UPCOMING EVENTS:
Monday: S&P Global US PMI.
Tuesday: German IFO Survey and US Consumer Confidence.
Wednesday: Australian CPI and BoC Policy Announcement.
Thursday: ECB Policy Announcement and US Q3 GDP Adv.
Friday: BoJ Policy Announcement and US PCE.
The last week was pretty much a mess. Volatility was high and markets were all over the place. The US Dollar gained and lost, even against the yen after the Japanese decided to intervene on Friday after days of continuing yen selling. The intervention came almost exactly one month after the first one.
Last time it offered a great dip buying opportunity as fundamentals didn’t change and the monetary policy divergence remained solid. One month forward to now and the fundamentals are still in place, but this time we are near the FOMC meeting and if the WSJ story is true, looks like Fed officials want to start a less aggressive approach from December onwards as the risk of overtightening is making them uncomfortable.
There’s also a good support in the 145.00 area if one wants to fade the intervention again, otherwise the pair may go to 140.00 if the USD correction intensifies.
Overall, the big picture didn’t change much, inflation is still high, and the core measure keeps on climbing. As per the inflation nowcast from the Cleveland Fed, we may see another hot print in the November CPI report and it’s hard to see the Fed not getting uncomfortable with another hot CPI report. The leading indicators, on the other hand, keep on printing a bleak picture going forward. Last week the NAHB Housing Market Index fell more than expected to 38 from the prior 46 reading. The worst of the recession is yet to come. The NAHB index generally leads unemployment rate by 6-12 months as shown in the picture below.
NAHB Index (inverted) vs. Unemployment Rate
This week the Fed is in blackout period, so we will not hear the same thing again and again from them until November 2nd when we will get the policy announcement and Powell’s press conference. Nevertheless, this week we will get some tier one data and some central bank policy announcements.
Monday: We will get the latest S&P Global PMIs for the US which surprised to the upside the last time. Such blips are common, but the general trend is for further deterioration. Although, this indicator is important, the ISM PMIs are considered the best and most reliable measures and we will need to wait another week to see those. The market may cheer a bad report with USD under pressure or get discouraged if the report surprises to the upside and bid the USD.
Tuesday: German IFO Survey is expected to weaken further as the recession coupled with a more hawkish ECB add to the bleak future. The US Consumer Confidence is expected to weaken a bit although remains high. This indicator is more correlated with the employment situation as opposed to the UMich Survey which is correlated with the financial situation and that explains why they diverged so much. Generally, when the spread between the two indicators becomes very wide a recession has followed as you can see in the chart below.
Chart by Michael McDonough (twitter)
Wednesday: We will see the latest CPI report for Australia. The Q/Q measure is expected to cool to 1.6% from 1.8% but the Y/Y measure is seen picking up to 7.0% from the prior 6.1%. The RBA favoured data, the Trimmed Mean figures, are seen matching the prior for the Q/Q at 1.5% but the Y/Y is expected to rise to 5.6% from 4.9%. The RBA surprised last time with a lower-than-expected hike, which contributed to create a policy divergence between the RBA and RBNZ and resulted in AUD/NZD falling for several pips. A surprisingly hot CPI may make the market to expect the RBA to revert back to a more aggressive stance.
The Bank of Canada is expected to hike by 75 bps in wake of the latest hot Core CPI report and the recent commentary from Governor Macklem saying that if the CAD depreciation against the Dollar persists, they will have to do more work on interest rates. The problem is that even if the BoC hikes more than the Fed, the global recession favours the USD anyway, so for USD/CAD to reverse the general upward trend we need to see the Fed to reverse course, which is not expected for 6 months at very least.
Thursday: As inflation in EZ continues to advance the ECB is seen to hike rates again by 75 bps. ECB members already signalled this move and more to come in the next “several meetings”. The ECB is also expected to begin QT sometime in Q2 2023 (doubt they will be able to do that when things will be much worse by then). The market sees the peak rate in late Q2 at around 3%. It’s been kind of a pattern fading the ECB event with an almost 100% success rate, although some were better than the others in terms of follow through action. This is of course because no matter what the ECB does, the recession will be bad, and the USD is favoured in a global recession. In the chart below you can see the ECB policy decisions and how the EUR/USD pair is trading cleanly in the downward channel.
We will also see the US Adv. Q3 GDP report, which is expected to show a 2% annualised growth after two consecutive negative prints, which triggered a technical recession talk. Generally, GDP isn’t a market mover as it’s a very lagging indicator.
Friday: The BoJ is expected to keep monetary policy unchanged with rates at -0.10% and QQE with Yield Curve Control (YCC) to flexibly target 10yr JGBs at around 0% with 0.25% as the ceiling. Inflation in Japan remains much lower than the other advanced economies and it’s not adding any pressure to the central bank. The BoJ may even get away with its policy as the global recession intensifies and price pressures recede.
US PCE hasn’t been a market mover as the market is focused on the timelier CPI report. The headline PCE Y/Y is expected at 5.8% down from the prior 6.2% and the M/M reading is seen at 0.5%, up from the prior 0.3%. The Core measures are expected at 5.2% for the Y/Y figure, up from the prior 4.9% and the M/M reading is seen at 0.5%, down from the prior 0.6%.
This article was written by Giuseppe Dellamotta.
