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.
Asian equity markets traded higher, led by the rebound in Chinese tech stocks, with the Hang Seng index gaining more than 5%. The Reserve Bank of Australia raised interest rates by 25bp to 2.85%, as expected. China’s Caixin manufacturing PMI rose more than expected but remained in contraction territory at 49.2 in October, likely reflecting ongoing economic dislocations from Covid lockdowns.
Markets will likely be biding time ahead of policy updates from the US Federal Reserve tomorrow and the Bank of England on Thursday. The BoE’s active gilt sales (quantitative tightening) is scheduled to begin today. This morning’s UK October manufacturing PMI is expected to confirm the earlier ‘flash’ estimate showing output contracting for a fourth month in a row and a sharp deceleration in new orders. Due mostly to the drop in demand, the headline index fell to 45.8 from 48.4 in September, the weakest for 29 months during the early stage of the pandemic. Inflationary pressures eased slightly but remained elevated despite the weakening outlook for activity.
The US October ISM manufacturing survey is expected to fall towards the 50 no-change threshold. That would be broadly in line with the alternative S&P Global manufacturing PMI reading of 49.9 led by weakening demand and despite signs of improvement in supply chain disruptions. It would also be consistent with most regional Fed surveys. We forecast the ISM manufacturing to fall to 50.2 from 50.9 in September.x
Also out is US construction spending and the JOLTS survey. Construction spending in September is forecast to have contracted again on the back of a weakening housing market. Job openings, meanwhile, are expected to have fallen below 10 million in September for the first time since mid-2021, suggesting tentative signs of cooling of the buoyant labour market. The data releases are unlikely to change expectations for the Fed to raise interest rates by 75bp tomorrow.
US Treasury yields and the dollar edged lower overnight ahead of tomorrow’s Fed policy decision. The pound moved back above $1.15 and was marginally firmer against the euro. UK gilt yields closed higher yesterday but they remain well below levels during the aftermath of the mini-budget.
Asian equity markets are mostly higher this morning in line with a rise in the US market on Friday. Reports attribute the move to optimism about profit reports. Markets also continue to anticipate that central banks will soon slow the pace of their interest rate increases. In China the manufacturing and non-manufacturing PMIs for October both fell below the 50 level signalling a contraction in activity.
The earlier release of our Lloyds Business Barometer showed that UK business confidence weakened in October. The overall reading only fell by 1% point but that was the lowest since March 2021 and represented a fifth successive decline in confidence about the economy as a whole. Firms’ feelings about their own trading prospects and staffing levels, in contrast, improved this month, but they both remained weaker than in the first half of the year. Confidence in manufacturing fell for a fifth month in a row and continued to trend lower in other sectors, including retail and services, while six of the twelve UK regions and nations reported lower confidence.
Potentially of most interest in today’s UK money supply data may be September mortgage approvals and bank lending secured on dwellings. Give the ongoing rise in mortgage rates concerns are growing about activity in this area, so it will be interesting to see if that is reflected here.
What were seen as ‘dovish’ comments last week by European Central Bank President Lagarde, following the ECB’s latest 75 basis points interest rate hike, boosted hopes that the pace of rate increases will soon slow. However, today’s data for CPI inflation and GDP seem set to show the dilemma that the central bank still faces.
On the inflation front, outturns for October in some of the biggest countries in the Eurozone, most notably Germany and Italy, point to upside risks compared with today’s consensus. That suggests inflation could post another new high for the year pointing to the need for further tightening. In contrast, today’s GDP is likely to show that activity is close to stagnating. On a positive note, German GDP unexpectedly rose in Q3, which lowers the risk that output will have fallen in the region as a whole. However, activity is still very sluggish and PMI data point to the risk of a Q4 contraction.
Early Tuesday, the Australian central bank will give its last monetary policy update of the year before its summer break. Another rate hike is expected and in the wake of last week’s higher than expected Q3 CPI inflation some economists are now expecting a 50bp rise. However, the majority are still looking for a second successive rise of just 25bp.
Global bond yields rose on Friday and US Treasuries have continued to sell-off overnight. However, yields are still well below their levels of a week ago. Sterling is a touch lower against the US dollar but up against the euro this morning.
Asian equity markets are mostly lower this morning following on from a decline in the US S&P index yesterday. Disappointing earnings reports by tech companies may be at least partially tempering the recent bullish mood in global equity markets. Reports that US Treasury Secretary Yellen said that US inflation was “unacceptably high” and that she was not seeing any signs of a US recession may have dampened of an early ‘pivot’ on interest rate policy by central banks around the world. Hopes on this had been boosted earlier yesterday by what was seen as a more ‘dovish’ than expected European Central Bank policy update despite its latest 75 basis points interest rate hike.
There are no UK economic releases today but elsewhere it’s a busy end to the week. For the Eurozone, data on October business confidence will provide a further update on near-term trends. October PMI data released earlier this week suggested that activity in both the industrial and service sectors has fallen this month and consistent with that we expect confidence to have slipped in both.
Also in the Eurozone, October CPI and Q3 GDP releases for some of the larger countries will provide hints on the likely outturns for Monday’s data for the overall region. Inflation is expected to be a mixed bag with the annual rates expected to be up from September in France and Italy, down in Spain and little changed in Germany. Overall, they are likely to show that inflationary pressures remain elevated. GDP outturns may also be mixed. France and Spain are forecast to have grown modestly in Q3, but German GDP likely fell. Moreover, its contraction is predicted to accelerate in Q4 suggesting that Germany is falling into recession.
In the US, September consumer spending data will have been included in yesterday’s GDP release. That saw a rebound in GDP in Q3 after falls in Q1 and Q2, partly driven by a pickup in consumption, which should be confirmed in today’s numbers. The report will also contain the Fed’s preferred inflation measure, the PCE deflator, which is expected to show a rise in both annual headline and core inflation in September compared to August. That will likely reinforce expectations of another 75 basis points rise in US interest rates at next week’s Federal Reserve policy update. Also, of particular interest to the Fed will be the Q3 employment cost index, which is expected to show wage pressures remaining a concern.
Global bond yields continued to fall yesterday with UK yields again down particularly sharply. However, US Treasury yields have risen overnight. Sterling has slipped against both the euro and the US dollar overnight but is still up on the week.
Risk sentiment continued to ebb and flow as global equity markets were weighed down by disappointing earnings from key tech companies but supported by the prospect of eventual policy ‘pivots’ from central banks around the world. Following the BoC raising its policy rate by ‘just’ 50bps (vs. expectations of 75bps), RBNZ Governor Orr suggested in a speech overnight that the RBNZ was “well down the path of where they needed to be”, raising questions as to whether the RBNZ may be next to slow its rate of tightening.
Having been reappointed Chancellor by new UK Prime Minister Rishi Sunak, Jeremy Hunt yesterday announced that the keenly awaited fiscal statement and update from the Office for Budgetary Responsibility, previously due 31 October, had been re-scheduled to 17 November and “upgraded to a full autumn statement”.
In his first speech as Prime Minister earlier this week, Sunak suggested he would place economic stability at the heart of his agenda. The autumn statement will be the first test of this. He and the Chancellor now have three weeks to finalise the fiscal policy course to be pursued to better balance the UK’s finances over the medium term.
Away from UK political and economic developments, the focus today will be on the ECB’s policy update. Despite clear signs of a slowdown in the Eurozone economy – evident in our latest UK Sector Tracker, here – a further 75bp increase in all policy interest rates would appear likely. Most economists anticipate, and financial markets are almost ‘fully priced’ for, such an outcome. This would leave the deposit rate at 1.50% (from 0.75%), refinancing rate at 2% (from 1.25%) and marginal lending rate at 2.25% (from 1.50%). By further tightening policy, the Governing Council would be showing its commitment to getting inflation down and reducing the risk of ‘second-round effects’ taking hold.
ECB President Lagarde’s press conference will also be carefully listened to. She may be posed questions on the possible timing of quantitative tightening and her expectations of what the terminal rate of interest might be.
Elsewhere, the latest US GDP report is due to be released. Having contracted in Q1 and Q2, the US economy is expected to have expanded by 2.0% (annualised) in Q3, despite the slowdown in the housing market. Output will likely be helped by stronger consumer spending (supported by lower oil prices), positive business investment and a positive contribution from net trade.
UK government bond yields continued to trend lower yesterday. Two-year gilt yields fell below 3.30%, a level not seen since before the BoE meeting in September, in which the MPC raised Bank rate by 50bps. Fuelled by speculation of a Fed ‘pivot’ and amidst a broad US dollar sell off, the EUR rose above parity for the first time since 20 September. The GBP also rallied, settling above 1.16, its highest level in over six weeks.
Asian equity markets are generally higher this morning following on from a decent gain in the US market yesterday. Reports suggest that markets were boosted by hopes that the US central bank will soon start to slow the pace of its interest rate increases. However, disappointing earnings reports from several tech companies seem to be having a negative impact on US futures prices. In Australia Q3 annual CPI inflation rose by 7.3%y/y, higher than expected and up from 6.1%y/y in Q2.
With the identity of the next UK Prime Minister now decided financial market attention will turn to other matters. However, today seems set to be a very quiet day for UK economic news. There are no UK economic data releases of note and no immediate news on policy is expected. Markets are keenly awaiting next Monday’s statement on fiscal policy, if it still goes ahead as planned, and next Thursday’s Bank of England monetary policy update. But BoE policymakers are now in their pre-announcement silent period, so we are unlikely to learn anything more about the Bank’s plans today. Moreover, while rumours may circulate about fiscal policy it seems unlikely that we will learn anything of substance today.
The probable lack of domestic news means that the focus today may be on international developments. Here too markets are really in wait-and-see mode ahead of the policy updates from the European Central Bank tomorrow and the US Federal Reserve next week. However, ahead of that today’s announcement from the Bank of Canada will provide further evidence on the international interest rate outlook.
The BoC has raised interest rates by 300 basis points in total this year including hikes of 100bp and 75bp respectively at the last two meetings. There has been some talk that the BoC may slow the pace of hikes this time and an increase of ‘only’ 50bp seem to be a possibility, although markets are still expecting another 75bp move. Equally important will be what the BoC signals for its future intentions as the size of any further moves is expected to be much smaller. However, as is the case with most central banks around the world the BoC faces a difficult balancing act between growing downside growth risks and elevated inflationary pressures.
Today’s data calendar seems unlikely to have much impact on markets. European money supply data is expected to show annual growth of 5.9% in September. That’s down from 12% in early 2021 but the deceleration during 2022 has so far been more modest and seems unlikely to deter the ECB from raising interest rates. In the US, September new home sales are forecast to fall, while the advanced trade deficit may be little changed from August.
UK gilt yields dropped further yesterday, while bond yields in other international markets also declined. Ten-year gilt yields are down by more than 40bp from last Friday’s close, while US Treasury yields are about 15bp lower. In currency markets sterling is close to 1.15 against a generally weaker US dollar and is also up more modestly against the euro.
Asian equity market performance is mixed this morning as the recent rally in equity prices shows signs of petering out. In Japan PM Kishida announced a new economy minister and promised a new stimulus package for the economy by month end. Meanwhile, the chief economist of New Zealand’s central bank said that there were signs that inflationary pressures are easing.
Following weaker-than-forecast outturns for yesterday’s October PMI updates today’s UK and Eurozone data are likely to provide further confirmation that economic activity was under pressure in both heading into Q4. That will add to the uncertainty about how much further interest rates can rise even given ongoing evidence of high inflation and may reinforce concerns that central banks will tighten monetary policy by too much.
In the UK, the PMI data suggested that both manufacturing and services activity declined in October. Today’s CBI industrial survey will provide another insight into the factory sector and it is expected to show orders under pressure as both domestic and overseas demand weakens. There are also likely to be further signs that cost pressures are easing although the readings on these are still likely to be elevated by historic standards. Today’s update will also include the quarterly figures on businesses’ investment intentions that will be closely watched to see the extent that these are holding up given current uncertainties.
The Eurozone PMIs also showed both manufacturing and services output faltering and it seems that activity in Germany is coming under particular pressure as energy and other price pressures bite. Today’s October German IFO survey is forecast to provide a similar message with the reading for both current conditions and expectations forecast to be down again.
In the US, the Conference Board’s consumer confidence reading is expected to have fallen slightly from September’s five month high. The pickup over the past few months seems to have been fuelled by the drop in US petrol prices but US consumers need to weigh that against the still high levels of inflation as a whole and the likelihood of further interest rate hikes from the Federal Reserve.
UK gilt yields fell sharply yesterday in anticipation of Rishi Sunak becoming Prime Minister and continued to decline after his election as Conservative Party leader was confirmed. Bond yields elsewhere were more stable as markets wait for important monetary policy updates over the next couple of weeks. In currency markets sterling briefly rallied but that proved short lived, and the pound remains close to the bottom of recent ranges versus the euro and US dollar.
Market volatility remained at the start of the week, with Asian equities mixed overnight. Despite the Chinese economy growing faster than expected at +3.9%q/q in the third quarter, Chinese equities were trading lower following President Xi’s defence of the country’s zero Covid policy and his taking further steps to centralise control ahead of his third 10-year term.
The political situation in the UK has been a key focal point for financial markets of late and today is likely to be no exception. Conservative party MPs are expected to vote on the two leadership candidates this afternoon, Rishi Sunak and Penny Mordaunt. If both have the backing of 100 MPs, the threshold set to secure their place on the ballot, Conservative MPs will hold an indicative vote before the party membership have the final say for the second time in as many months. However, if one candidate withdraws, who is the Conservative Party leader and so new PM will be known today. There has been some speculation that the suggested planned fiscal budget on the 31st of October may be delayed if there is indeed a contested vote.
Ahead today, October ‘flash’ PMIs will be the data highlight at the start of week. They are expected to reaffirm challenging economic conditions at the start of Q4 as businesses face weakening demand and increasing economic uncertainty. We expect the UK manufacturing PMI to fall to 48.0, below the 50 no-growth threshold, and the services PMI to signal near stagnation at 50.3. In the US, markets expect manufacturing to hold up better (51.0) than services (49.6).
For the Eurozone, we forecast the manufacturing PMI to drop to 47.5 and the services PMI to fall to 48.0. These outturns would support consensus forecasts for negative Q4 GDP growth. However, the loss of economic momentum is unlikely to deter the ECB at its next policy update on Thursday as rate-setters’ focus remains on containing inflation and preventing second round effects. On Thursday, the ECB are expected increase all its interest rates by 75bp for a second successive policy meeting, taking their deposit rate to 1.5% (from 0.75%).
GBP rose overnight following Boris Johnson’s decision to not bid for the Conservative Party Leadership. Elsewhere, the Japanese yen has been turbulent, trading between 145.5 and 149.5 against the US dollar, amid the possibility of further intervention of the currency by the Bank of Japan.
Asian equity markets were under selling pressure following the negative end to the US trading session. US Treasury yields rose further, with Fed officials’ comments remaining hawkish. Philadelphia Fed President Harker said that policy rates will rise well above 4% by the end of 2022, while Fed Governor Cook said rates are likely to remain restrictive for some time.
UK economic data released earlier today revealed a sharper-than-expected drop in September retail sales of 1.4%m/m on the back of a 1.7%m/m decline in August. Retail sales were dragged lower by rising prices as well as the impact of the extra bank holiday for the Queen’s state funeral. GfK Consumer Confidence, however, surprisingly rose by 2 points, but remained weak at -47 in October. The climate for major purchases index slipped to -41 in October, from -38 in September. Finally, public sector net borrowing was larger than expected in September at £20.0bn, up from £17.8bn last September.
UK focus is squarely on domestic politics after PM Truss’s resignation yesterday. A new party leader and PM will be installed by next Friday at the latest in a fast-tracked process. Under new rules, candidates need the backing of at least¬ 100/357 Conservative MPs on Monday. That suggests there will be no more than three candidates. It is possible only one candidate gets 100 nominations in which case that person will automatically become leader. A new procedure in the situation of two remaining candidates proposes that Conservative MPs will provide an ‘indicative vote’ of their preference before the Conservative membership (~172K) choose the winner (a bit like the BBC’s Strictly Come Dancing programme?).
Elsewhere, there are only second-tier economic data releases today. Canadian August retail sales and October Eurozone consumer confidence later today will attract limited attention. A new low in Eurozone consumer confidence is expected. Despite that, ECB policymakers remain focused on bringing inflation down and are expected to raise interest rates next week, potentially by 75bp for a second successive meeting.
The pound weakened in reaction to the UK retail sales data as well as domestic political uncertainty, falling below $1.12 and also weakening against the euro. UK 30-year gilt yields fell again yesterday, but whoever becomes the next PM, markets will look for reassurance that Chancellor Hunt’s fiscal plan on 31 October remains on track.
Global financial markets remained volatile and Asian equity markets were under pressure overnight despite some recent positive corporate earnings announcements. Dampening risk sentiment were US Treasury yields reaching new multi-year highs on expectations of further Fed policy tightening. Remarks from the US central bank for the interest rate outlook, especially in the near term, remained hawkish.
There are no major UK data releases today, but BoE deputy governor Ben Broadbent will give a speech this morning on “the inflationary consequences of real shocks”. The gilt market has so far remained relatively calm after the reversal of most of the government’s mini-budget by the new Chancellor, while investors await details of further tax and spending measures on 31 October. The BoE has confirmed it will start active gilt sales (QT) on 1 November, focused initially on short- and medium-term maturities. The Bank will announce its interest rate decision on 3 November and is currently expected by markets to raise them by at least 75bp to 3%.
There will be UK data releases early Friday, including the GfK consumer confidence measure and retail sales. The latest monthly public finance figures will also be released early tomorrow ahead of the Chancellor’s 31 October fiscal plan. Consumer confidence fell to an all-time low in September despite the announcement of the energy subsidy. Given the news over the past few weeks, particularly the concerns expressed about rising mortgage rates, it would be no surprise if it has fallen again in October. We forecast a new low of -52 from -49 in September.
Despite the ongoing weakness in sentiment, we think it is probable that UK retail sales may have risen modestly by 0.4%m/m in September after a big fall in August. Nevertheless, the underlying trend for sales volumes remains weak, given various headwinds including from rising prices. There is additional uncertainty to the data and a possible downside risk to our forecast with the potential impact of the extra bank holiday for the Queen’s funeral.
The US data focus today includes the regional Philadelphia Fed manufacturing survey, existing home sales and the usual weekly jobless claims on a Thursday. The data are unlikely to change the Fed’s focus on getting inflation down, with recent Fed comments remaining hawkish. Several Fed speakers are scheduled today, including Philadelphia Fed President Harker discussing the economic outlook.
UK gilt yields continued to fall yesterday, with the 30-year yield closing at 3.99%, below 4% for the first time in more than two weeks. The 10-year gilt yield was down 7bp at 3.88%. Since the UK close, however, US Treasury yields have climbed. In FX, the pound has fallen towards $1.12, although it appears more to do with dollar strength than the domestic political situation.
