Expectations of an imminent BoE rate hike mount

Chris Scicluna
Emily Nicol

US bond yields make new highs Friday as detail counters a disappointing payrolls gain; stocks rally in Japan/Hong Kong today, mixed elsewhere; imminent BoE rate hike now priced after weekend comments
After selling off earlier in the day in anticipation of a robust US employment report, USTs initially rallied on Friday as investors reacted to a disappointing 194k increase in total non-farm payrolls in September. However, that rally proved short-lived, with the yield on the 10Y UST closing at 1.61% – up 4bps from Thursday’s close and a new four-month high. The lift in bond yields weighed modestly on Wall St – the S&P500 closing down 0.1%. The greenback weakened a little on the release of the payrolls data, and failed to recover despite the rebound in bond yields.

The turnaround in the bond market reflected other detail in the employment report that was more upbeat and which still leaves the Fed very much on track to announce the start of the QE taper at the FOMC’s next meeting on 3 November (albeit perhaps with some dissent amongst the ranks). For example, while the uplift in jobs in September was disappointing, growth over the preceding two months was revised up by a sizeable 169k. Moreover, the workweek lengthened by 0.2 hours – indicating stronger growth in production than suggested by the payrolls gain – and average hourly earnings grew at a brisk 0.6%M/M and 4.6%Y/Y. In addition, with the household survey reporting a 526k increase in employment, the U-3 unemployment rate fell by a sharp 0.4ppts to 4.8% (in line with the FOMC’s median projection for Q4) and the broader U-6 jobless rate fell 0.3ppts to 8.5% – the latter now just 1.7ppts above the pre-pandemic low.

While US equity futures have reopened little changed today – on what is likely to be a quiet day given the Columbus Day holiday in the US – the major bourses in the Asian region have made mostly a positive start to the week. This is especially so in Japan and Hong Kong – two markets that have had a rough ride in recent weeks – with the TOPIX advancing 1.8% and the Hang Seng up a similar 1.7%. In Japan, the market reacted positively to weekend comments made by new PM Kishida. Doubtless unimpressed by the sell-off in stocks since he won his party’s leadership – especially with the national election just three weeks away – Kishida indicated on a Fuji TV news programme that his mooted lift in capital gains tax is well down the list of policy issues that he is seeking to tackle. A further weakening of the yen, to its lowest level against the dollar since late 2018, also supported today’s rally. In Hong Kong, the rally was paced by internet retailers, with Ali Baba stock continuing its recent rebound with an advance currently close to 7%. This follows Friday’s news that, following an anti-trust investigation, Beijing had imposed a smaller-than-expected fine on food delivery company Meituan. Elsewhere in Asia, the gains have been much smaller, with Mainland China’s CSI300 and Singapore’s Straits Times up just 0.2%. Markets were closed for holidays in South Korea and Taiwan.

In the Antipodes, with New South Wales beginning to ease restrictions – at least for the unvaccinated – following a more than three-month lockdown, the recent sharp rebound in Aussie bond yields has continued today. Indeed, the 10Y AGCB has lifted about 8bps to 1.72%, widening its spread against its UST counterpart to the most in three months. So while new highs in oil prices and a further rebound in the price of iron ore have lifted energy and materials stocks, the ASX200 has declined 0.3% today. In New Zealand, the yield on the 10Y NZGB increased 5bps to 2.17% – the highest rate since early 2019.

Moving to Europe, Gilts are weaker yet again this morning (10Y yields up almost 5bps so far to above 1.20% for the first time since May 2019) and UK money markets are this morning fully pricing 25bps worth of BoE rate hikes by the end of this year after the weekend saw two MPC members flag concerns about upside risks to inflation. Indeed, after Chief Economist Pill last week flagged increased upside risks to the inflation outlook, in a newspaper interview on Saturday, BoE Governor Bailey appeared to start laying the groundwork for imminent tightening, warning of the need to act to prevent above-target inflation becoming permanently embedded. And while the MPC had recently flagged greater uncertainties about the outlook for the labour market – not least given the conclusion of the government job support schemes last month – Bailey also thought that a pickup in unemployment over the near term was now unlikely. Meanwhile, external MPC member Saunders – who already voted last month to bring the BoE’s net asset purchases to an early conclusion – judged that investors were right to have brought forward their expectations on rate hikes. So, while Bailey also acknowledged that the economic recovery from the pandemic still had some distance to being fully realized, and there remain downside risks to growth over the near term which might cause the majority to hold back for a month, there is certainly a significant chance of a 15bps hike in Bank Rate (to 0.25%) at next month’s MPC meeting, when the BoE will update its economic forecasts. And if that hike is not forthcoming, a clear signal of the likelihood of a hike before year-end might now seem more likely than not. Of course, speeches by other MPC members (which this week will come from Deputy Governor Cunliffe and the up-to-now dovish externals Tenreyro and Mann) will continue to be closely monitored.

A relatively quiet week ahead in Japan: machinery orders and Reuters Tankan perhaps of greatest interest
A relatively quiet week for economic data in Japan kicked off today with the BoJ releasing its quarterly Opinion Survey for Q3, capturing responses from just over 2,200 adult individuals. The survey found that on balance respondents remained pessimistic about the outlook for economic conditions one year ahead. Regarding the outlook for prices, almost 60% of respondents expected a slight increase in prices over the coming year – similar to the previous survey – and just over 8% of respondents expected a significant increase. Almost 54% of respondents had no knowledge at all of the Bank’s 2%Y/Y inflation target and just over 46% had never heard that the BoJ had been implementing aggressive easing measures in order to hit that target.

Looking ahead, tomorrow will bring the release of the BoJ’s goods PPI and bank lending figures for September, with the former likely revealing continued pressure amidst rising energy prices, a weaker yen and ongoing supply bottlenecks. While most domestic indicators for August have been very soft due to the spike in virus cases during the month, Wednesday’s core machine orders report may show greater resilience as firms invest for better times ahead. That day will also see the release of the Reuters Tankan for October, which at the very least should reveal an improvement in the forecast indices given the sharp decline in virus cases over the past month. Thursday will bring the release of the final IP report for August, which will likely more-or-less confirm a disappointing 3.2%M/M decline in output in large part due to a virus- and bottleneck-driven slump in production in the auto sector. Similarly, Friday’s Tertiary Industry Activity Index will likely confirm that August was a bad month for the service sector, with activity weighed down by record virus cases and restrictions across much of the country.

Credit, trade and inflation data ahead in China this week
While the PBoC’s money and credit figures for September are due any day, the first scheduled economic report in China this week is Wednesday’s international trade data for September. After far exceeding consensus expectations last month, Bloomberg’s survey indicates that the median analyst expects growth in exports to slow to a still very strong 21.7%Y/Y from 25.6%Y/Y previously (measured in dollar terms), with PMI data continuing to indicate that supply bottlenecks and power shortages are providing some constraints on growth in manufacturing. So while growth in imports is also expected to have slowed to 20.7%Y/Y from 33.1%Y/Y previously, China’s trade surplus is forecast to have narrowed to a four-month low of $46.6bn. On Thursday, attention will turn to inflation with China releasing its CPI and PPI reports for September. Consistent with the previous trend, Bloomberg’s survey indicates that analysts expect inflation to have remained very subdued at the CPI level (indeed steady at 0.8%Y/Y). However, driven by rising commodity prices and supply bottlenecks, PPI inflation is forecast to have increased to a fresh 13-year high of 10.5%Y/Y, in the process placing pressure on downstream firms’ profits.

IP data ahead in Italy today; sentiment, labour market and final September inflation readings ahead in the euro area later in the week
This week’s euro area calendar kicks off today with the release of IP figures from Italy, which are expected to have weakened in August (albeit nowhere near as much as last week’s pull-back in German production). Given subdued output and supply bottlenecks, euro area goods trade figures (due Friday) are likely to suggest that exports weakened in August after adjusting for price changes. And with production in the autos sector particularly impacted by supply shortages, euro area car registration figures for September (Friday) are likely to confirm ongoing weakness at the end of the third quarter too. Indeed, based on the national figures from the four largest member states, car registrations fell 25%Y/Y. Sentiment indicators due in the first half of the week include the German ZEW survey for October and French BoF survey for September, of which the latter will provide an update on the Bank's forecast for Q3 GDP growth and the estimated pandemic-related shortfall in the level of output at the end of September. Meanwhile, final inflation numbers from Germany, Spain and France (due Wednesday, Thursday and Friday respectively) are expected to confirm that headline inflation jumped in September as energy prices shifted notably higher. And in the context of the inflation outlook, the euro area's latest labour force survey (Thursday) will provide an update on labour market slack in Q2. In terms of policy, today ECB Chief Economist Lane will give opening remarks at an ECB conference on "Monetary Policy: Bridging science and practice" while several other Governing Council members are due to speak publicly today and throughout the rest of the week.

As expectations of an imminent BoE rate hike mount, labour market and GDP statistics the focus in the UK this week alongside more BoE-speak
With an imminent BoE rate hike now priced, this week's UK data calendar will be closely watched, and it gets underway tomorrow with the ONS's labour market statistics. Having returned back above the pre-pandemic level in August, the number of payrolled employees is expected to have risen further in September before the government's Job Retention Scheme came to an end. The number of job vacancies is likely to have risen to a new record high too. And headline wage growth (which slowed modestly to 6.8%3M/Y excluding bonuses previously) will have remained elevated, even if it continues to moderate. Indeed, the ONS previously judged underlying earnings growth to be between 3.6-5.1% in the three months to July, with the upper end stronger than the range ahead of the pandemic. Of equal importance will be Wednesday's release of August GDP numbers, alongside the monthly output components. Having moved broadly sideways at the start of the third quarter, GDP is expected to have been boosted by a pickup in services activity as hospitality was supported by "staycations". Manufacturing and construction output, however, seem likely to have been constrained by persistent supply bottlenecks, but the expected GDP growth of about 0.5%M/M would make further inroads into spare capacity. The latest goods trade figures for August will also be published on Wednesday. Other releases include the BRC retail sales monitor (tomorrow) and the RICS house price survey for October – the first since the conclusion of the stamp duty holiday – as well as the BoE's latest quarterly credit conditions survey (Thursday).

Following the weekend’s hawkish noises from BoE Governor Bailey and external MPC member Saunders, commentary from the Bank will remain closely scrutinised. A pre-recorded speech from Deputy Governor Cunliffe is due on Wednesday followed by speeches from (up to now dovish) external members Tenreyro and Mann on Thursday, with the latter's titled "Coping with the legacy of the Covid-19 crisis".

US bond market closed for Columbus Day today; inflation and retail sales figures the focus over the remainder of the week
It should will be a slow start to the week in the US the bond market closed today for the Columbus Day holiday (the NYSE remains open). Over the remainder of the week, with fiscal policy matters on the back burner for now, attention will be firmly on the latest data releases. The data flow begins tomorrow with the JOLTS report for August casting further light on labour market dynamics and the latest NFIB survey proving an update on sentiment amongst small businesses. However, investors will doubtless already be looking through that data to Wednesday’s CPI report for September. Daiwa America’s Mike Moran expects the core CPI to have increased 0.2%M/M – an outcome that would likely see annual inflation tick up to 4.1%Y/Y – with upward pressure on the prices of many core items is likely to be evident, but discounting on virus-sensitive services likely to limit the advance. He expects higher food and energy prices to drive a slightly larger 0.3%M/M lift in the headline index, which should nonetheless leave annual inflation steady at 5.3%Y/Y. Wednesday will also bring the release of the minutes from last month’s FOMC meeting, while there are also a number of Fed speeches scattered through the week.

The following day will bring the release of the PPI for September, with Mike expecting still chunky 0.6%M/M increases in the both the headline and core indexes amidst the impact of ongoing supply shortages. On Friday attention with turn mostly to the household sector, with the release of both the retail sales report for September and the preliminary findings of the University of Michigan’s survey for October. Regarding the former, Mike expects a decline in auto sales to result in a 0.4%M/M decline in total spending. With outlays for other goods already well above the pre-pandemic trend, he expects core spending to have been little changed, especially with virus concerns likely halting a six-month string of gains at restaurants and bars. Meanwhile, he anticipates only a modest increase in consumer sentiment in October, with an improving labour market likely partially offset by the spread of new virus cases and the elevated level of inflation. Friday will also bring the release of the New York Fed’s manufacturing survey for October, import price data for September and business inventories for August.

Sentiment surveys and the labour market the focus in Australia this week
It has been a quiet start to the week in Australia with no economic data of note today. Looking ahead, tomorrow the latest NAB Business Survey – which all things considered has remained remarkably robust through the state lockdowns – may signal a further recovery in business conditions in September as firms looked forward to the easing of pandemic restrictions that has now begun in New South Wales and will likely follow in Victoria in a matter of weeks. The Westpac Consumer Sentiment Index for October will follow on Wednesday, and that should also improve a little if the recent creep up in the weekly ANZ-Roy Morgan consumer confidence index is any guide. On Thursday, attention will turn to the labour market, with the ABS releasing the Labour Force Survey for September. According to Bloomberg’s survey, following a 146k decline in August, the median analyst expects a further 110k decline in employment in September, but unsurprisingly the range of estimates is very wide. Following a surprise decline last month as labour force participation fell more than expected, the median analyst expects the unemployment rate to increase 0.3ppts to 4.8% – an outcome that would still be lower than prior to the initial virus outbreak in New South Wales. As far as the RBA is concerned, the only diary entry this week is an online speech being given on Thursday by Deputy Governor Debelle on the topic “Climate Risks and the Australian Financial System”.

Consumer spending, housing and business sentiment the focus in New Zealand this week
This week’s relatively light Kiwi economic diary kicks off tomorrow with the release of the Statistics New Zealand’s monthly indicators of retail spending. This indicator reported a near 20%M/M slump in spending in August after the country was plunged into a hard lockdown over the second half of the month. With restrictions having since eased to varying degrees across the country, the indicator should report a rebound in September but spending is likely to have remain far below that reported in July. On Wednesday, the preliminary results of the ANZ’s Business Outlook survey for October may also strengthen slightly as firms look forward with hope to a further easing of restrictions, conditional on developments in virus cases and vaccinations. Similarly, after plunging 22.1pts to a 16-month low of just 40.1 in August, at least a partial rebound in the manufacturing PMI seems likely to be reported on Friday. By contrast, the REINZ housing report for September – likely to be released at some point during the week – will probably continue to be weighed down by the impact of restrictions on spring house-hunting activity. 

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