November 2, 2022 8:34:01
Asian equity markets overall were cautiously firmer ahead of the Fed policy announcement later today. Speculation that China may be reconsidering its zero-Covid policy could be adding to a more constructive risk tone. Still, there remains uncertainty whether the Fed will pivot towards smaller rate rises from next month. Yesterday’s JOLTS data showed an unexpected rise in US job openings, suggesting labour demand remains strong. In the UK, the British Retail Consortium reported another increase in annual shop price inflation to 6.6% in October, including a record high of 11.6% for food prices.
Ahead of this evening’s US Fed policy update, the final reading for Eurozone October manufacturing PMI survey and the US ADP employment report (ahead of Friday’s ‘official’ figures) will be released. German unemployment claims data are also due. The Eurozone manufacturing survey is expected to confirm the preliminary ‘flash’ release showing a ninth consecutive fall in the headline index to 46.6, led by a sharper pace of contraction in output and demand, reflecting weakening global prospects and ongoing energy concerns. Despite signs of easing in supply bottlenecks, inflationary pressures remain elevated. Meanwhile, we expect the US ADP report to show the economy added 220k private sector jobs in October, similar to last month.
Today’s principal focus is on the Fed decision at 18:00GMT, followed by Chair Powell’s press conference at 18:30. Both economists’ forecasts and market pricing point to a fourth successive 75bp hike to a 3.75%-4.00% range. Given that the Fed prefers to avoid surprising markets with its immediate policy actions, such an outcome appears a near certainty. Any surprise is more likely to lie within the future policy guidance. Powell may further hint that the future pace of rate increases will slow, but the key message will be that the focus is still on controlling inflation. As such, he may refrain for now from committing firmly to a policy pivot towards smaller rate hikes and may prefer to maintain some policy flexibility to respond to incoming data.
Markets will probably bide their time ahead of the Fed policy announcement. US 10-year Treasury yields remain just above 4%. UK gilt yields fell yesterday ahead of Thursday’s Bank of England policy update. The 2-year gilt yield closed down 5bp at 3.19%, significantly below late September highs of above 4.70%. The pound was slightly higher against the US dollar and the euro.
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