Key events for the week ahead – BoC, ECB, and BoJ policy decisions, Inflation (US PCE inflation Sep, prelim Euro-area CPIs Oct, Aus CPI Q3), prelim PMIs for Oct, US GDP Q3
Recap from last week
While the FOMC looks set to raise rates by 75bps again next week, the focus shifted to the timing of when the Fed will start to slow the pace/size of rate hikes. The likelihood of changing to smaller hikes “at some point” has been well-telegraphed in the FOMC minutes. Two articles came out last week. The NYT article suggested that any “serious discussion” on smaller hikes would be delayed by at least a month as inflation remained high and the labour market tight. “The conversation about whether to scale back is now more likely to happen in December”. (Source: NYT Jeanna Smialek). The WSJ article received more traction as a signal from the Fed. The article suggested that the Fed may start to prepare markets for smaller hikes after the Nov meeting and “are likely to debate then whether and how to signal plans to approve a smaller increase in December”. (Source: WSJ Nick Timiraos). Both articles highlight how smaller hikes could conflict with the Fed’s goal of tightening monetary policy. The Fed’s problem will be whether it can slow the pace/size of rate increases while still appearing to be hawkish, and not undo the work it has done to tighten financial conditions.
We are now in the blackout period ahead of the FOMC meeting next week.
The RBA minutes noted that the Board was also worried about market reactions to slowing the pace of hikes. Aus inflation is expected to peak at over 7% (currently 6.1%). The pace of hikes was slowed to assess the impact on households amid high mortgage debt and variable mortgage rates; “The full effects of higher interest rates were yet to be felt in mortgage payments and the increases in the cash rate were close to the interest rate buffer applied when many current borrowers took out their loans” (source: RBA). The RBA is concerned with the cash rate at 2.6% – while futures markets currently expect the cash rate to peak higher at around 4% late next year (unless inflation eases faster). Aus labour market data last week was weaker than expected as employment growth slowed. The CPI release this week will be important leading up to the RBA meeting next week. Aus CPI is expected to increase to +6.9% in Q3. The Aus government budget will be released this week.
Outlook for the week ahead
Central bank policy decisions this week; The BoC is expected to increase by 50bps to 3.75% as inflation data last week remained elevated at +6.9% for Sep.
The ECB is expected to increase rates by 75bps to 1.5%. last week Euro area CPI for Sep was confirmed at +9.9% in Sep from +9.1% in Aug. This week, the prelim CPIs for Oct will be released for Germany, Italy, France, and Spain.
The BoJ is expected to keep policy unchanged. The policy rate differential will keep pressure on the currency amid unconfirmed interventions. Japanese headline CPI remained at +3% in Sep while core CPI ex fresh food accelerated to +3% and has been above +2% now for six months. CPI growth ex-energy and fresh food is accelerating and reached +1.8% in Sep – still below the BoJ +2% threshold.
US PCE inflation for Sep expected to ease to +5.8% from +6.2% in Aug. Core PCE is expected to increase to +5.2% from +4.9% in Aug. The US employment cost index for Q3 is expected to remain elevated at +1.3% (QoQ). US GDP growth in Q3 is expected to increase to +2.1% (SAAR basis) from -0.6%. The contribution of domestic versus external demand will be important.
Prelim global PMIs for Oct will provide insight into changes in growth momentum amid high inflation and rising rates.
This week, the US Treasury will auction and settle approx. $255bn in ST Bills, raising approx. $26bn in new money.
The US Treasury will also auction the 2-year, 5-year, and 7-yr Notes and 2-year FRN – to settle on 31 Oct.
QT; approx. $19.4bn of ST Bills will mature on the Fed balance sheet this week. Of this total, approx. $3.2bn in ST Bills will be redeemed/roll-off the balance sheet and approx. $16.2bn in ST Bills will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
