Equity market indices are mostly higher this morning, following stronger performances in the US and Europe yesterday. Investors continued to assess the Covid situation in China and the outlook for global monetary policy, including the possibility of smaller hikes going forward. That said, the Reserve Bank of New Zealand overnight raised interest rates by 75bp to 4.25%, which was in line with expectations. It now expects interest rates to peak higher at 5.5% after revising its inflation outlook and despite a brief recession forecast for next year.
Today’s main data focus is the November flash PMI reports, particularly those for the UK and the Eurozone. We expect the UK manufacturing and services PMIs to fall to 45.6 (from 46.2) and 48.0 (from 48.8), respectively. It would be a fourth month of contraction for the overall index for manufacturing and a second consecutive month of contraction in services output. The deceleration in overall activity is consistent with Q4 GDP contraction which would be a second successive quarterly decline, signifying a technical recession.
Also in the UK, the Supreme Court is due to rule on whether the Scottish Parliament can hold a second independence referendum without the consent of Westminster. Meanwhile, following last week’s Autumn Statement, Chancellor Jeremy Hunt is due to appear before the Treasury Select Committee at 3pm. Bank of England Chief Economist Huw Pill is also scheduled to speak.
In the Eurozone, the PMI survey outcome is also forecast to remain in contraction territory, weighed down by weak demand and a challenging economic outlook. It is expected to be consistent with a fall in quarterly GDP (in Q4) for the first time since early 2021. We have pencilled in a tenth straight decline in the headline manufacturing index to 46.0 but little change in the stabilisation reading at 48.8.
The US calendar is busy today ahead of tomorrow’s Thanksgiving holiday. US PMIs will be released, but they tend to receive less attention than the ISM surveys due early next month. There has been a notable recent difference between the services PMI and the more upbeat ISM equivalent. Today’s composite PMI is expected to remain below the key 50 level. Durable goods orders, new home sales and the final University of Michigan consumer sentiment survey will also be released.
The main US focus, however, will probably be the published minutes of the Fed’s last monetary policy update on 2 November. The Fed raised interest rates again by 75bp, but the question going forward is whether the hiking pace slows and where interest rates might peak in 2023. After 75bp increases at each of the last four meetings, which brought the Fed funds rate to a 3.75-4.00% range, financial markets expect a smaller increase at the next meeting on 14 December.
Global bond market performance was mixed yesterday as US Treasury yields rose but UK gilt yields slipped back close to their lowest levels since last Thursday’s fiscal statement. In currency markets, sterling was up against the euro but fell modestly against a generally stronger US dollar.
Asian equity market performance is mixed this morning. Chinese indices led the underperformers as concerns about the rising numbers of Covid cases remained a factor. Comments from some US Federal Reserve and European Central Bank policymakers yesterday both indicated support for a slowing of the pace of interest rate increases at their respective December policy updates.
Just released data for October UK public finances showed net borrowing of £12.7bn. That was much lower than forecast but still some way above the borrowing rate for the same month a year ago. Today’s data may lead to some downward revision to borrowing forecasts for the year as a whole but the deteriorating underlying trend still provides support for last week’s fiscal tightening measures.
Senior officials from the Office for Budget Responsibility will testify to a House of Commons Committee this afternoon about last week’s fiscal update. Their comments are unlikely to reveal much that is new. However, it will be interesting to see if they are questioned about why they expect a quicker rebound in economic activity than the Bank of England. They may also be asked about how high the risks are that the new fiscal targets will not be met.
Today’s data calendar is light. Possibly of most interest will be the November consumer confidence update for the Eurozone. It rebounded modestly last month from a multi-year low, but it is unclear whether this month will have seen a further rise. Several central bank policymakers are also scheduled to speak in both the Eurozone and the US.
The OECD will release a new set of economic forecasts today. Those seem likely to show downgrades to economic growth forecasts everywhere, including the UK. Despite that forecasts for inflation will still show price pressures remaining intense near term but falling through next year.
The New Zealand central bank will issue its latest monetary policy update early on Wednesday. A ninth successive interest rate rise is expected and the majority of forecasters are expecting the RBNZ to up the ante with a 75 basis point hike. However, it faces a difficult decision with a tight labour market and recent inflation outturns above expectation pointing to the need to hike aggressively while a faltering housing market argues for caution. The RBNZ is also expected to make changes to its forward guidance by highlighting the likelihood that rates may peak above previously expected levels.
Global bond market performance was mixed yesterday as US Treasury yields rose but UK gilt yields slipped back close to their lowest levels since last Thursday’s fiscal statement. In currency markets, sterling was up against the euro but fell modestly against a generally stronger US dollar.
Equities are mostly trading lower across the Far East amid concerns that China may tighten restrictions following reports of a number of Covid-related deaths across the country. The extent to which global economic activity will slow in response to tighter monetary policy also remains a concern for markets. On Friday, Boston Fed’s Collins reiterated her view that all options for the size of the next interest rate increase in December remain open, including the possibility of another 75bp rise. Over the weekend, however, Atlanta Fed President Bostic said that he favoured slowing the pace of interest rate increases.
It is a holiday-shortened week in the US, with the Thanksgiving holiday on Thursday and an early close for US markets on (Black) Friday which also marks the start of the Christmas shopping season. However, a number of US data releases are crammed into the first part of the week, including the flash PMIs, durable goods orders and new home sales reports and the final reading of the University of Michigan consumer sentiment survey, as markets continue to gauge how much further US policy rates will rise.
After 75bp increases at each of the last four meetings, which brought the Fed funds rate to a 3.75-4.00% range, financial markets expect a smaller increase at the next meeting on 14th December. Recent signs of softer inflation are likely to be welcomed by rate-setters but are not sufficient to prevent further policy tightening. Later today, US Fed rate-setter Mary Daly is due to speak on ‘price stability’ at an event hosted by the Orange County Business Council. In recent comments, Ms Daly ruled out the Fed pausing hiking and suggested that US policy rates could end up in a 4.75 – 5.25% range.
Questions over how far the ECB will raise interest rates also continue to rage, with markets pondering whether it will raise rates again by 75bp at its next policy meeting in December or decides on a smaller half-point increase. One reason for a smaller hike is that the economic downturn appears to be gaining momentum. At the same time, the latest inflation at 10.6% for October is uncomfortably high for policymakers, so another 75bp hike remains a possibility along with plans to reduce the balance sheet. A number of ECB officials are scheduled to speak today, notably Vasle, Holzmann, Simkus and Centeno, and markets will be watching for clues about the next policy move.
There is a lack of key economic data releases today, including in the UK, where the focus is limited to a speech by Bank of England policymaker Cunliffe at the University of Warwick. However, with the focus of the event on DEFi digital currencies, his comments may provide little to no insight into his views on the UK monetary policy outlook.
The risk-off tone has provided support to the US dollar at the start of the week with the Bloomberg dollar index trading 0.5% higher. GBP/USD is modestly lower as a result but continues to trade above 1.18. US bond yields meanwhile are marginally weaker with 10-yr yields below 3.80%.
Asian equity market performance is mixed this morning as markets remain unsure about how further global, and in particular, US monetary policy will be tightened. Comments made by US Federal Reserve policymakers yesterday were hawkish. St Louis Fed President Bullard warned that US interest rates may need to rise above 5%, while Minneapolis Fed President Kashkari in reference to the favourable reaction by markets to lower than expected US inflation said that they “cannot be overly persuaded by one month’s data”.
Just released data for UK retail sales October posted a rise of 0.6%, following large declines in the previous two months. It was the first monthly gain since July and only the second this year. Nevertheless, retail sales were still 6.1% lower than a year ago. Moreover, the fundamental drivers of consumer expenditure remain precarious with spending power being squeezed both by high inflation and rising interest rates. The November reading for the GfK consumer confidence measure, released a little earlier this morning, posted a second consecutive small gain. Nevertheless, it is still close to September’s all-time low.
In the US October existing home sales are likely to provide further evidence of the negative impact of higher interest rates on one of the most rate sensitive sectors. Data released yesterday showed housing construction starts post a fall of 4.2% in October and todays outturn for sales is expected to see a decline of 6%, which would be the 9th consecutive slip. The news earlier this week that retail sales rose sharply in October was an indication that some parts of the economy are still growing, and the consensus expectation is that US GDP will rise in Q4 However, weakness in more interest rate sensitive sectors may be seen by markets as an indication that rates are biting and so may not have much further to rise.
Jonathan Haskel, one of the external members of the Bank of England’s Monetary Policy Committee speaks at a conference this afternoon. As he is scheduled to talk about fiscal policy there will be most interest in whether he has anything to say about yesterday’s UK budget update and whether it had any impact on his thinking about how much further UK interest rates are likely to go up. However, it seems more likely that he will avoid comments on the immediate policy outlook. European Central Bank President Lagarde and US Federal Reserve policymaker Collins are also scheduled to talk at conferences.
UK government bond yields rose yesterday. However, most of the upward move occurred before the UK budget update and so may have been more of a response to international uncertainties. Sterling was down modestly on the day against both the US dollar and euro on Thursday. However, it has rebounded overnight as it holds on to most of this week’s gains particularly versus a generally weaker dollar.
Asian equity markets are mostly lower overnight following the negative close in the US and Europe, while US Treasury yields edged higher. Fed policymakers reaffirmed the likelihood of further increases in US interest rates, especially after yesterday’s stronger-than-expected retail sales report.
Today’s UK Autumn Statement is expected to take place around lunchtime. The fiscal update will come in conjunction with the latest set of economic forecasts from the OBR (Office for Budget Responsibility). As these are being released only a couple of weeks after the BoE’s latest forecasts, there will inevitably be comparisons. The BoE expects GDP to have fallen in late 2022 and continue to do so throughout 2023. It will be interesting to see if the OBR is more optimistic even after it accounts for new tax and spend measures that will be announced today.
A key part of the OBR’s forecast will be by how much it gauges that public finances have deteriorated since its last update in the Spring. A combination of factors, including lower economic growth and higher interest rates, points to a deterioration even after the reversal of most of the measures announced in September’s mini-Budget. The Chancellor’s focus is expected to ensure that his key fiscal rule for debt to fall as a share of GDP in five years’ time is still met and, more broadly, to restore policy credibility. Reports point to tightening in the order of £50-60bn, with just over half accounted for by spending cuts and the rest by tax rises.
On the spending side, reports suggest that state pensions and benefits could be uprated in line with inflation. Savings will need to come from future cuts to departmental budgets. On the revenue side, it is rumoured that the windfall tax on energy companies may be extended as will be the freezing of inheritance and income tax allowances. An additional consideration will be what the Chancellor intends to do about the Energy Price Guarantee which expires at the end of March. Overall, a significant fiscal tightening may help reinforce the BoE’s message that interest rates may rise by less than markets currently expect.
UK GfK consumer confidence and official retail sales will be released early Friday morning. it was a surprise that consumer confidence rose in October to -47. Nevertheless, it remains very close to its all-time low of -49 and we expect it will have dropped back to the low in November. We also forecast a small bounce in October retail sales after a big fall in September, but the underlying position still looks precarious.
Several central bank speakers will draw attention later today. They include the BoE MPC’s Pill (Chief Economist) and Tenreyro, as well as the Fed’s Bullard and the ECB’s Villeroy. Eurozone October CPI inflation figures are expected to confirm preliminary ‘flash’ estimates of a rise to 10.7% in the headline measure. US data include housing data and the Philadelphia Fed manufacturing survey.
The pound is marginally higher overnight against both the US dollar and the euro ahead of the Autumn Statement later today. The 10-year gilt yield closed at 3.15%, the lowest for two months since before the September mini-budget.
Most Asian equity markets are trading lower this morning despite gains in US and European markets yesterday. Markets may have been negatively impacted by geopolitical tensions following reports that missiles from the Russian-Ukrainian conflict had hit Poland. US President Biden said that the missiles were “unlikely” to have been launched from Russia. Meanwhile, former President Trump has confirmed he will run to be Republican candidate for the 2024 US Presidential election.
Just released data showed a higher-than-expected rise in UK annual CPI inflation in October to 11.1% (from 10.1% in September), while ‘core’ inflation was unchanged at 6.5%. A sizeable rise in inflation had generally been expected primarily because the government’s measures to cap utility prices had not fully offset the recent rise in gas market rates. Higher-than-expected producer price gains also pointed to pipeline inflationary pressures remaining elevated. The UK numbers contrast with recent outturns in the US which have shown evidence that inflation is slowing.
Bank of England Governor Bailey and several colleagues from the Monetary Policy Committee will testify to a House of Commons Committee this afternoon about their recent decision to raise interest rates. Markets will be watching for whether they add to their guidance that rates are likely to rise further albeit by less than markets expect. However, the greatest attention is likely to be on tomorrow’s budget update, its impact on the economy, and whether fiscal tightening may reduce the need for further interest rate increases.
US updates for retail sales and industrial production are forecast to have both risen in October. Some of the most interest rate sensitive sectors, notably housing is seeing a clear negative impact from higher interest rates. However, the economy as whole still seems to be growing and the consensus is that GDP will rise again in Q4.
That appears at odds with the view that there will be an early pivot in monetary policy. Nevertheless, lower than expected October producer price data yesterday provided further support to market expectations that US interest rates may be close to a peak. Those expectations had already been boosted by a downward surprise on CPI inflation last week. Several Fed policymakers have warned against reading too much into the data and said that interest rates have further to rise albeit the pace of increases may now slow. Today’s Fed speakers are likely to provide further support to those comments.
Despite US government bond yields falling sharply yesterday after the downward surprise on the PPI, the move has largely reversed. In currency markets, the prospect of a slower pace of monetary tightening added to the downward pressure on the US dollar with GBPUSD briefly moving above 1.20. Meanwhile, against EUR, sterling is broadly flat.
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.
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.
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.
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