The major currencies were mostly firmer last week as the dollar remains under broad-based pressure. JPY, NZD, and GBP outperformed while CAD, AUD, and CHF underperformed. Risk sentiment is likely to remain constructive on reports of looser Covid restrictions in Shanghai as well as ongoing notions of a Fed pivot. We believe overall market sentiment is swinging too far into positive territory and will eventually swing the other way.
AMERICAS
With no Fed speakers nor major U.S. data reports this week, we suspect markets will be content sticking with recent trades that have been working. That includes higher equities, lower bond yields, and a lower dollar. It’s more than just the Fed pivot, however. Risk sentiment continues to be buoyed by some loosening of Covid restrictions in China. These two drivers have been largely responsible for the rise in risk sentiment in recent weeks and we see little on the horizon this week that will change this.
The Fed narrative has clearly shifted more dovish after Powell’s speech last week. WIRP suggests that a 50 bp hike December 14 is fully priced in, with only around 10% odds of a larger 75 bp move. The swaps market is pricing in a peak policy rate of 5.0% and no longer sees risks of a higher 5.25% peak. At midnight last Friday, the media embargo went into effect and there will be no Fed speakers until Chair Powell’s post-decision press conference December 14. The dollar has tended to soften during this quiet period this year as there will be no hawkish Fed rhetoric to push back against the market’s more dovish take on the Fed.
November ISM services PMI Monday will be closely watched. All of the other surveys have shown weakness picking up last month and so markets will look for ISM services PMI for confirmation. Headline is expected at 53.5 vs. 54.4 in October. Keep an eye on the components. Prices paid in services remains elevated, unlike the steady drop we’ve seen in manufacturing. The economy remains resilient. The Atlanta Fed’s GDPNow model is currently tracking 2.8% SAAR growth in Q4, down from 4.3% previously but still quite respectable. With more and more Q4 data being reported, expect this reading to be very volatile in the coming weeks.
November PPI Thursday will be important. Headline is expected at 7.2% y/y vs. 8.0% in October, while core is expected at 5.9% y/y vs. 6.7% in October. This report has taken on greater significance after last week’s upside surprise to average hourly earnings. Of note, November CPI will be reported December 13, the day the FOMC meeting begins. Headline is expected at 7.3% y/y vs. 7.7% in October, while core is expected at 6.0% y/y vs. 6.3% in October. We believe markets have gotten too complacent about inflation risks. As the chart shows, both AHE and core PCE have flat-lined near 5% for most of this year despite falling CPI and PPI readings. We believe getting core PCE back down to the Fed’s target of 2% will be much more difficult than markets are pricing in.
University of Michigan consumer sentiment Friday will be watched. Headline is expected to remain steady at 56.8, though both current conditions and expectations are seen falling from November to 58.0 and 54.3, respectively. Despite weaker consumer sentiment, consumption has held up in recent months. Both 1- and 5 to 10-year inflation expectations are seen steady at 4.9% and 3.0%, respectively.
Other minor data will be reported. October factory orders will be reported Monday and are expected at 0.7% m/m vs. 0.3% in September. October trade data will be reported Tuesday and the deficit is expected at -$80.0 bln vs. -$73.3 bln in September. . October consumer credit will be reported Wednesday and is expected at $28.0 bln vs.25.0 bln in September. Weekly jobless claims will be reported Thursday. October wholesale trade sales and inventories and Q3 household net worth will be reported Friday.
Bank of Canada meets Wednesday and is expected to hike rates. The analyst community is split between 25 and 50 bp, while WIRP suggests only 30% odds of a larger 50 bp move vs. 60% at the start of last week. The swaps market is pricing in a peak policy rate near 4.25% vs. 4.25-4.5% at the start of last week. Ahead of the decision, October building permits will be reported Monday and trade data will be reported Tuesday. After the decision, November Ivey PMI will be reported Thursday.
EUROPE/MIDDLE EAST/AFRICA
ECB tightening expectations have steadied. WIRP suggests a 75 bp hike December 15 is around 20% priced in, down from 45% at the start of last week and fully priced in right after the October decision. Elsewhere, the swaps market is still pricing in a peak policy rate near 3.0% vs. 3.5-3.75% after the October decision. We think there is still room for ECB tightening expectations to fall further and we stand by our call that the ECB will pivot and cut rates before the Fed does. Villeroy, Makhlouf, and Wunsch speak Monday. Lane and Panetta speak Wednesday. Lagarde, de Cos, and Villeroy speak Thursday.
Final November services and composite PMI readings will be reported Monday. Italy and Spain report for the first time and their composite PMIs are expected to improve from October to 46.5 and 48.5, respectively. It’s way too soon to get excited about these modest improvements in the monthly readings when all signs point to recession ahead.
Eurozone reports October retail sales Monday. Sales are expected at -1.7% m/m vs. 0.4% in September, while the y/y rate is expected at -2.6% vs. -0.6% in September. Italy reports October retail sales Wednesday. Sales are expected at -0.5% m/m vs. 0.5% in September.
Germany reports some key data. October factory orders will be reported Tuesday. Orders are expected at 0.1% m/m vs. -0.4% in September, while the y/y rate is expected at -4.7% vs. -10.8% in September. IP will be reported Wednesday. IP is expected at -0.6% m/m vs. 0.6% in September, while the y/y rate is expected at -0.7% vs. 2.6% in September.
The U.K. has a very quiet week in terms of data. Final services and composite PMI readings will be reported Monday. Construction PMI will be reported Tuesday. November BOE inflation survey will be reported Friday. Bank of England tightening expectations have steadied. WIRP suggests a 50 bp hike December 15 is priced in, with 25% odds of a larger 75 bp hike vs. 35% at the start of last week. The swaps market is still pricing in a peak policy rate between 4.5-4.75%, down sharply from 6.25% right after the mini-budget in late September.
Norway reports November CPI Friday. Headline is expected at 7.0% y/y vs. 7.5% in October, while underlying is expected at 6.0% y/y vs. 5.9% in October. If so, this would be the first deceleration in headline since August but would remain well above the 2% target. Next Norges Bank meeting is December 15 and a 25 bp hike to 2.75% seems likely. At the last meeting November 3, it delivered a dovish surprise and hiked 25 bp to 2.5% vs. 50 bp excepted. 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%.
ASIA
Japan reports some key data. Final November services and composite PMI readings will be reported Monday. October cash earnings and household spending will be reported Tuesday. Nominal earnings are expected to slow two ticks to 2.0% y/y, while real earnings are expected to slow sharply to -2.1% vs. -1.2% in September. If so, this would be the lowest for real earnings since June 2020. The lack of any significant wage pressures is likely to keep the BOJ on hold for the time being. Elsewhere, household spending is expected at 0.9% y/y vs. 2.3% in September. Final Q3 GDP data will be reported Thursday.
October current account data Thursday will be of interest. The adjusted balance is expected at JPY353 bln vs. JPY671 bln in September. However, the investment flows will be of most interest. September data showed that Japan investors turned net sellers of U.S. bonds again (-JPY2.4 trln) after one month of net buying interrupted nine straight months of net selling. Japan investors remained net sellers (-JPY7 bln) of Australian bonds for the third straight month, Canadian bonds (-JPY17 bln) for the eighth straight month, and Italian bonds (-JPY456 bln) for the second straight month. Indeed, Japan investors were total net sellers of foreign bonds in September of nearly -JPY3 trln.
Reserve Bank of Australia meets Tuesday and is expected to hike rates 25 bp to 3.10%. After October CPI data came in soft last week, WIRP now suggests only 60% odds of a 25 bp hike vs. 70% at the start of last week, while the swaps market is pricing in a peak policy rate near 3.55%, down from 4.10% at the start of last week.
Australia also reports some key data. Final November services and composite PMI readings will be reported Monday. Q3 current account data will be reported Tuesday. Q3 GDP data will be reported Wednesday. Growth is expected at 0.6% q/q vs. 0.9% in Q2, while the y/y rate is expected at 6.2% vs. 3.6% in Q2. October trade data will be reported Thursday. Exports are expected to rise 2% m/m vs. 7% in September, while imports are expected at 2% m/m vs. flat in September.
