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Asian equity markets bounced back, broadly erasing the week’s earlier losses, after a stronger close on Wall Street with the S&P 500 index gaining for the first time in over a week. Swings in investor sentiment continue to be driven to a large degree by concerns about the global economic outlook and hopes that inflationary pressures will start to ease. Overnight, Chinese data revealed annual produce price inflation unchanged but negative at -1.3% and consumer price inflation falling to 1.6% from 2.1%.
The Bank of England/Ipsos Mori household inflation attitudes survey will be released this morning. It will be watched by policymakers ahead of next week’s monetary policy update to assess whether inflation expectations remain anchored to the 2% target. Inflation expectations among businesses in the BoE’s separate DMP survey are still elevated but have fallen back from their recent peak, so it will be interesting to see if this is also reflected among households. The latest Q3 reading of the BoE/Ipsos Mori survey showed a further pickup in one-year-ahead inflation expectations to 4.9% but falls in longer-term expectations.
In the afternoon, the spotlight will turn to US producer price inflation data and the University of Michigan consumer sentiment survey. The PPI data come ahead of next week’s CPI inflation update. Fed policymakers will be looking for further evidence of moderation in goods price inflation as well as indications on how services price inflation is evolving which is critical for the overall inflation path in 2023. We expect headline PPI for final demand to fall to 7.2% (from 8.0%) and the core measure excluding food and energy to fall to 5.8% (from 6.7%).
The preliminary December results of the University of Michigan survey will also garner interest. We look for little change in the headline sentiment index at 56.9 (vs 56.8 last month), a level which suggests caution among consumers facing high inflation and interest rates. The survey’s inflation expectations indicators will also be especially interesting and have remained high. Long-term inflation expectations (5-10 years ahead) have risen in the past two months to recent highs.
Treasury yields fell in overnight Asian markets ahead of today’s US producer price inflation data. The benchmark 10 year Treasury yield edged down to 3.46%, while the recovery in risk sentiment helped to weaken the US dollar. The pound moved up above $1.2250 but was marginally lower against the euro. Prices of both oil and gold rose.
Asian equity markets mostly remained on the back foot following a fifth consecutive daily fall in the US S&P 500 index. Concerns remained about the global economic outlook, while safe-haven demand was also supported by warnings from Russian President Putin on the rising threat of nuclear war. Reports of easing of Covid restrictions in Hong Kong, however, support stocks there.
The UK RICS housing survey was released overnight and showed activity remaining weak in November due to the uncertain economic environment and rising interest rates. The net balance for new buyer enquiries was negative for a seventh straight month although, at -38%, it was an improvement on October’s -53%. RICS nevertheless said that a ’job rich’ recession could limit the housing downturn, with the fall in prices also mitigated by a relative shortage of houses on the market. That said, survey’s prices net balance fell to -25% from -2%, meaning that a net 25% of respondents reported lower prices. Separately, an REC survey reported signs that UK hiring and pay growth moderated in November.
There are no further notable UK or Eurozone data in the rest of the day, although there are a few scheduled ECB speakers including President Lagarde. In the US, the latest weekly jobless claims data are due this afternoon. The figures are not yet pointing to significant job losses despite attempts by the Fed to slow the economy, and we have pencilled in a slight fall in initial claims to 220k. Last Friday’s monthly jobs report was stronger than expected, including an unexpected re-acceleration in wage growth. That outcome has raised concerns that significant more monetary policy tightening may still lie ahead even though the pace of rate rises seems set to slow at next week’s policy update. Former Fed Chair Bernanke gives a Nobel lecture today which may generate some interest.
Early Friday sees the release of China’s producer price and consumer price inflation data. Trade figures released earlier this week revealed bigger than expected contractions in both imports and exports, reflecting the impact of Covid restrictions and weak global demand. The weakness of activity is expected to contribute to weaker inflation, with PPI forecast to fall to -1.5% (from -1.3%) and CPI at 1.6% (down from 2.1%).
UK gilt yields, except at the ultra long end, ended lower yesterday. US Treasury yields, however, are slightly higher during Asian trading. The pound remains above $1.22 and little changed against the euro at €1.16. Brent crude oil edged higher at just above $78 a barrel after recent falls.
Asian equity markets are mostly lower this morning reflecting concerns about downside risks to economic growth. China saw a fall in its trade surplus in November. Both exports and imports slipped possibly partly due to Covid restrictions. Australian GDP rose by 0.6% in Q3 down from 0.9% in Q2. That deceleration may boost hopes that interest rates in Australia will soon peak. German industrial production fell by a smaller than expected 0.1% in October, while September was revised up. In the UK, the Halifax house price index for November recorded its biggest monthly drop since 2008.
Today’s Bank of Canada monetary policy update is expected to result in a seventh consecutive interest rate hike but there is uncertainty over how much they will be raised. Each of the last two meetings has seen a slowing in the pace or increases from 100 basis points in July to 75bp in September and 50bp in October. A majority of forecasters are expecting a further deceleration today to just a 25bp rise, which would take the policy rate to 4.0%. However, a sizeable minority look for another 50bp increase and, with last week’s stronger than the expected labour market report providing support for the larger move, the outcome is not a foregone conclusion.
Possibly of even more interest to markets will be any signal of where rates are likely to peak. Many economists think that the BoC may at least pause its hiking either after today’s announcement or the next one in late January. Moreover, market pricing points to a peak rate of about 4.30% around 65bp below the expected high point in the US.
Most of today’s data are updates to previous releases. In the Eurozone, Q3 GDP growth is expected to be left unrevised at 0.2%. However, the report will include new detail on the drivers of growth. The estimate for Q3 employment will provide further indications of the strength of the labour market.
In the US, Q3 labour productivity growth is expected to be revised up which should lower the rate at which unit labour costs rose during the quarter. Nevertheless, labour costs are still expected to be growing a rate that the Federal Reserve is likely to regard as too high for it to achieve its inflation target. Finally, in Japan Q3 GDP is predicted to be revised up modesty although it is still thought to have fallen compared with Q2.
Early Thursday, the UK’s RICS house price balance for November will be released. Concerns that higher interest rates are having a negative impact on the housing market have already shown up in some data and it will be interesting to see if that will also be seen here.
Bond yields saw small drops in both the UK and the US yesterday. Meanwhile, in currency markets, the US dollar posted gains against both the euro and sterling.
Asian equity markets are mostly lower this morning. Yesterday’s stronger than expected US economic data and media reports that the US Federal Reserve may predict a higher peak for interest rates next week have dampened hopes of an early end to interest rate hikes. The Reserve Bank of Australia as expected raised interest rates by 25 basis points at its latest policy update. Its statement said that inflation remained too high but that medium-term expectations were well anchored. October German factory orders rose by a higher-than-expected 0.8% and September was revised up.
Today’s data calendar is very light. In the UK, the construction PMI report for November will provide a timely update on a very interest rate sensitive sector ahead of next week’s Bank of England monetary policy meeting. In October, the headline rose to its highest level for five months led by a surge in commercial building. Other parts of the sector were less strong as housing activity slowed and civil engineering output fell for the fourth month in a row. The consensus expectation is that activity rose again in November at a pace that was only slightly below the previous month. However, growth expectations for the year ahead were very subdued last time and seem likely to be so again in the latest report, which suggests that the current bounce in activity will not be sustained.
In the US, already released October data for international trade point to another substantial rise in the overall trade deficit. International trade made a positive contribution to Q3 GDP growth as US exports accelerated and import growth slowed. However, the deficit rose in September and seems to have risen even further early in Q4. That deterioration may reflect a loss of competitiveness due to the strong dollar but the negative impact on demand for US exports due to slowing growth around the world is also probably a factor.
November trade figures for China, due early Wednesday, will provide further information on international trade conditions. Both export and imports are expected to have slipped in part due to the impact of the latest Covid lockdowns. Those may have restricted the supply of products for export and demands for imports. Meanwhile, Australian Q3 GDP is forecast to show a slowdown in growth from Q2, which if confirmed would raise the odds that the Australian central bank may soon stop raising interest rates.
US Treasury yields rose yesterday after the stronger-than-expected US data but UK gilt yields were down on the day. In currency markets, the US dollar rebounded against both the euro and sterling as markets took onboard the possibility of a higher terminal rate for US interest rates.
Equities across the Asia-Pacific region are mostly trading higher this morning in response to optimism of a further reopening of China’s economy from Covid restrictions. Yesterday, Shanghai joined other major Chinese cities in scrapping PCR testing requirements to enter outdoor public venues – in a sign that the authorities were driving a gradual shift away from the strict zero-Covid policy that has been in place, and which had led to a number of public protests. The ongoing impact of the lockdown measures on service sector activity in China were shown by a third straight fall in the Caixin services PMI in November, which dropped from 48.4 in October to 46.7 in the latest reading.
The coming week’s data calendar is again relatively light in terms of big hitters as markets square up to monetary policy updates in the following week from the Fed (14 Dec), the ECB (15 Dec) and the BoE (15 Dec). With the pre-meeting quiet or blackout period in place, there are no scheduled Fed or BoE speakers, and the few ECB speakers are expected to refrain from commenting on monetary policy decisions. Nevertheless, a number of survey indicators will provide additional insight into current economic trends.
In the UK today, the final November services PMI is expected to confirm the preliminary ‘flash’ report showing a second consecutive month of contraction at 48.0. Taken together with the manufacturing report, the survey is signalling a negative outturn for Q4 GDP growth, which would be a second consecutive quarterly contraction. Similarly, the final November Eurozone services PMI is forecast to confirm the ‘flash’ estimate of 48.6, consistent with contraction for a fourth straight month, and the likelihood of a negative outturn for Q4 GDP growth.
In the US, we forecast the ISM services to have declined to 53.0 (from 54.4) in November which would still signal expansion albeit at a slower pace. The alternative PMI-based measure of US services activity has been below the 50 level for the past five months. Notably, the latter excludes the public sector, construction, mining, utilities and wholesale and retail trade.
Overnight, the BRC will release its latest ‘unofficial’ UK retail sales figures for November which will provide an indication of consumer outlays (unadjusted for inflation) at the start of the festive shopping period. Elsewhere, despite the recent soft Australia October inflation outturn, the Reserve Bank of Australia is predicted to hike by another 25bp to 3.10%.
Hopes of a further reopening of the Chinese economy has boosted market risk sentiment. Notably, the US dollar has fallen against most of its major peers and in most cases reversed the moves seen after last Friday’s strong US payrolls report. GBP/USD has moved back above 1.23, while the euro has edged above 1.0550 and to its highest level versus the dollar since late June.
Asian equity markets are lower this morning showing caution ahead of some key US data. US Federal Reserve policymaker Williams reaffirmed the guidance made by other Fed officials that interest rates will need to go higher to control inflationary pressures. Meanwhile, European Central Bank President Lagarde emphasised the need to anchor inflation expectations. EU officials have expressed optimism that a deal will soon be reached with the UK on the Northern Ireland aspects of the Brexit agreement.
The key economic release of the day for markets will be the monthly US labour market report. Always seen as a bellwether of US conditions, it is currently even more important as the Federal Reserve tries to work out whether inflationary pressures are easing. Recent US inflation data suggests that upward pressures on prices from international developments are easing. However, the Fed is also concerned about domestic pressures, not least the impact of tight labour market on wages.
The October report showed a solid rise in employment, a small move up in the unemployment rate – to a still very low 3.7% – and signs that, while wage growth has levelled off, it remains uncomfortably high compared with the 2% inflation target. We expect a similar outcome for November indicating no significant easing in pressures. That would seem consistent with the Fed’s policy guidance that the pace of interest rate hikes will now slow but rates still have further to rise.
Today’s Canadian labour market report will also be interesting particularly as the Bank of Canada will give its latest monetary policy update next week. As is the case with the US, the BoC has to balance signs that international inflationary pressures have eased against ongoing concerns about a tight labour market. Today’s report is expected to show wage growth still above the level that would be consistent with the BoC’s inflation target, while the labour market is only expected to show very tentative signs of easing up. Forecasters are divided Economists are divided on whether the BoC will again raise rates by 50 basis points next week or opt for a smaller rise of 25bp.
Richmond Federal Reserve President Barkin and Chicago Fed President Evans are scheduled to speak today but they are unlikely to provide any clues on the US interest rate outlook. Neither of them vote on interest rate changes this year but previous comments suggest that they will be supportive of another rate hike.
Bond yields in both the UK and the US continued to move lower yesterday as data in the US supported hopes that inflationary pressures may be easing. In currency markets, the US dollar slipped further against both the euro and sterling as hopes of an early peak in US interest rates continued to rise.
Asian equity markets were buoyed by Fed Chair Powell’s remarks last night that the pace of hikes may moderate in the upcoming December meeting. The risk-on tone was also supported by reports that China may be easing its stance on Covid restrictions. Data released overnight showed China’s November Caixin manufacturing PMI edged up to 49.4 from 49.2 but remained in contraction territory. Earlier this morning, Germany reported a sharper than expected drop in retail sales, while UK Nationwide house prices also fell in the month-on-month comparison.
This morning’s November PMI manufacturing reports for the UK and the Eurozone are final updates. The initial ‘flash’ readings remained below the key 50 expansion/contraction level in the UK (46.2) and the Eurozone (47.3) for a fourth and fifth consecutive month, respectively. The survey indicates that the manufacturing sector is leading the downturn, but services are also in contraction territory. The overall signal is negative Q4 GDP growth in both jurisdictions. The better news is that there are tentative indications that underlying inflationary pressures, while still elevated, may be starting to ease.
There will also be focus on the latest update of the Bank of England’s ‘Decision Maker Panel’ (DMP) survey of businesses. Notably, last month’s survey showed a significant fall in 1-year ahead CPI inflation expectations to 7.6% from 9.5%, while for 3 years ahead it fell to 4.0% from 4.8%. These figures, nevertheless, remain elevated and add to the case for further monetary policy tightening.
The highlight of this week’s US data calendar is tomorrow’s monthly labour market report. For today, the November ISM manufacturing index is forecast to show activity in the sector stalling – we expect the headline index at 50.0. Meanwhile, the Fed’s preferred inflation gauge, the PCE deflator, is expected to confirm the message of the already released CPI data that inflation slowed in October but is still significantly above target. We forecast the headline PCE deflator to edge down to 6.1% from 6.2% and the core measure excluding food and energy to fall marginally to 5.0% from 5.1%.
Fed Chair Powell’s comments last night resulted in significant declines in the US dollar and Treasury yields. As a result, the pound rallied above $1.21 with similar gains for the euro versus the greenback. US 10-year Treasury yields declined from near 3.8% towards 3.6%, while market pricing for peak US policy rates next year fell.
Asian equity indices are mixed, trading lower in Japan and China but higher in most other parts of the continent, as investors continue to assess the Covid situation in China. China’s November official PMIs were weaker than expected and remained in contraction territory at 48.0 for manufacturing and 46.7 for non-manufacturing. In the UK, business confidence fell in November (see below), while the British Retail Consortium reported a further rise in shop price inflation, including an acceleration in food inflation to a record 12.4%y/y.
Overnight, business surveys for November were released. They showed overall business confidence falling by 5 points to 10%, the lowest since February 2021 (a 21-month low). Firms’ optimism for the economy decreased for a sixth month in a row and their own trading prospects were also lower. There were tentative signs of less vigorous pay growth, but firms’ expectations for their own prices rose to a new high.
The Bank of England has indicated that further interest rate rises are likely required to bring inflation back down. BoE Chief Economist Huw Pill speaks at an event this morning.
In the Eurozone, the preliminary flash estimate for November CPI inflation will be closely watched. Yesterday saw a bigger than expected fall in Spanish inflation, while German inflation declined in line with expectations. French inflation data this morning was steady. Overall, Eurozone headline inflation looks set to fall for the first time in 17 months to 10.4% from 10.6% in October. As a result, after hiking by 75bp in the last two policy meetings, the ECB may lean towards a smaller 50bp rise in December.
The US Fed’s policy outlook signals have been nuanced. On the one hand, the hiking pace looks set to moderate next month after four successive 75bp increases. On the other, policymakers have indicated that the level of interest rates may end up higher for longer to reduce inflationary pressures. Fed Chair Powell’s remarks on the economic outlook and the labour market this evening will draw the most attention later today. Before that, there are several data releases including an update on the Q3 GDP estimate and the ADP employment report ahead of Friday’s official figures.
Early Thursday, China’s Caixin manufacturing PMI survey is due. The Caixin survey has a smaller sample size than the ‘official’ PMIs released overnight and referred to above, but it tends to capture the activity of smaller private firms compared with the official survey. The consensus forecast is a fall to 48.9 from 49.2.
US Treasury yields were slightly lower overnight ahead of Fed Chair Powell’s speech later today. The US dollar was also broadly softer, although the pound remained below $1.20 and was marginally lower against the euro.
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