The Macro Outlook for w/c 7 November 2022

by Kim | Nov 7, 2022

Key events for the week ahead – US CPI and the US midterm election

Recap from last week

Last week the FOMC opened the door to changing the pace of rate hikes. This allows the FOMC to consider the “cumulative tightening of monetary policy” and its effects. The decision gives the FOMC the optionality to adjust the size of the next hike which will be decided “on the totality of incoming data”. This decision comes against the backdrop of higher-than-expected inflation and significant uncertainty around the path of rates. But there is no reason to pivot policy right now – and Chair Powell noted that we “still have some ways to go” on rates and that “the ultimate level of interest rates will be higher than previously expected”. By the end of the week though, and after the payrolls beat on Friday, the somewhat steeper yield curve (higher long rates) may be indicating that it’s too early to be slowing. This will be something to watch. This also sets the scene for the important US CPI report this week – and inflation is expected to ease only slightly from +8.2% in Sep to +8% in Oct, with an acceleration in monthly CPI expected from +0.4% in Sep to +0.7% in Oct.

US labour market momentum was still robust. Non-farm payrolls for Oct beat expectations at +261k and Sep was revised higher to +315k. Payroll growth is slowing but is well ahead of the pre-pandemic trend. The household survey had some divergence as monthly employment declined and the unemployment rate increased to 3.7% (from 3.5% in Sep). JOLTS for Sep showed hires may have peaked, but are still elevated. Layoffs & discharges are at near-series lows. Openings rebounded after the fall last month. Quits are also within 10% of the series high but did fall further this month. This softening suggests an increasing reluctance to shift jobs.

Last week, the BoE also increased rates by a further 75bps. The statement highlighted the considerable uncertainty around inflation, the path of rates, and growth. Inflation stands at 10.1% and is expected to peak at 11%. Guidance was that further increases in the Bank rate may be needed for a sustainable return of inflation to target “albeit to a peak lower than priced into financial markets”. The press conference placed more emphasis on the assertion that the Bank Rate will need to go up by less than what markets are currently pricing.

The RBA increased the cash rate target by 25bps as expected. Inflation is now expected to peak higher at +8% (from +7.8%). The RBA noted that it had “increased rates materially since May to help return inflation to target”. There remains high uncertainty around how households will respond to higher mortgage rates. Further increases in rates are expected and the timing and size are to be determined by incoming data.

Global PMI momentum continued to slow into Oct. Both the global manufacturing and services PMIs slipped into slight contraction. G7 manufacturing was weaker, especially in Europe, the UK, and Canada. There was a notable slowdown in US and ASEAN manufacturing (both still expanding). The slowdown in services momentum was also noted this month – especially in the US, UK, Eurozone, China, and Aus. Japan was the only G7 economy where both manufacturing and service activity was expanding.

Outlook for the week ahead

The US CPI for Oct and the US midterm election are the main focus this week. US CPI is expected to ease only slightly from +8.2% in Sep to +8% in Oct, with an acceleration in monthly CPI expected from +0.4% in Sep to +0.7% in Oct.

There will also be a number of US Fed (and other CB) speakers– and this may start to add to headline risk with speeches fluctuating between dovish and hawkish sentiment ahead of the next Fed meeting.

This week, the US Treasury will auction and settle approx. $255bn in ST Bills, raising approx. $34bn in new money.

The US Treasury will also auction the 30yr Bond and the 10yr and 3yr Notes this week. These will settle on 15 Nov.

Approx $16.5bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested/rolled over.

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