Monetary policy

Fed to hike another 75bps, focus on Powell’s guidance for hints of a slower pace of tightening ahead
Unlike the BoE, there seems little doubt about the size of the latest Fed rate hike to be delivered on Wednesday. The FOMC is widely expected to raise the fed funds rate by 75bps for a fourth successive meeting, which will take the target range to 3.75-4.00%. While some market participants had previously anticipated a possible downwards shift in the pace of tightening, recent further upside surprises to inflation, continued labour market tightness and a relatively firm pace of economic growth in Q3 all point to another hike of 75bps. Nevertheless, our colleagues at Daiwa America anticipated a slight pivot on guidance this week. Chair Powell has noted in the past that the Fed will at some point slow the pace of adjustment, and our colleagues suspect that policymakers will discuss a deceleration to 50 basis points in December and possibly a pause in early 2023. Mr. Powell might provide hints along these lines at his press briefing, although Powell will be mindful not to encourage a significant easing of financial conditions.

BoE expected to raise rates by 75bps amid ongoing concerns about domestically-generated inflation
The BoE’s latest policy announcement on Thursday is expected to see the MPC raise Bank Rate by 75bps to 3.00%. However, with conditions in the Gilt market now stable, sterling firmer than of late, and certain MPC members having cautioned that market pricing of future tightening was probably too aggressive, the risks to that view are skewed to the downside. The size of the rate hike will, in good part, depend on the BoE’s updated economic forecasts. Despite the recent rise in inflation to double-digits and continued evidence of a very tight labour market, the government’s decision to cap the increase in household energy bills between October and April means that the near-term inflation forecast will be significantly lower than projected in August. Moreover, data also suggest the economy contracted in Q3 by more than the BoE previously expected (by as much as 0.5%Q/Q vs the BoE’s forecast of -0.2%Q/Q), and high inflation will likely result in further contractions to come, which should help inflation fall back in due course.

But with the Sunak government having postponed its fiscal update until 17 November, there remains a lack of clarity surrounding the magnitude of further increases in household energy bills from April on, as well as the extent of forthcoming public spending restraint and tax measures that are likely ultimately to result in a tightening of the fiscal stance. And it remains to be seen what the BoE will assume in this respect for its projections. Nevertheless, given continued tightness in the labour market we continue to expect the MPC to flag concerns about domestically-generated inflation, justifying the hike of 75bps this week. And the BoE’s updated forecasts will maintain expectations of further hikes to come, albeit perhaps suggesting a terminal rate below the current market-implied rate of 4.75%.

Data

Japanese IP declined in September as autos sector was in reverse, but solid growth in Q3 as supply constraints eased
Japan’s industrial production figures came in on the soft side in September, with the drop in output, of 1.6%M/M, double the consensus forecast. The weakness was driven by a sharp decline in motor vehicles (-12.4%M/M), with production of general machinery down 5%M/M. The fall last month followed strong growth in the previous three months, to leave manufacturing production up almost 10%Y/Y and 6%Q/Q in Q3, the strongest quarterly growth since Q320 as supply constraints eased and suggesting a solid contribution to GDP growth. But with the inventory-shipment ratio jumping to its highest since July 2020, manufacturers were less upbeat about the near-term production outlook forecasting a further drop (0.4%M/M) in October.

Japanese retail sales rise in September, but consumers’ willingness to buy durable goods falls to a record low in October
The value of Japan’s retail sales came in slightly firmer than expected in September, rising by more than 1%M/M for the second successive month, to leave them up 1.2%Q/Q in Q3 and 4.4%Y/Y. Sales of household appliances jumped 14½%M/M, with autos up more than 11%M/M. But the strength in part reflected higher prices. Indeed, when adjusting for prices, retail sales were still down more than 1%Y/Y in September. And if today’s consumer confidence survey is to be believed, spending will remain very weak for the time being. In particular, the headline sentiment index fell 0.9pt to 29.9 in Octoebr, the lowest since January 2021, with the measure for households’ willingness to buy durable goods fall to a fresh record low.

Chinese PMIs disappoint in October signalling contraction in manufacturing and services
The Chinese government official PMIs disappointed at the start of Q4, signalling renewed weakness in manufacturing and services alike with tight Covid restrictions taking their toll. In particular, the manufacturing output index fell 1.9pts in October to 49.6, the lowest since April, amid a further weakening in new orders and a slight lengthening in delivery times. The services activity index fell for the fourth consecutive month and by almost 2pts to 48.7, the first contractionary reading since May, with the new business PMI signalling another sizeable decline (42.8). Overall, the composite PMI fell to 49.0, the lowest since May and more than 2½pts below the Q3 average.

German retail sales beat expectations in September but downwards trend still in play
Consistent with Friday’s stronger-than-expected GDP data, this morning’s German retail turnover figures for September also beat expectations, with real-terms growth of 0.9%M/M contrasting with the consensus forecast of a second successive decline. Nevertheless, while sales volumes in September were up 3.2% from the same month in 2019 before the pandemic, they were almost 7½% below the peak in June 2021. And over Q3 as a whole, they were down 1.1%Q/Q following the drop of 2.7%Q/Q in Q2. Sales in September were also down 0.9%Y/Y in real terms. However, sales were up 9.9%Y/Y in nominal terms, underscoring the major erosion of purchasing power by high inflation.

Euro area flash CPI expected to surge amid higher energy inflation in Italy, while GDP growth expected to remain positive despite likely contraction in Italy
Most attention in the euro area today will be on the flash estimates of October inflation and Q3 GDP. Not least reflecting the surge in Germany and Italy, headline euro area HICP inflation is likely to have jumped 0.9ppt to 10.8%Y/Y. Core inflation will also likely reach a new record high from September’s reading of 4.8%Y/Y. Amid record rates of inflation, momentum in the euro area’s economy looks set to have slowed in the third quarter. But based on Friday’s member state figures we think aggregate growth remained in positive territory in Q3 at about 0.2%Q/Q, down from 0.8%Q/Q in Q2. Looking further ahead, the euro area’s unemployment rate (Thursday) is expected to move sideways at a series low (6.6%), while aggregate producer price inflation (Friday) is likely to remain close to August’s high (43.3%Y/Y). Finally, there are plenty of ECB Governing Council members due to speak publicly, including Chief Economist Lane today and President Lagarde on Thursday and Friday.

UK bank lending data expected to report softer demand amid rising borrowing costs
Data-wise in the UK, today brings the BoE lending numbers, which are likely to show a softening in demand for consumer credit and mortgage loans amid rising borrowing costs. Against this backdrop, the Nationwide house price report (tomorrow) is expected to report a notable easing in the annual rate to an eighteen-month low in October. Meanwhile, the BRC shop price index (Wednesday) will certainly highlight still significant inflationary pressures on the high street. In terms of surveys, the final manufacturing (tomorrow), services (Thursday) and construction PMIs (Friday) will be of note.

US payroll data to report further moderation in the pace of job growth
The week’s US data highlight will be Friday’s labour market report for October. Our colleagues at Daiwa America expect a third successive slowing in the pace of job growth, although their forecast for nonfarm payroll growth of 225k (from 263k in September) is touch above the current BBG consensus (190k). In line with the consensus, however, they anticipate a rise in the unemployment rate of 0.1ppt to a still-low 3.6%. Other US data due this week include the latest JOLTS job data, ISM manufacturing survey and construction spending numbers (tomorrow), the ADP employment report (Wednesday) and Q3 productivity and labour cost figures, and factory orders and full trade report for September (Thursday). Today will be relatively quiet for US data, however, with just the Chicago business barometer due.