsequent Statement of Monetary Policy continues to target 2024 for liftoff. The bank said it is committed to maintaining “highly supportive” monetary conditions and is prepared to be patient by not hiking rates until its inflation objective is met. The bank did admit that risks to its inflation forecasts had shifted upward, but said the continuation of QE at the current pace is seen as appropriate. It said that the February 1 review of QE will be based not only on progress towards its goals for inflation and unemployment, but also on what other central bank are doing as well as how the local bond market is functioning.
Governor Lowe later gave a speech acknowledging that a hike before 2024 was possible. He said 2024 liftoff was still “plausible” but added that a quicker return of inflation to target could make a case for earlier liftoff. Lowe made a similar statement at the last RBA decision but this was pretty much offset by the steady official forward guidance. Next policy meeting is December 7 and no change is expected then. We see no hurry on the part of the RBA to removing accommodation until the economy is on firmer footing. Last week, October jobs data came in very weak, posting the third straight month of losses despite the reopening of the economy. However, the RBA (like many other central banks) feels it must acknowledge that inflation has been running higher for longer than anticipated.
There was little market reaction to the RBA news. Swaps market is pricing in 75 bp of tightening over the next twelve months, a bit lower than what was expected at the beginning of the month. The yield on the targeted April 2024 government bond rose 2 bp to 0.66%, while the 10-year yield rose 7 bp to 1.83%. Lastly, AUD is trading near .7335 and remains heavy after the recent bounce failed to clear the .7370 area. Last week’s break below .7315 sets up a test of the September 29 low near .7170.
The virtual meeting between Xi and Biden didn’t yield any concrete outcome, yet it’s a positive event in and of itself. The two spent the three hour call discussing trade, competition between the two countries, Taiwan, and human rights. The headlines described the tone as “respectful and open” even if no breakthrough was reached, aside from a minor commitment by China to fast track U.S. executives entering the country. In short, good news that the countries are talking but no new incremental information or tradable outcomes. The yuan appreciated 0.3% on the day before giving up these gains, but remains well within recent ranges.