Macroeconomics: The Day Ahead for 2 November

The Bank of England’s MPC policy meeting and accompanying Q4 Monetary Policy Report along with earnings from tech behemoth Apple top the agenda on a relatively light day for statistics, which sees the release of Eurozone Manufacturing PMIs, German Unemployment, US weekly jobless claims, Challenger Job Cuts and Q3 Non-farm Productivity. There are also a number of other European and EM rate decisions in Norway, Czechia and Egypt, to accompany the as expected no change in Malaysian rates, while speeches by ECB’s Lane and Schnabel will be closely watched, above all in light of the weaker than expected Eurozone GDP and larger than expected fall in CPI. Outside of Apple, there are a number of major commodity and energy companies reporting including Shell, Cheniere Energy, Conoco Philipps, Duke Energy, Marubeni, Pioneer Natural Resources and Sumitomo Corp, as well as Molson Coors and Starbucks. Govt bond supply takes the form of French and Spanish multi-maturity sales, and Canadian 30-yr. Norges Bank is expected to pause its run of rate hikes since January at 4.25%, but suggest that with inflation remaining elevated, and the risk of additional pressures from the weakness of the NOK, a further hike in December will likely be necessary. By contrast Czechia’s CNB is expected, by a small majority of forecasters, to commence a rate cut cycle with a 25 bps move down to 6.75%. CNB governor Michel has recently hinted at the possibility of a cut before year end, and markets have swung behind a rate cut this meeting after Q3 GDP contracted 0.3% q/q, against a CNB forecast of +0.7% q/q. That said other CNB board members such as Kubicek and Prochazka have suggested that with Sep headline CPI still at 6.9% y/y (sharply down from August’s 8.5%), it is still too early to consider cutting rates, a very split decision looks to be inevitable. Egypt’s central bank is seen holding rates at 19.25%, with inflation continuing to climb (last 38.0% y/y) but the economy contracting sharply (last -7.6% q/q), as it seeks to negotiate further support from the IMF.

** U.K. – BoE rate decision **

– The vast majority of forecasters look for the BoE to keep rates unchanged again at 5.25%, and a smaller majority for rates to be left on hold until at least Q2 2024, though the vote is again likely to be split with Greene, Haskel and Mann seen voting for a further 25 bps hike. The statement will doubtless continue to retain a tightening bias, and the high for longer ‘table mountain’ narrative, and the accompanying Monetary Policy Report will offer a fresh set of economic forecasts. With markets now discounting a lower rate trajectory than in August by around 75 bps, there are likely to be upward revisions to both GDP (albeit modest) and inflation forecasts, though still seeing CPI notably below the 2.0% target rate on the 3-year time horizon. It will also announce the results of its annual review of the supply side of the economy, which may well suggest that Unemployment may need to rise more than it previously expected in order to bear down on wage growth. Be that as it may, the sharp steepening of the UK yield curve (even more than its G7 peers) has raised questions over its Quantitative Tightening (QT) strategy, above all its active Gilt sales, particularly the added fiscal cost of covering losses on its Gilt holdings. But making an adjustment at the current juncture, having only just announced the increase in the pace of its QT in September would be very tricky: a) because it would appear to be giving into political pressure to ease the fiscal burden, and b) if it were to adjust its Gilts sales to have a greater proportion of short and medium-dated maturities, this would put upward pressure on rates in the most economically sensitive part of the curve, tightening policy further as the economy faces recession (however shallow). That said, the steepening of the curve and the crystallizing of large losses on long-dated Gilts does underline why other major central banks have eschewed active QE sales, and leaves the BoE with a major problem, and what some might term a very unnecessary dilemma, which could have been avoided had the BoE been more proactive and less reactive in this tightening cycle.

** U.S.A. – FOMC & Treasury Quarterly Refunding **

– There were few surprises from the Fed statement or Powell’s press conference, with the statement tersely observing that “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” Meanwhile Powell when asked whether rates were ‘sufficiently restrictive’ replied: “We’re not confident that we haven’t, we’re not confident that we have”. “Inflation has been coming down, but it’s still running well above our 2% target … A few months of good data are only the beginning of what it will take to build confidence,” adding “It is still likely … we will need to see some slower growth and some softening in the labor market … to fully restore price stability.” On balance one might term the Fed as being less hawkish (rather than dovish), but the risk of a further rate hike has obviously receded, with Powell noting “Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.” As for the quarterly refunding, the increase to $112 Bln was slightly less than the $114 Bln that had been expected, most notably for 10 and 30-yr, with no increase in the size of the unloved 20-yr, with the increases in monthly auction size were also at the margin less than expected, and the Treasury also flagged some “modest reductions” to short-dated T-Bill auctions by early December. Overall the Fed and Treasury announcements were a cue for markets to unwind some of the seemingly relentless bear steepening of recent weeks.