Drivers for the Week of November 5, 2023

November 05, 2023
Here's a look at the main drivers in Developed Markets this week.

The dollar saw broad-based losses last week. NZD, AUD, and SEK outperformed while JPY, CHF, and NOK underperformed. With no major data releases this week from the U.S., markets will likely continue to run with the soft landing narrative. This means the dollar is likely to remain under pressure as U.S. yields move lower. However, we believe underlying strength remains in the U.S. economy and view this dollar weakness as corrective.


Let’s look at the dollar correction within the context of this entire market move. Recall that at end of July, U.S. yields broke into a higher trading range after Treasury surprised markets with higher estimates of net borrowing Q3. The 10-year yield rose from 3.84% July 27 to peak near 5.02% October 23. It is coming up on the 50% retracement level of that move near 4.43% while the 62% level comes in around 4.29%. This roughly coincided with a move in DXY from 100.551 July 27 to a peak near 107.348 October 3. It is coming up on the 38% retracement level of that move near 104.752 while the 50% and 62% levels come in around 103.950 and 103.147, respectively. Until some of these key technical levels are broken, we view these moves lower as corrective in nature.

Financial conditions should loosen. The Chicago Fed’s measure had been tightening very modestly since mid-September. However, the 10-year yield has fallen nearly 45 bp from the late October peak while the S&P 500 has risen over 6% from the late October low. These moves should lead to looser financial conditions when last week’s readings are reported Wednesday.

There are no major U.S. data releases this week. As a result, markets will surely run with the soft landing theme and push UST yields and USD lower for the time being. We just don't think it's going to be smooth sailing, not when inflation is still so elevated. October CPI data out next week may be problematic. The Cleveland Fed's Nowcast model suggests headline will ease to 3.3% y/y vs. 3.7% in September but core will pick up a tick to 4.2% y/y.

The Fed is happily allowing the markets to embrace its dovish stance. WIRP suggests only 5% odds of a hike December 13, rising modestly to 10% January 31. More importantly, the first cut is about 65% priced in for May 1 and fully priced in for June 12. We continue to believe that this is dovish rate path is very unlikely given how persistent price pressures have been.

We expect Fed officials to continue pushing its dovish narrative. Cook speaks Monday. Barr, Schmid, Waller, Williams, and Logan speak Tuesday. Cook, Powell, Barr, and Jefferson speak Wednesday. Bostic, Barkin, Paese, and Powell speak Thursday. Logan and Bostic speak Friday. Bostic speaks Saturday.

We believe the U.S. economy remains fairly robust. The New York Fed’s Nowcast model was just updated to 2.41% SAAR for Q4 vs. 2.79% previously. This is still above the Atlanta Fed's GDPNow estimate of 1.2% SAAR, which will be updated Tuesday.

Data highlight will be preliminary November University of Michigan consumer sentiment Friday. Headline is expected at 63.5 vs. 63.8 in October. If so, it would be the fourth straight drop to the lowest since May. However, consumption has been holding up relatively well despite the slide in sentiment.

Other minor data will be reported. September trade (-$60.0 bln expected) and consumer credit ($9.0 bln expected) will be reported Tuesday. Wholesale trade sales and inventories will be reported Wednesday. Weekly jobless claims will be reported Thursday. October budget statement will be reported Friday.

Bank of Canada releases the summary of its deliberations Wednesday. At that October 25 meeting, the bank delivered a dovish hold and markets took notice. Similar to the Fed, WIRP suggests 5% odds of a hike December 6, rising modestly to top out near 10% January 24. A rate cut is mostly priced in for June 5.


Final services and composite PMIs will be reported Monday. Italy and Spain report for the first time and their composite PMIs are expected at 47.7 and 48.7, respectively. Both would be down about one and a half points from September.

Germany reports key data. September factory orders will be reported Monday and are expected at -1.5% m/m vs. 3.9% in August. IP will be reported Tuesday and is expected to remain steady at -0.2% m/m.

September IP readings will roll out. Spain reports September IP Tuesday and is expected at 0.4% m/m vs. -0.8% in August. Italy reports IP Friday and is expected at -0.2% m/m vs. 0.2% in August. Eurozone IP won’t be reported until November 15.

Italy and eurozone report September retail sales Wednesday. Italy is expected at -0.1% m/m vs. -0.4% in August, while the eurozone is expected at -0.2% m/m vs. -1.2% 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 largely priced in for April 11. Guindos, Holzmann and Nagel speak Monday. Nagel speaks again Tuesday. Lane, Kazaks, Wunsch, Makhlouf, de Cos, and Vujcic all speak Wednesday. Villeroy, Lane, and Lagarde speak Thursday. Lagarde and Nagel speak Friday.

ECB reports September inflation expectations Wednesday. Expectations had been trending lower before the August bump higher and so the ECB will be watching this very closely.

The monthly U.K. data dump begins. September GDP, IP, services, construction and trade will all be reported Friday. GDP is expected at 0.0% m/m vs. 0.2% in August, IP is expected at 0.0% m/m vs. -0.7% in August, services is expected at 0.0% m/m vs. 0.4% in August, and construction is expected at -0.4% m/m vs. -0.5% in August. Q3 GDP will also be reported then and is expected at -0.1% q/q vs. 0.2% in Q2, while the y/y rate is expected to fall a tick to 0.5%..

Markets are still digesting the dovish hold from the Bank of England last week. WIRP suggests 15% odds of a hike December 14, rising mostly to top out near 25% February 1. The first cut is largely priced in for August 1. Chief Economist Pill speaks Monday. Governor Bailey speaks Wednesday. Pill speaks again Thursday.

Norway reports October CPI Friday. Headline is expected to pick up two ticks to 3.5% y/y, while underlying is expected to fall a tick to 5.6% y/y. If so, headline would accelerate for the first time since May and move further above 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 won’t come until the December 14 meeting. Of note, WIRP suggests 33% odds of one more hike next month.


Bank of Japan release minutes of its September 21-22 meeting Monday. At that meeting, the bank delivered a dovish hold. Governor Ueda said that “Because we aren’t in a state where inflation accompanied by wage growth - sustainable and stable inflation - is in sight, we’re patiently continuing with monetary easing under the current framework.” To underscore his dovishness, Ueda said the risks of undershooting the 2% target are greater than overshooting it and sees inflation continuing to fall from current levels. Governor Ueda also speaks Monday.

Bank of Japan releases the summary of its opinions from its October 30-31 meeting Thursday. At last week’s meeting, the BOJ kept rates steady but tweaked Yield Curve Control once again. By referring to the 1% ceiling for 10-year JGB yields as a reference point rather than a rigid target we believe YCC is for all intents and purposes gone. Governor Ueda said “Uncertainty is extremely high within both overseas and domestic economies and financial markets. We decided that it’s appropriate to increase flexibility so that long-term yields can be smoothly shaped, according to different future scenarios.” With YCC gone, we still look for liftoff either March 19 or April 26.

Japan data highlight will be September cash earnings and household spending data Tuesday. Nominal earnings are expected at 1.0% y/y vs. 0.8% in August, while real earnings are expected at -2.4% y/y vs. -2.8% in August. No wonder spending is expected at -2.7% y/y vs. -2.5% in August. Final services and composite PMIs will be reported Monday.

September current account data will be reported Thursday. An adjusted surplus of JPY2.27 trln is expected vs. JPY1.63 trln in August. However, the investment flows will be of more interest. The August data showed that Japan investors became net buyers of U.S. bonds (JPY643 bln) again and for three of the past four months. Japan investors remained net buyers (JPY142 bln) of Australian bonds for the sixth straight month after eight straight months of net selling, and remained net sellers of Canadian bonds (-JPY30 bln) for the second straight month and for seven of the past eight months. Investors were net sellers of Italian bonds (-JPY106 bln) after two straight months of net buying. Japan investors became total net buyers of foreign bonds (JPY2.0 trln) again and for three of the past four months. With Japan yields moving higher, it’s possible that Japan investors will stop chasing higher yields abroad but it’s way too early to say.

Reserve Bank of Australia meets Tuesday and is expected to hike rates 25 bp to 4.35%. A handful of analysts polled by Bloomberg look for steady rates, while WIRP suggests 50% odds. Those odds rise to 75% December 5 and full priced in for February 6, with odds of a second hike topping out near 35% in Q2. Its Statement of Monetary Policy will be released Friday and will contain updated macro forecasts. At the last meeting October 3, the bank kept rates steady at Governor Bullock’s first meeting. Similar to her predecessor Lowe, Bullock said “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks.”  

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