• The two-day FOMC meeting ended with another 75 bp hike, as expected; Chair Powell’s press conference left no doubt as to the Fed’s commitment to tighten; U.S. yields are moving higher after the FOMC decision; ADP reported its private sector jobs estimate; October ISM services PMI will be the data highlight; tensions remain high in Brazil
  
• BOE is expected to hike rates 75 bp to 3.0%; ECB officials remains hawkish; yet ECB tightening expectations have fallen back a bit; Norges Bank delivered a dovish surprise and hiked 25 bp to 2.5% vs. 50 bp excepted; Turkey reported October CPI; Czech Republic is expected to keep rates steady at 7.0%
  
• Australia reported firm September trade data; China’s National Health Commission said Covid Zero remains the favored strategy to fight the pandemic; Malaysia hiked rates 25 bp to 2.75%, as expected
  

The dollar continues to gain after Powell’s hawkish press conference. DXY is up for the second straight day and is trading just below 113. The break above 112.259 sets up a test of the October 21 high near 113.942. The euro is trading near $0/9745 and is on track to test the October 21 low near $0.9705 and then the October 13 low near $0.9635. Sterling is trading near $1.14 ahead of the BOE decision. Ahead of the BOE decision (see below), sterling is leading this move lower in the foreign currencies today, trading near $1.1265 and on track to test the October 21 low near $1.1060. The yen is holding up relatively well today as USD/JPY trades near 148.30. A break of 149.35 is needed to set up a test of the October 21 high cycle high near 152. The combination of ongoing risk off impulses and continued repricing of the Fed tightening path is likely to see the dollar continue to recover after this recent correction. Much will depend on the Fed and how the U.S. data come in but so far, the signs remain positive for the greenback.

AMERICAS

The two-day FOMC meeting ended with another 75 bp hike, as expected. As usual, markets were hoping for some sign of a pivot and focused on the phrase in the statement that “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” While this is always a given for any central bank when setting monetary policy, it was perceived as a softening of the Fed’s commitment to hiking rates aggressively and that the pace would soon slow. After the statement, equity markets rallied, U.S. yields fell, and the dollar weakened. But not for long.

Chair Powell’s press conference left no doubt as to the Fed’s commitment to tighten. To wit, he said it’s very premature to think about pausing rate hikes. While he admitted that it will be appropriate to slow rate hikes at some point, he added that the Fed still has “some ways to go” and that the ultimate level of rates is higher than previously expected. We pretty much all knew that the December Dot Plots would see a hawkish shift and Powell confirmed that, which is very unusual for a non-Dot Plot meeting. How big a shift likely hasn't been determined yet and will depend in large part on the data that comes out between now and December 13-14. Powell said the Fed will likely have a discussion of a smaller hike at the December meeting but he firmly downplayed the importance of the pace of hiking and put more weight on how high the terminal rate will be. Powell also said that the Fed wants to get where real rates are positive across the curve. All in all, Powell delivered the goods. His stance was unmistakably hawkish and took the sheen off of the perceived "dovish" statement. In the end, equity markets sold off, U.S. yields rose, and the dollar strengthened. We think the Fed will be satisfied with that market reaction.

Looking ahead to the December 13-14 meeting, WIRP suggests a 50 bp hike is fully priced in with around 35% odds of a larger 75 bp move. That will surely change as before that meeting, we will see two more sets of jobs, inflation, and retail sales reports and so that December decision will be truly data dependent. Updated forecasts will be released then and are likely to move closer to market consensus of higher inflation, slower growth, and higher unemployment. Even before Powell’s admission of a higher terminal rate, we had been expecting a hawkish shift in the Dot Plots but now it’s a done deal. The 2022 plot will be moot but as things stand now, we believe the 2023 plot is likely to move up to 5.125% from 4.625% in September. 2024 is tricky but we would expect a move up to 4.625% from 3.875% in September, signaling some easing from a higher peak but not by a lot. After yesterday’s decision, Fed officials will go forth to spread the message. Collins is first up and speaks tomorrow. The market is now pricing in a peak policy rate near 5.25%, which is the peak seen in this cycle.

U.S. yields are moving higher after the FOMC decision. The 2-year yield traded at a new cycle high near 4.72% and is the highest since July 2007. The June 2006 high near 5.13% is the next big target, followed by the June 2006 high near 5.28%. The 10-year yield traded near 4.19% but remains below the October 21 cycle high near 4.34%. Looking ahead, the June 2007 high near 5.32% is the next big target. Of note, the 3-month to 10-year curve has moved back into positive territory near 11 bp after inverting the last week or so. As such, it's worth discussing U.S. recession risks. Even if the curve inverts again, we would await confirmation from our other favorite recession indicator, the Chicago Fed National Activity Index. If the Fed ends up hiking nearly 500 bp over the course of a little over a year, that is slamming on the brakes and a recession gets much more likely. However, it's not showing up in the data yet. The housing sector is taking it on the chin but other sectors are holding up relatively well. The economy will eventually slow sharply, that is a simple fact. How deep and how long the downturn is yet to be determined and right now, it's all just guesswork.

ADP reported its private sector jobs estimate. It came in at 239k vs. 185k and a revised 192k (was 208k) in September. It’s still too early to say if the ADP model works better now after its recent tweaks. It’s a mixed bag, as ADP understated private NFP the past three months and overstated it the four months prior to that. Consensus for Friday’s NFP is 200k vs. 263k in September. The unemployment rate is expected to rise a tick to 3.6%, while average hourly earnings are expected at 4.7% y/y vs. 5.0% in September. We know that the labor market is a lagging indicator but the Fed is counting on seeing some weakness there in order to help fight inflation. So far, the unemployment rate hasn’t been cooperating. Ahead of the jobs data, we get some more labor market data with October Challenger job cuts, weekly jobless claims, and Q3 nonfarm productivity and unit labor costs all reported today.

October ISM services PMI will be the data highlight. Headline is expected at 55.3 vs. 56.7 in September. Keep an eye on prices paid and employment, which stood at 68.7 and 53.0 in September, respectively. Recall that the ISM manufacturing headline fell largely due to lower prices paid and improved supply chain measures, while employment, new orders, and output rose. Let’s see if the same holds true for the services sector. September trade (-$72.2 bln expected) and factory orders (0.3% m/m expected) will also be reported today. The Atlanta Fed’s GDPNow model is currently tracking 2.6% SAAR growth in Q4, down from 3.1% previously. The next model update will come today after the data.

Tensions remain high in Brazil. Press reports tens of thousands of Bolsonaro supporters have gathered across the country, some at army bases calling for a military intervention to stop the transfer of power to President-elect Lula. Roadblocks by the protestors have continued, thought Bolsonaro has called on them to dismantle because they harm the economy and aren’t a legitimate form of protest. In hindsight, it’s not that surprising when Bolsonaro refused to officially concede. Brazil was closed for holiday yesterday but expect markets to react negatively today, not only to the ongoing protests but also to the hawkish Fed decision.

EUROPE/MIDDLE EAST/AFRICA

The Bank of England is expected to hike rates 75 bp to 3.0%. At the last policy meeting September 22, the bank hiked rates 75 bp to 2.5% but the MPC was unusually split, with 5 voting for 50 bp, 3 for 75 bp, and 1 for 25 bp. It said then that it still sees inflation peaking at just under 11% next month but remaining above 10% in the following months. Of note, Quantitative Tightening (QT) began this Tuesday without a hitch but longer-dated gilts were excluded. Look for some guidance from the bank today when this exclusion might end. Updated forecasts will be released and while there is still some fiscal uncertainty, the bank may be able to incorporate a rough framework of the fiscal plan to be unveiled by Chancellor Hunt. Looking ahead, the swaps market is pricing in 250 bp of tightening over the next 12 months that would see the policy rate peak near 4.75%, down sharply from 6.25% right after the mini-budget in late September.

ECB officials remains hawkish. President Lagarde warned that a mild recession was possible but added that “we don’t believe that that recession will be able to tame inflation.” Elsewhere, Nagel acknowledged that “Political pressure might increase over time as long as we’re in this process of hiking rates. We shouldn’t refrain from further rate hikes.” He added that he does not expect a hard landing for the economy next year. Kazaks said “It’s clear that interest rates will need to rise much higher to bring inflation down to the target of 2% over medium term. There’s no need to pause at the turn of the year. The rate increases must continue into the next year, until inflation, especially core inflation, shows a visible slowdown.” He added that “In my view, recession in the euro area is a baseline scenario, but so far it’s likely to be relatively shallow and brief. And hence insufficient to break the backbone of inflation persistence.”

Yet ECB tightening expectations have fallen back a bit. WIRP suggests another 75 bp is about 50% priced in for December 15 vs. nearly fully priced in after the bank’s October meeting. Looking ahead, the swaps market is pricing in a peak policy rate near 3.0%, down from between 3.5-3.75% after the October meeting. With a big chunk of the eurozone already tipping into recession, can the ECB hike as aggressively as anticipated? It appears that the market is starting to have it doubts.

Norges Bank delivered a dovish surprise and hiked 25 bp to 2.5% vs. 50 bp excepted. However, markets were split as half the analysts polled by Bloomberg look for a 25 bp hike while the other half look for hikes of either 50 or 75 bp. The bank said it would “most likely be raised further in December” without specifying the likely size. Norges Bank also noted “The policy rate has been raised markedly over a short period, and monetary policy is beginning to have a tightening effect on the economy. This may suggest a more gradual approach to policy rate setting.” Updated macro forecasts and expected rate path will be released at the December 15 meeting. Currently, the expected rate path sees the policy rate peaking near 3.0% in Q3 23. This is more hawkish than the swaps market, which sees the policy rate peaking near 2.75%. Of note, September CPI picked up to 6.9% y/y, the highest since June 1988 and further above the 2% target. As such, we believe that market pricing will eventually move closer to the Norges Bank’s view.

Turkey reported October CPI. Headline came in close to expectations at 85.51% y/y vs. 83.45% in September, while core came in at 70.45% y/y vs. 72.00% expected and 68.09% in September. Headline was the highest since June 1998 and further above the 3-7% target range. At the last policy meeting October 20, the central bank delivered its third dovish surprise in a row by cutting rates 150 bp to 10.5% vs. 100 bp expected. It said that it would consider a similar cut at the next meeting November 24 and may also consider an end to the easing cycle then. If one last 150 bp cut is seen, rates would bottom at 9.0% while CPI inflation still rising. PPI accelerated to 157.69% vs. 151.50% in September, suggesting further upside pressure ahead on CPI. As we’ve said many times before, the country is lurching towards a crisis with its unorthodox policy mix that favors growth over inflation.

Czech National Bank is expected to keep rates steady at 7.0%. Of note, rates have been kept steady since the last 125 bp hike back in June. Minutes from the last meeting September 29 showed that most policymakers believed inflation was probably near its peak. There were two dissents in favor of a hike but the board is dominated by doves after the July appointments brought three new doves to the board to go along with new Governor Michl. Yet inflation is still running well below target and so it remains to be seen whether the tightening cycle is truly over. The swaps market is pricing in steady rates over the next 12 months. However, the bank may eventually be forced to hike again if price pressures remain high.

ASIA

Australia reported September trade data. Exports came in at 7% m/m vs. 1% expected and 3% in August, while imports came in flat m/m vs. 3% expected and 4% in August. As a result, the trade surplus jumped to AUD12.4 bln vs. AUD8.75 bln expected and a revised AUD8.7 bln (was AUD8.3 bln) in August. In y/y terms, both picked up significantly and the strength in exports is noteworthy in light of the slowdown in mainland China. Exports of ores and minerals rose 8.7% m/m. Final October services and composite PMI readings were also reported. Services improved to 49.3 vs. 49.0 preliminary, dragging the composite up two ticks to 49.8.

China’s National Health Commission said Covid Zero remains the favored strategy to fight the pandemic. This comes days after unverified social media posts suggested authorities were exploring ways to move beyond the controversial policy. Communist party chief Ma Xiaowei hosted the meeting and said officials must be committed to Covid Zero, adding “We must resolutely maintain the general approach of ‘preventing imported cases and domestic resurgence’ and the overall strategy of ‘dynamic Covid Zero’.” Elsewhere, Caixin reported soft October services and composite PMI readings. Services came in at 48.4 vs. 49.0 expected and 49.3 in September, which helped drag the composite two ticks lower to 48.3.

Bank Negara Malaysia hiked rates 25 bp to 2.75%, as expected. The bank noted that the hike would “pre-emptively manage the risk of excessive demand on price pressures consistent with the recalibration of monetary policy settings that balances the risks to domestic inflation and sustainable growth.” It added that it is not on any pre-set course and that future decisions will remain data dependent as well as “measured and gradual.” September CPI came in at 4.5% y/y, down from the cycle peak of 4.7% in August. While the bank does not have an explicit inflation target, still-high price pressures should keep the gradual tightening cycle going for now. The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%, up from 3.5% at the start of this week.