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.
