Key events for the week ahead – FOMC & ECB Minutes, Flash PMIs Nov, RBNZ policy decision, US Thanksgiving Holiday
Recap from last week
US Fed speeches hinted at the possibility to slow the pace of policy tightening from the Dec meeting. Markets are pricing a step down to +50bps. But as noted at the last FOMC meeting, it is the level of rates that is important now. Bullard sees the FFR higher, 5-5.25% at a minimum to get into the restrictive zone. Market probabilities are currently pricing up to that level and peaking in mid-2023. The US 2-10yr spread reached a YTD low of -0.69, as the resulting growth expectations fell.
So far, US consumer spending remains robust. Retail sales growth was higher than expected in Oct and spending was stronger across most categories. High-frequency initial claims also remain low. But there was further weakness in regional manufacturing surveys. Weaker/declining new orders became more widespread in Nov. Output growth stayed positive as firms worked through backlogs and supply chains adjusted. US housing market conditions and sales deteriorated further as credit tightens and mortgage rates stay elevated.
Inflation outside of the US showed little sign of easing in Oct. Euro area inflation was confirmed at +10.6% with price growth accelerating across most categories. Inflation in the UK came in higher than expected at +11.1% and core was also up to +6.5%. Inflation in Canada stalled with the headline rate remaining at +6.9%. Japanese inflation came in higher than expected and core ex-fresh food accelerated to +3.6% (from +3% in Sep). The BoJ has previously noted that the weakening Yen has been a driver of higher import costs for commodities, thereby driving up consumer inflation. This is not the kind of inflation the BoJ is looking for. Japanese GDP unexpectedly contracted in Q3 as personal consumption growth slowed and net exports declined.
The RBA minutes covered the policy debate and included details of the review of forward guidance. The 25bps increase was favoured given how fast the RBA had already hiked and the uncertainty over how household spending would react to the rapid tightening of conditions. Wage growth came in higher than expected in Q3 at +3.1% over the year with a notable acceleration in private sector wages to +3.4% (also linked to annual wage reviews). The labour market tightened further in Oct as employment increased by more than expected and the unemployment rate fell back to 3.4%. With inflation remaining high, this is likely supportive of further tightening.
Outlook for the week ahead
It’s a short week for the US Thanksgiving Day Holiday.
FOMC minutes will be released. This will likely include the debate for taking into account the ‘cumulative tightening of monetary policy’ (slowing the pace) amid significant uncertainty around the level of interest rates required for what might be deemed as ‘sufficiently restrictive’. Expecting the minutes to reinforce that there is “still some ways to go” on rates.
The lead-up to the next FOMC meeting could be interesting as markets digest Fed signaling and important data for rates just prior to the next FOMC meeting. Chair Powell is scheduled to speak at a Brookings event on Wed 30 Nov – the week before the blackout week for the 13-14 Dec FOMC meeting. Signaling from Chair Powell on the pace of hikes is likely at this event. The Brookings speech will be two days before the Nov non-farm payrolls (the last day before the blackout period), while the important Nov CPI will be released on 13 Dec, the day before the Dec FOMC announcement.
The flash PMIs will be released this week for Nov. Expectations are for continued moderate contraction in the Eurozone, UK, and US (services). Momentum is expected to slow in Aus and be little changed in Japan.
The RBNZ will meet this week on policy. The RBNZ stepped up the pace of hikes to 50bps back in Apr 2022 and there is an expectation that it may step up the pace to a +75bps increase this week.
This week, the US Treasury will auction and settle approx. $314bn in ST Bills, Cash Management Bills, and FRNs raising approx. $78bn in new money.
The US Treasury will also auction the 2yr, 5yr, and 7yr Notes this week. These will settle on 30 Nov.
Approx $16bn in ST Bills will mature on the Fed balance sheet this week and 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
