- All eyes on Fed, but busy day for data has UK GDP and activity indicators, Japan Q4 Tankan, South Korea Unemployment, South Africa CPI and NZ Current Account to digest; Eurozone Industrial Production, US PPI and Brazil rate decision ahead
- UK GDP: breadth of weakness sends very downbeat signal on UK; if persistent in coming months, pressure for rate to grow
- Fed meeting: ‘dot plot’ changes in focus, Fed likely to subtly push back on market rate expectations, emphasize real rates
EVENTS PREVIEW
The FOMC meeting stands front and centre, as this week’s 24 hour central bank policy meeting marathon gets underway, with a busy run of data also on the menu. There are the Japan Q4 Tankan, UK GDP and run of monthly activity and trade data, South Korea’s Unemployment, New Zealand’s Q4 Current Account and South African CPI to digest, while ahead lie Eurozone Industrial Production and US PPI. Brazil’s BCB also meets with a further 50 bps rate cut to 11.75% expected, its fourth cut in the current cycle, and following on from yesterday’s drop in IPCA inflation (4.68% y/y) back to the BCB’s target range, after a mostly adverse base effect driven uptick in the prior two months.
There is also the watered-down COP28 agreement, and German coalition compromise on the 2024 Budget following the constitutional court shock to digest, and oil markets will be watching the weekly EIA inventories very closely, after tumbling again yesterday on news of a sharp surge in Russian Black Sea oil exports in the latest week following storm disruption, which again questions Russia’s commitment to the OPEC+ output cuts, as well as API reporting a weekly 1.4 mln bbls in US Crude inventories. Japan’s Q4 Tankan was a good deal better than expected, with current DIs beating expectations, with the improvement in the Small Manufacturing and Services DI perhaps the most notable aspect, as these have been negative since early 2019.
** U.K. – October GDP and activity data **
PM Sunak may have won the first vote on the Rwanda immigration bill yesterday, though he will face further challenges to this legislation down the line, but this morning’s monthly GDP and other monthly activity indicators make for grim reading. The headline weakness in GDP (-0.3% m/m vs. forecast unchanged) was very broad-based, with Industrial Production down 0.8% m/m, Manufacturing Output -1.1% m/m, Index of Services -0.2% m/m and Construction Output -0.5% m/m, and the Tarde deficit widening to £-17.03 Bln. If this trend persists through the coming months, even if inflation only goes down modestly, then the pressure on the BoE to cut rates sometime in H1 2024 will only grow.
** U.S.A. – FOMC meeting, November PPI **
Ahead of the FOMC rate decision, November PPI is expected to ease modestly in y/y terms on both headline and core to 1.0% and 2.2%, with energy prices restraining headline, while core continues to suggest precious little in the way of pipeline pressures. Barring a very large PPI surprise, markets will be focussing on the Fed, and in the first instance, all eyes be on the dot plot, with the consensus looking for a shift down for end 2024 Fed Funds from 5.125% to 4.875% (markets priced for 4.25% – see table), though some expect no change and others look for 4.625%, while the end 2025 and 2026 projections are seen at 3.6% (vs. Sept 3.9%) and 2.9% (unchanged) respectively. The Summary of Economic Projections will also require particular attention on PCE deflator forecasts which, in September, anticipated 2024 to 2026 headline at 2.5%, 2.2% and 2.0%, and core at 2.6%, 2.3% and 2.0%. The point being that if the Fed wants to argue that rate cuts next year and thereafter, would still fit with a ‘sufficiently restrictive’ and hawkish narrative, then the spread between median Fed Funds rate and PCE Deflator forecasts will need to stay close to 2.0%, i.e. implying no loosening in ‘real’ rates, but also wanting to avoid a tightening in ‘real’ terms as inflation slips further, and also be a push back on current market rate expectations. They will need to tweak the statement, given that November’s: “Recent indicators suggest that economic activity expanded at a strong pace in the third quarter” has been superseded by the slowdown evident in Q4. Inflation data has eased a little further in core terms, but remains rather sticky at 4.0% (as was evident in yesterday’s data), while headline has bobbled above 3.0% since June – see chart; and Friday’s labour data were on balance stronger than expected, and not indicative of a sharper slowdown in labour demand, which would suggest that they can stick with “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low.
Inflation remains elevated”. Given the sharp fall in yields and easing in overall financial conditions since November, there will likely be a tweak to ‘Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain’. Per se, Powell may well stress that the inflation fight has yet not been won, despite the improvement over the year, and that the Unemployment Rate remains low, and the economy continues to expand, albeit at a notably slower pace than Q3’s outlier. He will likely that real long-term rates and overall financial conditions have eased significantly since the previous meeting, and per se require ongoing Fed vigilance, and continuing “to move carefully”. As a side note, it is worth stressing that what is discounted by markets on rates is not a working forecast, it is simply a forward rate, which is far less conditioned by economic forecasts, and far more by liquidity (overall global rather than market depth and positioning), which at the current juncture is very high. The sharp fall in yields over the past month is also testament to how much money has been parked in deposits and T-bills and other short dated defensive instruments, and has been mobilized to some extent on a FOMO basis, but also a logical move to lengthen duration as inflation falls, and the next move in rates in most countries will be lower. The fact that market liquidity (depth) is so poor serves to exaggerate the moves.
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