- More Fed officials are tilting hawkish; Fed Chair decision is imminent
- Chile elections set the stage for a runoff between conservative Jose Antonio Kast and leftist Gabriel Boric
- Mobility restrictions protests spread across Europe; Austria returns to a national lockdown
- The PBoC’s monetary policy report signals continued policy accommodations
The firming of expectations for the Fed to deliver the first hike of the cycle in mind-2020 remains as the key driver for currency markets. In particular, it leaves the euro and EM on the backfoot, especially with resurfacing concerns about Covid in Europe. We don’t think the decision on the Fed chair will prove a big near-term event, with Powell more likely than not to be reappointed. In Europe, Austria’s national lockdown came into effect on the weekend while the debate over compulsory vaccinations raged across the border in Germany. This added up to further EUR weakness to start the week with the single currency falling to a 1.1263 session low while GBP lost its 1.13 handle as risk aversion spread across asset classes. Equities in the APAC region were mixed with Hang Seng -0.4% but Shanghai Comp +0.6% and Nikkei +0.1%. Elsewhere the Kospi (+1.4%) outperformed after better than expected export data while the Treasury rally slowed to a halt and the yield curve flattened. Oil was lower across classes as signs emerged over the weekend that more nations may release supply from strategic reserves.
More Fed officials are tilting hawkish. Bullard has set the gold standard, but others seem to be moving in his direction. Last week, Vice Chair Clarida said that it may be appropriate to discuss speeding up the taper pace in December due to higher inflation and increased job gains. He noted “I’ll be looking closely at the data that we get between now and the December meeting.” Governor Waller took a more hawkish position that’s very similar to Bullard, saying the “The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.” Bullard has explicitly called for faster tapering and two hikes in 2022. There are no Fed speakers this week.
We don’t think the decision on the Fed chair will prove a big near-term event, but the re-appointment of Powell likely to trigger some upside for the dollar as he is seen as marginally more hawkish than Governor Brainard. Senator Manchin last week asked to meet with Governor Brainard, while two other Democratic Senators (Whitehouse and Merkley) have said they would oppose a second term for Powell. Reports suggest most Republican Senators are lining up against Brainard and so the consensus appears to be Powell, and perhaps just barely.
Lastly, the US fiscal outlook remains up in the air. The House passed President Biden’s “human infrastructure” bill last week by a narrow 220-213 vote. One Democrat and all Republicans were opposed. However, it’s not clear if it can pass in the Senate. All 50 Democratic Senators must vote in favor, and we do not yet know the status of Senators Manchin and Sinema yet.
Chile elections went roughly as expected, setting the stage for a runoff on December 19th between conservative candidate Jose Antonio Kast and leftist Gabriel Boric. Kast took 28% of the vits and Boric 26%. The outcome is still highly uncertain, but at this stage Boric seems slightly more likely to win. If it plays out this way, Boric will challenge the taxes, the pension system, and we would expect greater fiscal outlays on welfare benefits. Needless to say, this will add yet another political headwind for the country’s already complex outlook.
EUROPE / MIDDLE EAST / AFRICA
Mobility restrictions protests spread across Europe, while Austria returns to a full national lockdown, the fourth for the country. Also recall that Austria imposed mandatory vaccines to it citizens. Germany is also considering tighter restrictions. On the protests side, wire report unrest in Belgium, Netherlands, amongst other countries. There’s not much we can add to this aside from reaffirming our conviction that the ECB will remain amounts the most dovish G10 central banks.
The eurozone has a quiet week data week ahead. Preliminary November PMI readings will be reported Tuesday. Headline manufacturing PMI is expected at 57.3 vs. 58.3 in October, services PMI is expected at 53.5 vs. 54.6 in October, and the composite PMI is expected at 53.0 vs.54.2 in October. Looking at the country breakdown, the German composite is expected to fall a full point to 51.0, while the French composite is expected to fall slightly more than a point to 53.5. November German IFO business climate and French business confidence will be reported Wednesday. December German GfK consumer confidence will be reported Thursday. We see growing downside risks for the eurozone data in Q4 as the fourth virus wave sweeps over the continent. So far, Austria and Germany have been the hardest hit, but Italy is also coming under stress.
Like the Fed, the debate about Bank of England policy continues to rage. Over the weekend, Governor Bailey said that risks to the U.K. economy are “two-sided” right now. This echoed similar comments Friday from Chief Economist Pill. Bailey and other BOE officials have blamed the market for misinterpreting official comments, but we find this to be disingenuous at best. It’s the job of central bank officials to clearly set forward guidance so that markets are not taken off guard. Failure to do so is on the bank, not the markets. Of note, WIRP continues to suggest 50-50 odds for liftoff at the next policy meeting December 16. Swap market sees 100-125 bp of tightening over the next twelve months, which strikes us as way too aggressive.
Poland’s October industrial and PPI Monday came in higher than expected. The former printed 7.8% y/y, well above the 5.3% expected. PPI also came in higher than expected at 11.8% y/y, suggesting that price pressures are still rising. CPI rose 6.8% y/y in October, the highest since May 2001 and well above the 1.5-3.5% target range. Yet the central bank has only hiked rates twice for a grand total of 115 bp. More needs to be done but the bank has not committed to an extended tightening cycle in its forward guidance. Next policy meeting is December 8 and another 75 bp hike to 2.0% is likely then. Swap market is pricing in another 150 of tightening over the next twelve months, which does not seem aggressive enough to us. Real retail sales will be reported Tuesday and are expected to rise 3.7% m/m vs. -2.4% in September.
Bank of Israel announces its decision shortly and is expected to keep rates steady at 0.10%. At the last meeting October 7, the central bank delivered a hawkish hold by announcing an end to QE and seeing the policy rate between 0.10-0.25% in a year vs. 0.10% currently. Inflation unexpectedly eased to 2.3% y/y in October, moving closer to the center of the 1-3% target range and so there is little pressure to deliver any further tightening near-term. However, it will likely reaffirm its commitment to use FX intervention to prevent excessive shekel strength. Ahead of the decision, October unemployment and September manufacturing production will be reported.
The PBoC’s monetary policy report signals continued policy accommodations. The report said that officials recognized that “the difficulty for maintaining sable economic operation has risen.” This will lean on reserve requirement cuts, but also on targeted credit boosting measures to supports sectors such as SMEs, rural areas and clean energy production. That said, we think will also try to carefully manage a slowdown in investment in the real estate sector. We don’t see any major changes in policy for the currency as the PBoC will be mindful of the growing yield gap between China and the U.S. as the Fed embarks on tapering cycle. The PBoC kept the Loan Prime Rates on hold, as expected.
Still resilient external trade data out of South Korea suggest domestic and global activity remains resilient. For the first 20 days of November, Korea’s exports rose 27.6% y/y and imports 41.9% y/y. Unequivocally strong figures even after adjusting for base effects and seasonal factors. Bank of Korea meets Thursday and is expected to hike rates 25 bp to 1.0%. After it started the tightening cycle with a 25 bp hike to 0.75% in August, the bank remained on hold in October, signaling a modest pace of hikes likely lies ahead. Indeed, the next hike to 1.25% isn’t fully priced in until Q3 2022. However, markets may have to reassess this path as price pressures are rising. Last week, October PPI was reported at 8.9% y/y vs. 7.6% in September. This was the highest since October 2008 and warns of upside risks to CPI, which rose 3.2% y/y in October. This was the highest since January 2012 and further above the 2% target.
Taiwan reports October export orders came in at 14.6% y/y, below expectations for 21.6% y/y and 25.7% in September. Despite the lower print, it’s the 20th consecutive month of export orders growth. IP will be reported Tuesday and is expected to rise 11.90% y/y vs. 12.24% in September. While the economy remains in solid shape, the political landscape is likely to get more uncertain. A bipartisan group of lawmakers last week reintroduced a bill that would require the U.S. to seek Taiwan’s membership and meaningful participation at the IMF. While the bill is unlikely to go anywhere, it represents a growing effort by the West to push back against China’s growing assertiveness regarding Taiwan. Elsewhere, Taiwan has applied for members hip in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), while China has also applied.