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Macroeconomics: The Day Ahead for 3 November

  • Focus shifts from hawkish Fed to Bank of England; Services PMIs, Turkish and Swiss CPI, US jobless claims, Job Cuts, Non-Farm Productivity & Canada / US Trade Balance; raft of ECB speakers, rate decisions in Norway and Czechia; further deluge of US earnings; France, Spain, Canada auctions
  • Fed message all too clear: focus on terminal rate not on rate hike size, and more than willing to “over-tighten”
  • BoE: “one off” 75 bps expected, economic outlook likely very downbeat, likely to stress still a lot of uncertainty due to lack of detail on fiscal plans; 3 way split on rates perhaps biggest risk
  • US Services ISM: modest setback expected, but robust by comparison to PMI; weekly jobless claims to confirm still very tight labour market

EVENTS PREVIEW

Following on from the FOMC meeting, the focus turns to the BoE MPC rate decision, with Malaysia’s BNM having hiked 25 bps as expected, and Norges Bank seen hiking 50 bps to 2.75%, and Czechia’s expected to hold rates again at 7.0%, and not to be outshone, ECB speakers are out in very large numbers today. Services PMIs/ISM head a busy run of statistics, with a further rise in India contrasting with a drop in China the key feature of the Asian run, and there are also Australia’s much larger than expected Trade Balance along with Swiss and Turkish inflation readings to digest, while ahead lie US Challenger Jobs Cuts, weekly jobless claims, Trade Balance and Q3 Non-farm Productivity. There will be another deluge of corporate earnings, while Spain, France and Canada will auction govt debt. The post-mortem on the FOMC meeting is that in contrast to the BoC and RBA, it is a good distance away from actually dialling back on aggressive rate hikes. Even if it did open the door very slightly with the change in the statement wording, above all a) ‘ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time’; b) ‘the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments’. But as Powell noted “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected”, adding “we think that we have a ways to go, we have some ground to cover with interest rates before we get to that level of interest rates that we think is sufficiently restrictive”. In principle, the message is that markets should focus less on the size of rate hikes, and far more on where they might peak, and how long they will have to stay restrictive as per Powell: “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.” He also reiterated that the Fed would rather “over-tighten”: “I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon”. As and when the Fed does pivot to a pause, it will likely be quite sudden, but positioning in anticipation of that moment is likely to be a very risky strategy.

** U.K. – BoE rate decision **
It is to be assumed that MPC has been informed about the broad brush of what is to be announced in fiscal terms on November, even if it will obviously have to be careful about what it divulges in the context of today’s rate decision. The consensus is very much centred on a 75 bps rate hike to 3.0%, even if there are a few outlier calls for a smaller 50 bps move, and a 100 bps move, though markets are clearly discounting the idea that this will be a one-off move, though still expecting 50 bps moves in December and February and an additional 65 bps thereafter (see table). It is quite likely that there will be a split vote, though hopefully not on both sides of the majority decision. While the peak is not as high as the >5.0% seen only a few weeks ago, comments from a number of BoE officials still imply that the MPC majority believes that rates will peak at a lower level than markets are discounting, but the latter also implying a protracted and deep recession, which would push CPI below target on a m-t horizon, given that its forecasts are conditioned on market rate expectations, rather than staff forecasts or an MPC consensus. The communications from the MPC have to say the least been both confused, and confusing, and left a lot to be desired, and it will be interesting to see both how it alters its forecasts, and the extent to which its messaging leans against the market rate trajectory. It will almost certainly underline that the outlook remains very uncertain, not only due to domestic factors, but above all due to global recession risks. The press conference will doubtless see plenty of questions about pension fund LDI risks, and its balance sheet reduction (QT) programme, but however one judges the BoE’s policy implementation and communication, the fact is that fiscal policy is clearly in the driving seat, along with the overarching political theme of political instability.

** U.S.A. – Services ISM/PMI & Initial Claims **
The US Services ISM and PMI have seen an even sharper divergence than usual with the flash reading giving back much of the unexpected September rebound, while the ISM index has been remarkably steady over the past 3 months, and beating forecasts anticipating a setback. Another modest dip to 55.3 from 56.7 is expected, predicated on downbeat outlooks for much of the economy, and the drag from high inflation and tight monetary policy. As Powell and the FOMC statement reiterated, the labour market remains very tight, with Initial Claims seen little changed and very low at 220K (vs. 217k), with businesses still loath to lay off staff, even if hiring freezes and some shrinkage in staff due to attrition are clearly visible, but with little or no impact on overall tight labour supply.

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© 2022 ADM Investor Services International Limited.

Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.

ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.                  

A subsidiary of Archer Daniels Midland Company.

© 2021 ADM Investor Services International Limited.

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