QRA, US data and FOMC: The week ahead brings the next round of US high frequency indicators, as well as the latest FOMC meeting (1.6bp priced in, see below table) and the Treasury’s Quarterly Refunding Announcement. This sees the release of ECI, NFP and ISM data, but we doubt these events or what could be a low-key Fed meeting will be sufficient to shift the overall narrative. Indeed, given intense scrutiny across asset markets on US supply, the QRA could prove the most pivotal event on the week.
The question for the data and FOMC may be whether good news is good or bad news for asset prices since the interplay between still strong real side growth in the US and headwinds from additional tightening in financial conditions in the wake of the run-up in long-term yields leaves the outlook particularly murky at present. As numerous FOMC officials including Chairman Powell have stressed, this means the Fed must be patient in assessing developments, so it appears unlikely that the meeting will bring major new wrinkles on the outlook or guidance and could therefore be a non-event for markets.
Bank of Japan tweak or delay?: Halloween starts in Japan with the BoJ meeting on Tuesday October 31. Analyst polls from both Reuters and Bloomberg show strong majorities favouring the BoJ leaving policy settings unchanged, not tweaking Yield Curve Control (YCC), or making changes to asset purchases and forward guidance. In both polls, at least 90% of economists surveyed expect a strict status quo, a tiny fraction look for a lift to 10-year bond yield target, and/or a YCC tweak. By contrast, the split in the possible timing of the BoJ ending negative rate is more even, with 63% polled by Reuters expect the BoJ to end the policy only by the end of 2024. While it has been on a steady ascent from 52% in a September poll and only 41% in August, significant minority still expects negative rates to prevail until 2025 at the earliest.
BoE seen holding: The Bank of England also meet Thursday November 2. Presently there is near unanimity from BBG survey analysts that the bank will hold policy steady, leaving the bank rate at 5.25% (2.7bp priced in, see below table). After pausing at the last meeting, the UK CPI easing path has been mild, but expectations remain high that a sharp slide is due along with the next natural gas reset in the October report. Optimism about tumbling inflation has been backed by many BoE MPC members, including BoE Governor Bailey and Mr Table Mountain himself, Chief Economist Pill.
Oil traded higher in the wake of the renewed geopolitical fears with crude now up about 3% on the session at $85.75.
Yields were less responsive. The 10yr yield stands at 4.8475, near the bottom of the sub 5 bps range on the session. This marks the narrowest range in 10yr on a non-holiday day for more than a year and is a far cry from recent volatility
On Friday the Headline University of Michigan Sentiment index was slightly higher at 63.8 with expectations slipping slightly to 59.3. One-year inflation expectations jumped to 4.2% from 3.8%, rising more than expected. 5-10-year expectations held steady at 3.0% for the final October reading.
The Kansas City Fed Services Index dropped to -1 from 2 in September.
Asia opened on the back foot, adjusting to losses in the US on Friday, but there was a sigh of relief around APAC markets amid signs that tensions in the Middle East are not set to boil over in the immediate term.
It appears Israel’s move forward with the Gaza conflict is coming with a more measured approach than initially pledged. This has led to speculation that the fighting may remain localized, despite rhetoric from Iran. Over the weekend both Iran and the US issued warnings about the potential for the conflict to escalate. Iran indicated that the war could compel global action, while the US expressed an “elevated risk” of spillover, according to National Security Advisor Jake Sullivan.
Latest reports from Israel indicate that instead of launching an extensive ground invasion, the military is taking a cautious, day-by-day approach, considering civilian casualties and the potential spread of the conflict to Hezbollah in the north. Reports from officials suggest that the campaign could range from six weeks to six months.
Notably, the government’s objective in this conflict differs from past clashes with Gaza. Rather than merely weakening Hamas while allowing it to persist, officials aim to dismantle the organization entirely and ensure that Gaza is no longer a source of anti-Israeli violence, according to Bloomberg reports.
This saw WTI fall around 1.5% in Asia, while USTs sold off from the open, pushing US yields higher, while US equity futures bounced after falling for seven of the past eight sessions. USD started out higher but slipped into minor negative territory, gold skidded lower but remained above $2,000/oz.
FX performance against the USD was a mixed bag; AUD and NZD lead the gainers, JPY is broadly neutral, while GBP and EUR have softened slightly. CHF is the worst performer amid firmer risk sentiment.
Speaking over the weekend ECB’s Vujcic indicated that the central bank has concluded its cycle of interest rate hikes, stating, “we have completed the process of raising interest rates for the time being.” Vujcic made these remarks during a television interview on Sunday with Croatian state broadcaster HRT1, citing the current trend of declining inflation and a disinflation process. He also noted that various measures had been taken to mitigate lending, which had contributed to the decrease in lending activity.
Ford delegates approved the deal with UAW, the union said its agreement with Ford includes $8.1 billion in investments in both internal combustion and EV plants, as well as record-breaking raises for workers. The deal must now be ratified by Ford’s 57,000 hourly workers, a process that could take weeks.
The European data calendar kicks of with Swedish GDP and wages (07:00), followed by Spanish CPI (08:00), German GDP and state CPI’s (09:00. From the UK mortgage approval and consumer credit figure are due (09:30), followed by Eurozone consumer confidence (10:00). ECB’s De Guindos is one of the few speakers on the docket (13:00), followed by broader German CPI (13:00).
From the US Dallas Fed manufacturing survey (14:30), and the Treasury quarterly borrowing estimates (19:00)
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