The Macro Outlook for w/c 6 November 2023

by Kim | Nov 6, 2023

Key events this week – RBA monetary policy decision, US Fed-speak including Fed Chair Powell, UK GDP Q3

Recap from last week

Central bank decisions and important data overtook heightened geopolitical concerns last week.

As expected, the FOMC kept policy settings unchanged at its meeting last week. Current restrictive settings are expected to keep downward pressure on activity and inflation. The Committee continues to “proceed carefully” judging that the full effects of tightening are yet to be felt. Guidance remains unchanged; additional firming may be appropriate and will be based on the totality of the incoming data. Higher long yields are helping keep financial and credit conditions tighter and the hurdle is likely higher for further increases in policy rates. Policy settings are however likely to stay restrictive “until we are confident that inflation is a path to that (2%) objective”. This decision was interpreted to mean that the Fed was likely done with further rate hikes in this cycle. Additional cuts to the FFR have started to be priced in for 2024.

The BoJ kept policy rates unchanged but adjusted how it conducts YCC. Importantly, the BoJ removed the ‘hard’ ceiling to defend the 1% upper limit of the 10-year JGB yield, instead calling it a ‘reference point’. As expected, the BoJ increased its inflation estimates for 2023 through to 2025.

The BoE kept policy settings on hold amid signs of ‘some impact of higher monetary policy on the labor markets and on momentum in the real economy more generally’.

US economic data was not too hot last week and this likely contributed to the shift in the outlook for additional cuts to the FFR in 2024. The broad update of the US labor market showed some easing of tight labor market conditions. Non-farm payroll growth for Oct was lower than expected at +150k, as labor strikes affected results. The prior two months were revised lower by -101k payrolls. The household survey recorded a marked fall in employment that was only partially offset by a fall in participation. This resulted in an increase in the unemployment rate to 3.9% (from 3.8% in Sep). Average weekly hours slowed, and the effects of labor strikes were also reflected in the fall of average overtime hours in durable goods manufacturing. In Sep, job openings were little changed. The job opening rate remains well above the pre-pandemic average. Wages growth continued to ease in Q3 with growth of the ECI slowing to +4.3% from +4.5% in Q2. Pockets of elevated wage growth remain within public sector state and local government compensation.

Data globally continued to reflect the impact of tighter monetary policy conditions. The global S&P manufacturing PMI for Oct was downbeat with optimism in the outlook falling to an eleven-month low. Output contracted across Europe, the UK, China, and Japan. Output in the US according to this survey, expanded mildly for the second consecutive month. The global manufacturing PMI employment index fell for the second month with a contraction recorded across a majority of countries in the survey. The remaining global services PMIs for Oct will be released this week.

The Eurozone flash GDP showed activity contracted slightly in the Euro area in Q3 and growth likely stalled over the year. Euro area headline inflation slowed more than expected to +2.9% as energy prices fell. Core inflation slowed to +4.2%.

Canadian employment growth was lower than expected while the unemployment rate increased by more than expected to 5.7%.

Outlook for the week ahead

The RBA will meet this week. Market pricing for this meeting was only at a 50% implied expectation for a rate hike this week (as of 3 Nov), however, many economists are forecasting an increase to 4.35%. In Q3, inflation was higher over the quarter but slowed over the year to +5.4%. The question is whether this latest CPI report, together with other data from the inter-meeting period, will result in an upgrade to the inflation outlook. It’s likely to be a finely balanced decision.

There will be several US Fed speeches this week, including remarks from Fed Chair Powell, Governor Waller, and Dallas Fed President Logan.

Economic data will be light this week.

UK GDP for Q3 is expected to fall by -0.1% over the quarter. This would be on par with the BoE expectation of weakening growth in Q3 (compared to +0.2% in Q2).

The remaining suite of S&P global service PMI reports will be released this week helping to round out the view of economic activity at the start of Q4.

The US Senior Loan Officer survey for Q3 will be released this week and may provide some insight into lending conditions amid higher long-term yields. Initial claims for the wk ending 4 Nov are expected to increase by +217k.

This week, the US Treasury will auction and settle approx. $454bn in ST Bills raising approx. $23bn in new money. The US Treasury will also auction the 3-year and 10-year Notes and the 30-year Bond – these will settle next week on the 15 Nov.

QT this week: Approx $13.6bn in ST Bills will mature on the Fed balance sheet this week and will be reinvested.

An update of the quarterly refunding announcement is provided in the briefing document attached. 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