Asian equity markets are mostly higher overnight, especially in Hong Kong and China, supported by reports of easing US-China tensions, liquidity injections by the Chinese central bank and more optimism regarding the country’s property sector and Covid restrictions. Economic data, however, remained soft, with China’s retail sales falling 0.7%y/y in October and industrial production also missing expectations. Japan’s economy unexpectedly contracted by 0.3%q/q in Q3.
UK economic data released this morning showed the unemployment rate at 3.6% in the three months to September, which was up slightly from last month’s 3.5%. Annual average earnings growth was 6.0%, while underlying growth excluding bonuses increased to 5.7%, the highest for over a year. There were signs of moderation in demand with the number of vacancies falling, although it remains high by historical standards. Overall, the data still point to a tight labour market.
The UK data focus continues early tomorrow with the October inflation report. The energy price guarantee scheme means that October’s rise in energy prices is much lower than would otherwise have been the case. Nevertheless, the increase is expected to have pushed annual CPI inflation higher, and our forecast is for a rise to 10.5%. Meanwhile, ‘core’ inflation (excluding food and energy prices) is expected to have fallen modestly to 6.4% from 6.5%. This may be the peak in inflation, although there is uncertainty about what will replace the energy price guarantee next April.
Outside the UK later today, Eurozone Q3 GDP figures are expected to confirm growth of 0.2%q/q. Survey indicators, however, point to more weakness ahead. This morning’s German ZEW survey of investors will likely remain very low by historical standards. That said, we think it may signal an improvement in economic sentiment in November on the back of the recent slide in wholesale gas prices. We forecast the expectations index to rise to -53 from -59.2.
In the US, producer price inflation and the regional NY Fed Empire manufacturing survey are the key releases. The Fed’s Harker is due to speak on the economic outlook, with US policy rates expected to continue rising, albeit possibly at a slower pace from next month. ECB Executive Board member Elderson is also due to give a speech in Frankfurt later today.
The US dollar was broadly steady overnight, holding on to Monday’s modest gains. US 10-year Treasury yields were slightly higher. The pound fell below $1.18 yesterday but has pared some its losses during the Asian session and seen further gains after the release of the UK labour figures this morning which has pushed it back above this level.
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Following strong gains in equities last week, markets across Asia are a little mixed overnight, in part due to comments from US Fed policymaker Waller that stocks had overreacted to last week’s US inflation data and that interest rates had ‘a way to go’. China equities, however, are trading higher following the government’s announcement of a 16-point plan to help the Chinese property market. That comes despite further increases in the number of daily Covid cases being reported across the country.
Meanwhile, ahead of this week’s UK Autumn Statement, Chancellor Hunt made several media appearances yesterday in which he warned that he will have to make ‘very difficult decisions’ in order to balance the books.
Last week’s lower than expected US CPI inflation data for October helped reinforce market expectations that global interest rates may not need to rise as much as previously expected. However, US Federal Reserve officials have cautioned against reading too much into the data warning that further interest rate hikes are likely albeit probably at a slower pace than seen at the November meeting where the Fed hiked by 75bp. Nevertheless, market expectations for the peak in US rates, which had moved above 5% after what was perceived as a ‘hawkish’ November Fed monetary policy update, have now dropped back below that level.
Over the coming week, markets will be looking for further clues on the policy outlook across a number of major economies, including the US, UK and the Eurozone. For today, US Fed members Brainard and Williams are due to speak at separate events, while across the Eurozone the focus will be on speeches from officials including Panetta, Centeno, Guindos and Nagel. On the data front, today’s focus is limited to the September Eurozone industrial production report. Despite declines in Spain, France and Italy, a strong rise in German factory output is forecast to have a driven a 0.7% monthly rise in Eurozone industrial output.
A busy week for domestic economic data kicks off early tomorrow morning with the latest UK labour market report. There have been some tentative signs that the labour market is cooling, and vacancy data may provide a further indication that demand for labour has eased further. However, those are still very elevated, and the unemployment rate is predicted to have held at a multi-year low of 3.5% in the three months to September. That suggests the market is still very tight pointing to continued upward pressure on wages for now and we predict that underlying earnings growth (excluding bonuses) will have moved up again.
The US dollar has started the week slightly firmer against most of its peers but remains significantly down on its level prior to last week’s softer-than-expected US inflation report. GBP/USD had moved above 1.18 for the first time since August but has subsequently eased back below this level this morning.
Asian equity markets moved sharply higher, catching up with increases in the US and Europe after yesterday’s softer-than-expected US CPI inflation figures. Headline CPI fell to 7.7% in October from 8.2%, while the core rate (excluding the volatile food and energy components) declined to 6.3% from 6.6%. The outturn added to expectations that the pace of tightening will slow from next month and that the terminal rate might also be lower than previously anticipated. Fed policymakers cautiously welcomed the inflation data but reaffirmed that further rate rises were likely.
Official data released this morning confirmed the UK economy contracted in Q3, in contrast to the US and the Eurozone where growth rates were positive. The fall, nevertheless, was smaller than expected at -0.2%q/q compared with expectations for a -0.5% decline. That partly reflected a stronger start to the quarter (in July) than previously estimated, but it also meant a loss of momentum through the quarter which seems not to bode well for Q4. The latest monthly GDP data for September revealed a 0.6%m/m drop with the ONS saying that at least half was accounted by the loss of a working day for the Queen’s state funeral.
The University of Michigan’s US consumer sentiment survey for November is the main economic release later today. The headline index rose to a six-month high in October to 59.9, with recent improvements supported by the strong labour market. Lower gasoline prices had also supported confidence, but they have started to rise and may explain the pickup in the survey’s inflation expectations last month (see chart). For the headline consumer sentiment index, we have pencilled in a small fall to 59.5 in line with the market consensus forecast.
Central bank speakers include the external BoE MPC member Silvana Tenreyro who appears at the Society of Professional Economists Annual Conference. She dissented from the majority decision at the November policy meeting to raise interest rates by 75bp to 3% and voted instead for only a 25bp rise to 2.5%. ECB speakers include Vice-President Luis de Guindos, Chief Economist Philip Lane and Executive Board member Fabio Panetta.
Treasury yields and the dollar fell significantly in response to the US inflation report. The 10-year Treasury yield dropped by nearly 30bp to around 2.80%, while the equivalent 10-year gilt yield fell 17bp to 3.29% at yesterday’s close. The pound gapped up above $1.17 and was also higher against the euro before paring some of its gains during the Asian trading session.
Asian equity markets were in negative territory ahead of today’s key US inflation figures, following the US S&P 500 index closing more than 2% lower which erased most of its recent gains. Sentiment in Asia was weighed by a confluence of factors including reports of rising Covid cases in China, concerns around the currency market and mixed results in the US midterm elections. In the UK, the RICS housing survey confirmed weaker price expectations and activity in the sector. The survey’s net balance for new buyer enquiries fell to -55% in October from -36% in September. Going forward, it was noted that “the settling down in financial markets could provide some relief”.
US CPI inflation and a raft of central bank speakers, particularly from the US Federal Reserve but also the BoE’s Ramsden, will be the economic focus for today. Tomorrow morning at 07:00 GMT also sees the release of official UK GDP for September and Q3, with the data expected to confirm a contraction and the likely start of a technical recession.
The rise in US inflation has been skewed more towards domestic price pressures compared with Europe. Last week’s labour market report showed annual average hourly earnings growth slowing but remaining uncomfortably high for the Fed. Core CPI excluding the volatile food and energy components has also surprised on the upside in the past two months, rising to a forty-year high of 6.6% in September. For October, we expect core CPI inflation to edge up to 6.7%, above consensus forecasts, but the headline rate to fall slightly to 8.1%.
In contrast to the US and the Eurozone where Q3 growth rates were positive, the UK economy is expected to have contracted relative to the prior quarter. Part of the reason lies with the extra Bank Holiday in September for the Queen’s funeral. Nevertheless, the monthly GDP reports for July and August had already highlighted slowing momentum. We forecast a fall in September GDP of 0.5%m/m, resulting in a decline in Q3 of 0.5%q/q. As the chart below shows, the BoE expects growth to continue to contract in Q4 and at least to the end of 2023, implying that a technical recession has already begun.
The US dollar rallied yesterday, led by safe-haven demand, but was broadly steady in Asia. The pound fell below 1.14 against both the US dollar and the euro. US Treasury and UK gilt yields fell yesterday, but the former was little changed overnight. Brent crude oil was lower for a fourth day.
Most Asian equity markets are trading lower this morning despite gains in US and European markets yesterday. China has lifted its lockdown in Zhengzhou, where iPhone production is located, but has extend lockdown in its 4th largest city Guangzhou as it continues with its zero-Covid policy. China inflation data for October showed lower-than-expected outturns for both producer and consumer prices. Media reports suggests that the UK and EU may be close to a breakthrough on talks on the Northern Ireland protocol.
Vote counting is underway for the US mid-term elections. Initial indications are that the Republicans have wrested back control of the lower Chamber of Congress (the House of Representatives) but the Senate still seems on a knife edge. Overall, it appears that the US faces another period of divided government.
Previous recent occasions when one party has controlled Congress while the other held the Presidency has resulted in political gridlock as any new policy moves became virtually impossible. That seems likely to be the case this time again given that the ongoing acrimonious relationship between the Democrats and Republicans seems to leave little room for compromise. One potential implication of this is that the probable ruling out of further near-term fiscal support for the economy may slightly raise the odds of US interest rates peaking at a lower rate than previously expected. However, any impact on expectations is likely to be marginal.
Today’s calendar is extremely light with no data releases of note in any of the Eurozone, UK or the US. Very early Thursday morning, the October RICS house price balance for the UK will provide some indication of the impact of rising mortgage rates expectations. However, this is likely to have only a very limited impact as markets are really waiting for October CPI inflation data for the US due later on Thursday. That is generally seen as the key release of the week for global markets.
In the meantime, there are several central bank speakers today that will be of interest, although some are scheduled to speak about things other the near-term interest rate outlook. Bank of England policymaker Haskel will speak about investment in “intangibles’, on which he has written a couple of books and a topic which may have insight into the UK’s poor productivity performance. However, of more immediate relevance for the interest rate outlook may be comments from US Federal Reserve policymakers Williams and Barkin.
US and UK government bond yields both fell yesterday. Both markets are waiting for important data later in the week with US inflation and UK GDP statistics scheduled for release. In currency markets, sterling climbed to its highest level since late October against an under pressure US dollar but slipped modestly against the euro.
Asian equity markets are mostly up this morning after markets rose in Europe and the US yesterday, but Chinese indices are down. In Australia, measures of consumer confidence and business confidence in October both declined. In New Zealand, inflation expectations rose by more than expected in Q4. The British Retail Consortium said that sales growth slowed in October as cost-of-living pressures continued to rise. Meanwhile, the COP27 climate summit is underway. UK PM Sunak warned yesterday that climate and energy security go “hand in hand” and the Ukrainian situation showed the need to act urgently.
Today’s US mid-term elections involve votes for the whole of the lower chamber of Congress (the House of Representatives), around a third of the Senate and various State Governorships around the country. It will be seen as an indication of the popularity of the Biden Presidency after two years. The party holding the White House typically tend to do badly in the mid-terms and polls suggest that this time will be no exception. The Democrats currently control both chambers of Congress but they seem to lose the House, while the Senate looks a close call. Republican control of either will make it more difficult for President Biden to govern over the next two years and particularly to pass new legislation. Moreover, a big loss will probably boost speculation that Biden will not try for re-election although media reports currently suggest that he does indeed plan to run.
In the Eurozone, much stronger than expected September retail sales in Germany was a signal that today’s measure for the region as a whole may have gone up for the first time in four months. Nevertheless, high inflation remains an ongoing risk to spending power.
For the US, the NFIB index for October will provide a timely update on trends in the small business sector. The September reading showed optimism up to its highest level since May. However, already released data for some of October’s results pointed to a slippage in hiring plans.
Bank of England Chief Economist Pill, who on Friday reaffirmed the message that market expectation for UK interest rates may be excessive, is scheduled to speak twice today. The first appearance is a speech on monetary policy, while later he will talk to a House of Lords Committee about issues with labour shortages. The latter appearance may offer new insight into why so many workers have left the labour force over the past few years (see chart).
US Treasury yields and UK gilt yields both rose yesterday reflecting ongoing uncertainty about the monetary policy outlook in both economies. In currency markets, sterling touched its highest level in about a week against a generally lower US dollar and also appreciated more modestly versus the euro.
Over the weekend China authorities reaffirmed a commitment to their zero Covid policy stance. This follows the recent increase in the reported number of infections, which on Sunday rose to the highest level since May. Latest economic data for China showed a smaller-than-expected rise in the country’s trade surplus as weak global demand weighed on exports. Nevertheless, market risk sentiment has started the week on a positive note with almost all major equity indices positive across the Asia-Pacific region.
Both the Bank of England and the US Federal Reserve raised interest rates by three-quarters of one percent last week to 3% and a 3.75%-4.00% range, respectively, in line with expectations. There was, however, noticeable differences in the two central banks’ guidance on future policy. Although the Fed indicated that the pace of hikes could slow from next month, Chair Powell declared that peak interest rates would have to go higher than previously thought in order to tackle inflation. The Bank of England, in contrast, executed a ‘dovish’ hike by signalling that it believes the terminal rate for Bank Rate in 2023 will be lower than markets currently expect. That was backed up by a downbeat economic assessment in its updated forecasts showing quarterly contractions in output to at least the end of 2023. Moreover, the forecasts do not take account of the difficult decisions on fiscal policy that will be announced in the forthcoming Autumn Statement scheduled for 17 November, which might further dampen the near-term growth outlook.
Over the coming week, a number of members from both central banks are set to speak in the coming week, which will be watched closely for further clues on the respective policy outlooks. For today, the focus will be on Fed policymakers Mester, Collins and Barkin who are set to speak at events over the course of the day. Elsewhere, the day is void of any major data releases, with only the Eurozone Sentix investor confidence survey due. ECB President Lagarde is due to release a pre-recorded video this morning on the topic of ‘Towards a legislative framework enabling a digital euro for citizens and businesses’, suggesting that the prospect of comments on monetary policy are low. The ECB’s Panetta is also due to speak.
Having fallen sharply on Friday, the US dollar has regained some of its poise this morning but still remains down relative to where it was before last week’s ‘hawkish’ Fed policy update. GBP/USD continues to trade above 1.13, while EUR/USD remains just below the parity mark. US 10-yr Treasury yields have nudged up further overnight and continue to trade well above their UK equivalents.
Asian equity market moves are mixed this morning. The biggest gains are in Chinese indices, while economic uncertainty weighs on other markets. In its latest statement on monetary policy, the Australian central bank revised down its economic growth, inflation and labour market forecasts and repeated that any future interest rate hikes will be data dependent. Opinion polls in the US suggest that the Republicans are on course to win back control of the lower chamber House in next week’s Congressional elections but that the Senate is a close call.
The US labour market report is likely to be the closest watched report of the day. It is always seen as a key bellwether of US economic conditions. However, Wednesday’s Federal Reserve monetary policy update, which was perceived as more ‘hawkish’ than expected, has probably increased the importance of this report and subsequent updates. The Fed remains more concerned about inflationary pressures than downside economic growth risks. That increases the focus on indicators of domestic inflation conditions such as the labour market update.
Recent monthly updates have suggested that the US labour market remains buoyant and seemingly very tight. Employment growth is still solid, while the unemployment rate is at a multi-year low. As a result, concerns persist about upward pressure on wage growth. Recent data suggest that wage growth has stabilised, but the Fed sees it as still uncomfortably high. We expect today’s report for October to show slower employment growth than in September but still too high to reassure the Fed. Meanwhile, in another signal of potential inflationary pressures, the unemployment rate is forecast to hold at its recent low of 3.5%.
In the UK, October construction PMI data will provide a timely update on a sector that has historically been particularly interest rate sensitive. The September heading reading surprised on the upside rebounding to its highest level in three months but there are doubts whether that more optimistic picture can persist.
A briefing from Bank of England Chief Economist Pill will provide some further details on yesterday’s monetary policy update. Meanwhile, Boston Fed President Collins will be the first Fed policymaker to speak post Wednesday’s update.
US Treasury yields continued to rise yesterday as markets took onboard the implications of this week’s US monetary policy update. They have now retraced most of the late October fall in yields as markets anticipated an early ‘pivot’ in Fed monetary policy. UK gilt yields also rose yesterday However, their rise was much more modest in response to what was perceived as a relatively ‘dovish’ monetary policy update by the Bank of England, despite its 75 basis point interest rate hike. In currency markets, the US dollar rose sharply against both the euro and sterling on the back of higher US rate expectations.
Following on from the declines seen on Wall Street yesterday, stocks have slipped across Asia in response to the US Fed’s latest policy decision. While the 75bp hike in interest rates, to a range of 3.75 – 4.00%, was widely anticipated, in his press conference Fed Chair Powell noted that the ultimate level of interest rates was likely to be higher than previously expected. Risk sentiment has also been hurt by a weaker-than-expected China Caixin services PMI reading for October, which dropped to 48.4 from 49.3, taking it further into contractionary territory.
Following the US Fed policy decision last night, today it is the turn of the Bank of England’s Monetary Policy Committee to deliver its latest interest rate decision. UK interest rate expectations have fluctuated a lot in recent weeks, with markets at one point discounting a rise of more than 150bp post the conclusion of today’s announcement. However, current expectations are lower and give a roughly equal weight to the possibility of a third successive 50bp move or a 75bp hike. Meanwhile, most economic forecasters are looking for a 75bp increase. There has also been much volatility in expectations of the peak in rates. Following the Kwarteng ‘mini-budget’ on the23rd September, markets expected base rate to reach around 6% next year.
However, market expectations have since been scaled back to a peak of 4.75%. These fluctuations are at least partly due to recent changes in fiscal policy that were seen by at least some BoE officials as a reason for larger hikes. Yet, the subsequent policy reversals have likely removed much of that need.
Today’s policy update from the BoE is one of the occasions when it produces a new set of economic forecasts and will also been accompanied by a press conference from the Governor Andrew Bailey. While the delay in the fiscal statement may have provided difficulties, recent public announcements by the Chancellor still give substantial indications on the course of fiscal policy. Incorporating this and other recent developments may result in the Bank’s economic forecasts changing only relatively modestly compared to its previous projections in August. Inflation will be expected to end the year above 10% but be projected to fall sharply through next year. Downside risks to growth will also be stressed. Overall, however, the key message is likely to be that the environment remains particularly uncertain. Consequently, the BoE is likely to stress that further moves in interest rates remain ‘data dependent’.
Ahead of that, the Norges Bank is forecast to announce another 50bp rise in interest rates, having delivered similar increases at its previous three meetings. However, a sizeable minority of the Bloomberg consensus of economists are predicting that the central bank will ease the pace of increase to a 25bp hike, suggesting that the risk of a rise smaller than 50bp are high. Data wise, the final reading of the UK services PMI is expected to be broadly unchanged around 47.5. Meanwhile in the US, the ISM services report for October is predicted to fall to 55.5 from 56.7 – but still consistent with solid activity. Elsewhere, a number of ECB speakers are scheduled.
The US dollar is noticeably firmer across the board, which has pushed GBP/USD back below 1.14 and EUR/USD further below parity.
