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.
