Macroeconomics: The Day Ahead for 29 October

A blockbuster 48 hours awaits with a slew of major data, central bank rate decisions, top level political meetings and a veritable deluge of corporate earnings. For today, there are the FOMC and Bank of Canada rate decisions (and the BoJ on Thursday morning), accompanied by Australian Q3 CPI (much higher than forecast, implying no further RBA rates cut before 2026), Spain (in line and solid) and Sweden’s Q3 GDP (better than expected, though wholly down to a transitory 1.2% m/m spike in August), UK monetary and credit aggregates and US Pending Home Sales. Alphabet, Meta Platforms and Microsoft headline the run of corporate earnings, which also has Foxconn, Larsen & Toubro and Sinopec in Asia; Airbus, Banco Santander, BASF, Deutsche Bank, Endesa, Equinor, GSK, Mercedes Benz, OMV and UBS in Europe, while the US also looks to Boeing, Caterpillar, Kraft Heinz, Phillips 66, Starbucks and Verizon Communications amongst others.

** U.S.A. – FOMC rate decision **

A further 25 bps rate cut to 3.75%/4.0% is expected, with Miran certain to vote for a larger cut, though perhaps more interest will be in whether Powell can maintain the consensus otherwise. That also applies to an anticipated announcement that the Fed will end its balance sheet reduction (QT) programme. While Friday’s CPI data was below forecasts at 0.3% m/m 3.0% y/y headline and 0.2%/3.0% core, there were notably larger gains (0.7% to 0.9% m/m) on clothing, furniture and household appliances, symptomatic of tariff related pressures, and Services ex-Housing remains above 3.0% y/y, which may prompt some more hawkish FOMC members to voice dissent – Hammack (non-voter), Musalem and/or Schmid, and even Waller who was arguing for a 50 bps cut earlier in the year has become more cautious mostly due to solid growth. The dovish faction will prevail for the time being, but Fed messaging is set to be more dissonant, and today’s statement and Powell press conference may not offer any guidance on a December rate cut (even though one is assumed in the September ‘dot plot’), which would also leave Treasuries vulnerable, especially as a ‘terminal rate’ of 3.0% is ‘priced in’. In terms of ending QT, the current pace for Treasuries is only $5.0 Bln per month (total current holdings $4.196 Trln), per se, the move would be largely symbolic, with the MBS roll-off at $35 Bln (current holdings $2.1 Trln) set to continue; given prior comments Bowman may dissent on the QT vote. One has to add that the Fed has already made two mistakes in the past 4 years: a) arguing that the post-pandemic surge in inflation was ‘transitory’, and b) cutting rates aggressively at the start of this cycle in the belief that labour demand was at risk of falling away. The current resumption of rate cuts may well be the third, given that the overall picture on inflation (indisputably high) and growth (solid, and likely to see a boost to private consumption from the ‘BBB’ tax cuts in 2026) should outweigh softer labour demand given yesterday’s Consumer Confidence Labour differential at 9.4 vs. 8.7 was hardly ‘ominous’, even if the related 6-mth outlook dropped to -12.0. This is perhaps the biggest threat to the ‘everything rally’, even if the run of Q3 corporate earnings clearly evidence the strength of the AI investment boom, though at some point corporates will also need to show benefits to their ‘bottom lines’.

** Canada – BoC rate decision **

The consensus anticipates a 25 bps rate cut to 2.25% from the Bank of Canada, despite higher than expected CPI and a solid rise in September Employment. Both of those have been largely dismissed by BoC governor Macklem, who depicted underlying labour demand and growth outlook as weak, as supported by the BoC’s latest Q3 Business Outlook survey – see chart. The risk is that the BoC holds at this month’s meeting, but gives a fairly clear signal that the December meeting, though given the BoC’s assessment of the balance of risks to the economic outlook, this would look like needless fine tuning. The BoC will also publish a detailed set of GDP and inflation forecasts for the first time since its January meeting, having only offered analyses of the outlook at prior forecast update meetings. The focus will then rapidly shift to the November 4 Budget, which will hike spending to try and offset the shock from the trade tensions with the US, though this will be more a case of mitigating rather than offsetting the impact, particularly when one considers Q2’s -10.1% SAAR fall in Non-residential CapEx.

Source: Bloomberg Finance L.P.

** Japan – BoJ rate decision **

The BoJ is expected to defer a further interest rate hike and hold at 0.50%, largely in deference to continued political uncertainty, with the basic outlines of the new Takaichi coalition government’s stimulus and inflation fighting measures still lacking a lot of detail, which will have to be hammered out in negotiations with the various opposition parties to pass legislative muster in the Diet, and only then evaluated in terms of implication for monetary policy (even if the case for a further rate hike has long been robust). Some upward tweaks to CPI and GDP are anticipated in its forecast update, though this will make a decision to hold rates at this meeting an even more difficult ‘sell’ for Governor Ueda, especially after a hawkish message in September and the likelihood of some hawkish dissenting votes. Particular note also needs to be given to comments about the JPY, given that currency weakness has been a swing factor in favour of rate hike decisions in this gentle tightening cycle.