Weekly Market Recap (20-24 November)

The PBoC left its
LPR rates unchanged as expected:

• LPR
  1-year 3.45%.
• LPR
  5-year 4.20%.

ECB’s Wunsch (hawk
– voter) gave a clear signal that the ECB is going to hold rates steady in the
next two months, but warned that an easing in financial conditions due to rate
cuts bets could prompt further rate hikes:

• Bets on rate cuts
  risk prompting rate hikes instead.
• Markets are
  optimistic to rule out further rate hikes.
• But rates should
  stay unchanged in December and January.

ECB’s de Cos (dove
– voter) pushed back against rate cuts bets:

• ECB is not expected
  return to forward guidance on monetary policy.
• It is absolutely
  premature to start talking about interest rates cuts.

The US Leading
Economic Index (LEI) posted another decline coming in at -0.8% vs. -0.7%
expected and -0.7% prior. This is the 19^th consecutive monthly
decline.

Fed’s Barkin
(neutral – non voter) repeated that the Fed remains data-dependent and resolute
to keep conditions tighter for longer given the uncertainty around inflation:

• Not a big time to offering
  forward guidance.
• Fed will respond to
  data.
• Overall core
  inflation numbers are coming down nicely, but a lot of that is for goods.
• Business contacts on
  the ground report they are still raising prices faster than before
  pandemic.
• Continue to view
  inflation as a stubborn which feeds the higher for longer approach.
• Skilled trades
  continue to see wage pressures.
• Inflation does seem
  to be settling but the job is not done.

BoE’s Governor Bailey
(neutral – voter) reaffirmed the BoE’s “higher for longer” stance given the
tightness in the labour market and elevated wage growth:

• Far too early to be
  thinking about rate cuts.
• Returning inflation
  to 2% target remains our absolute priority.
• When inflation is
  high, we take no chances.
• The tragic events in
  the Middle East have added upside risk to energy prices.
• Labor market remains
  tight despite softening recently.
• Wage inflation remains elevated.
• We must be alert to
  any second-round effects of higher food and energy prices.
• The evolution of
  food prices will matter for wage growth looking ahead.
• The squeeze on real
  incomes from higher food and energy prices may still be influencing wage
  demands.
• Inflation data for
  October released last week were welcome news, it’s much too early to
  declare victory.
• We must watch for
  further signs of inflation, persistence and that may require interest
  rates to rise again.
• How long a
  restrictive stance will be needed will ultimately depend on what incoming
  data tells us.
• The MPC’s latest
  projections indicate that monetary policy is likely to be restrictive for
  quite some time yet.

ECB’s Villeroy
(neutral – voter) threw forward guidance out of the window and reaffirmed the
ECB’s “wait and see” stance:

• Our reliance on
  forward guidance was excessive, we should be more modest with future
  guidance.
• We should expect more
  bond volatility, renewed increases would be another reason not to hike
  rates.
• We have to
  discontinue our PEPP reinvestments in due time, and possibly earlier then
  the end of 2024.
• On our inflation
  target, I am not fixated on 2% to the nearest decimal place.
• The latest
  developments in Israel and the oil market shouldn’t significantly change
  downward inflation trend.
• We should and can
  avoid recession, a soft-landing path is more likely.
• The question quickly
  shifted from “When will we stop hiking?” to “When will we
  start cutting?”
• See rates plateauing
  for at least the next several meetings and the next few quarters.

RBA’s Governor
Bullock remains optimistic on the labour market side but warns against changes
in inflation expectations:

• Optimistic that the
  gains made in employment can be kept.
• Says inflation is a
  crucial challenge in the next one or two years.
• Says inflation is
  not only about supply issues, gasoline and rent, that there is still
  ongoing and underlying demand.
• If inflation
  expectations adjust higher in response that’s a problem.
• We haven’t had any
  productivity growth in Australia for a number of years.

The RBA released
the Minutes of its November Monetary Policy Meeting, which were more hawkish
than expected:

• Considered case for
  raising rates or holding steady.
• Board saw
  “credible case” that a rate rise was not needed at this meeting.
• But judged case for
  hiking was the stronger one given inflation risks had increased.
• Whether further tightening
  required would depend on data, assessment of risks.
• Saw risk that
  inflation expectations could increase if rates were not raised.
• Important to prevent
  even a modest further increase in inflation expectations.
• Growing mindset
  among businesses that cost increases could be passed on to customers.
• Noted staff
  forecasts for inflation at meeting assumed one or two more rate rises.
• Board noted cash
  rate remained below that in many other countries.
• Rising house prices
  could indicate policy was not especially restrictive.
• Surge in domestic
  population growth made it harder to judge resilience of economy.
• Inflation and
  economy were slowing, geopolitical and global outlook uncertain.
• An escalation in
  tensions in the middle east could be a drag on global growth.

BoE’s Governor
Bailey and other BoE members reaffirmed their commitment to keep monetary
policy tight due to inflation persistence:

• Markets are putting
  too much weight on current data releases.
• Need to be concerned
  about potential inflation persistence.
• Need to cement
  commitment to 2% inflation target (Mann).
• More tightness in
  monetary policy now is important (Mann).
• Speed limit of UK
  economy is low now (Ramsden).
• We are very clear in
  distancing ourselves from market expectations (Ramsden).
• Fall in headline
  inflation is not a good guide on inflation trend (Haskel).
• We are on target to
  get inflation back to 2%.
• Latest inflation
  fall is good news, largely expected.
• There are some signs
  that wage growth is coming off.
• But there is weakening
  in some parts of the labour market.
• Inefficient labour
  market is one upside risk to inflation.
• Approach to monetary
  policy can be characterised as being watchful, responsive.
• Would not rule out
  having to raise the bank rate further in the future.

The Canadian CPI fell
further on all measures, which is a welcome news for the BoC:

• CPI Y/Y 3.1% vs.
  3.2% expected and 3.8% prior.
• CPI M/M 0.1% vs. 0.1%
  expected and -0.1% prior.
• BoC Core Y/Y 2.7% vs.
  2.8% prior.
• BoC Core M/M 0.3% vs.
  -0.1% prior.
• CPI Median 3.6% vs. 3.6%
  expected and 3.9% prior (revised from 3.9%).
• CPI Trimmed-Mean
  3.5% vs. 3.6% expected and 3.7% prior.
• CPI Common 4.2% vs. 4.3%
  expected and 4.4% prior.

ECB’s President Lagarde (neutral – voter) reaffirmed
the ECB’s “wait and see “ approach:

• We have made those
  future decisions conditional on the incoming data meaning that we can act
  if we see rising risks of missing our inflation target.
• The energy and supply
  chain shocks which played a substantial role in last year’s inflation
  surge are now unwinding.
• We expect headline
  inflation to rise again slightly in the coming months.
• Our monetary policy
  is in a phase where we need to be attentive to the different forces
  affecting inflation, but always firmly focused on our mandate.
• We will need to
  remain attentive until we have firm evidence that the conditions are in
  place for inflation to return sustainably to our goal.
• Given the scale of
  our policy adjustment, we can now allow some time for them to unfold.
• This is not the time
  to start declaring victory.
• Our assessment is
  that strong wage growth mainly reflects catch-up effects related to past
  inflation, rather than a self-fulfilling dynamic.
• We need to remain
  focused on bringing inflation back to our target and not rush to premature
  conclusions based on short-term developments.

The Fed released the Minutes of its November FOMC
Monetary Policy Meeting, which didn’t contain anything new:

All Participants:

• Agreed that monetary
  policy should remain restrictive until inflation sustainably moves towards
  the Committee’s objective.
• Judged maintaining
  the federal funds rate at 5¼ to 5½ percent as appropriate.
• Agreed on the
  necessity of reducing the Federal Reserve’s securities holdings.
• Agreed that every
  policy decision should be based on incoming information and its
  implications for the economic outlook and risk balance.

Most Participants:

• Continued to see
  upside risks to inflation, including potential prolonged imbalances in
  aggregate demand and supply.

Many Participants:

• Commented on the
  significant tightening of financial conditions due to higher long-term
  yields.
• Observed the
  contribution of term premiums to the rise in longer-term Treasury yields.
• Noted downside risks
  to economic activity, including larger-than-expected effects of tightening
  financial and credit conditions.

Several Participants:

• Noted potential
  cyber risks and the importance of readiness for such threats.
• Commented on the
  recent decline in the use of the ON RRP facility.
• Emphasized the
  importance of banks being prepared to use Federal Reserve liquidity
  facilities.

Some Participants:

• Noted benefits for
  businesses from improved hiring ability, supply chains, and reduced input
  costs.
• Reported
  difficulties for businesses in passing on cost increases to customers.
• Expressed concern
  over the sustainability of increased labor supply.
• Highlighted
  challenges for small businesses due to tighter financial and credit
  conditions.

A Few Participants:

• Noted nominal wages
  still rising at rates above those consistent with the 2% inflation
  objective.
• Expressed concern
  over the recent pace of increases in labor supply.
• Discussed the
  importance of monitoring Treasury market functioning and hedge fund
  leverage.
• Observed that the
  process of balance sheet runoff could continue even after reducing the
  federal funds rate target range.

RBA’s Governor Bullock delivered some hawkish comments
as she sees demand still outstripping supply which could prompt a “more
substantial” monetary tightening:

• Inflation challenge
  is increasingly driven by homegrown demand.
• ‘More substantial’
  monetary policy tightening is right response to demand-driven inflation.
• Supply-chain
  inflation is easing and has a bit further to run.
• Service costs rising
  strongly as demand outstrips supply.
• RBA liaison with
  firms indicates domestic cost pressures are proving persistent.
• Will take time to
  get inflation back to 2-3% target.
• Board seeking to cool
  demand while keeping employment growing.

The OPEC+ meeting was postponed from the 26^th
to the 30^th of November. Saudi officials have expressed
dissatisfaction with the oil production levels of other member countries. The
kingdom, which has voluntarily reduced its oil output by an additional 1
million barrels per day since July, is currently engaged in challenging negotiations
with other OPEC+ members about their production rates.

The length of the potential delay for the meeting is
still unclear, as no final decision has been made yet. This information comes
from delegates involved in the talks, who have requested anonymity due to the
private nature of the discussions. Crude Oil sold off on the news but erased the losses in the following days.

The US Durable Goods Orders missed expectations across
the board with negative revisions to the prior figures:

• Durable goods -5.4%
  vs. -3.1% expected and 4.0% prior (revised from 4.7%).
• Ex transportation
  0.0% vs. 0.1% expected and 0.2% prior (revised from 0.5%).
• Ex defense -6.7% vs.
  5.0% prior (revised from 5.8%).
• Non-defense capital
  goods ex air -0.1% vs. 0.1% expected and -0.2% (revised from 0.6%).

The US Jobless Claims beat expectations across the
board with Continuing Claims falling for the first time in two months. This
data set covered the NFP survey week:

• Initial Claims 209K
  vs. 226K expected and 233K prior (revised from 231K).
• Continuing Claims
  1840K vs. 1875K expected and 1865K prior (revised from 1862K).

BoC’s Governor Macklem reaffirmed their “wait and see”
approach:

• Canada interest
  rates may now be restrictive enough.
• Excess demand that
  made it too easy to raise prices is now gone.
• Reiterates that if
  high inflation persists, the Bank of Canada is prepared to raise its
  policy rate further.
• The Canadian economy
  is approaching balance, we expect it to remain weak for the next few
  quarters, which means more downward pressure on inflation.
• Inflation in Canada
  is still too high and progress cutting it is slower than we had hoped.
• Expectations for
  near-term inflation have been slow to come down and this is a concern.
• Long-term inflation expectations
  have remained well-anchored.
• The latest CPI
  number was certainly encouraging.
• Good news for
  Canadian citizens.
• Right now, is not
  time to be thinking about cutting rates.
• We do not have to
  wait until inflation is back to 2% before we cut interest rates, but we do
  need to wait until it’s clear that we are on that path to hitting 2%.
• When it comes to
  monetary policy, we will be taking it one meeting at a time.
• If inflation keeps
  coming down, if we see underlying inflationary pressures ease, we probably
  won’t have to raise rates further.

ECB’s Nagel (hawk – voter) reaffirmed that the central
bank has reached its terminal rate and from now they will just keep rates
steady as long as necessary to get to the 2% target:

• Believes the ECB
  is close to a level considered as the terminal rate.
• Uncertain if the
  ECB will implement further rate increases.
• He anticipates
  that the ECB rates will remain stable for some time.
• There is no
  concern that the ECB is moving toward a hard landing.
• Acknowledges the
  existence of some risk factors that could potentially trigger inflation.
• We will get to our
  2% inflation target in the end.
• It is too early to
  talk about rate cuts.
• Rates must stay high to bring inflation
  back to target.
• Still cannot be sure if we have reached a
  peak in rates.
• The goal is in sight in terms of inflation,
  but not yet reached.
• Inflation could still tick up in the coming
  months.
• Does not see a hard landing for Eurozone
  economy.

Thursday was the PMIs day
with the US on holiday for Thanksgiving Day:

• Australia Manufacturing
  PMI 47.7 vs. 48.2 prior.
• Australia Services PMI 46.3 vs. 47.9 prior.
• Eurozone
  Manufacturing PMI 43.8 vs. 43.4 expected and 43.1 prior.
• Eurozone Services
  PMI 48.2 vs. 48.1 expected and 47.8 prior.
• UK Manufacturing PMI
  46.7 vs. 45.0 expected and 44.8 prior.
• UK Services PMI 50.5
  vs. 49.5 expected and 49.5 prior.

The ECB released the
Accounts of its October Monetary Policy Meeting:

• All members agreed to maintain interest rates at current levels.
• Members
  argued in favour of keeping the door open for a possible further rate hike.
• The
  view was held that all three elements of the reaction function were moving in
  the right direction.
• ECB
  should be ready for further rate hikes if necessary.
• It
  could be expected that, based on the current outlook, inflation return to 2%
  target by 2025.
• Members
  agreed to continue applying flexibility in reinvesting redemptions falling due
  via PEPP.
• Discussion of an early termination of PEPP reinvestments currently seen
  as premature.
• Most of the impact of past rate hikes had yet to materialise.
• It
  was generally assumed that the “last mile” of bringing inflation back
  to target was the most difficult.

The New Zealand Retail
Sales beat expectations:

• Retail Sales Q/Q
  0.0% vs. -0.8% expected and -1.8% prior.
• Retail Sales Y/Y -3.4%
  vs. -3.5% prior.
• Retail Sales
  excluding Autos Q/Q 1.0% vs. -1.5% expected and -1.6% prior.

The Japanese CPI missed
expectations across the board:

• CPI Y/Y 3.3% vs. 3.4%
  expected and 3.0% prior.
• Core CPI Y/Y 2.9%
  vs. 3.0% expected and 2.8% prior.
• Core-Core CPI Y/Y
  4.0% vs. 4.1% expected and 4.2% prior.

The Japanese
Manufacturing PMI missed expectations while the Services PMI ticked higher:

• Manufacturing PMI
  48.1 vs. 48.8 expected and 48.7 prior.
• Services PMI 51.7
  vs. 51.6 prior.

BoE’s Pill (neutral –
voter) reaffirmed that the central bank is going to hold rates high amid
elevated inflation:

• We cannot afford to ease off tight monetary policy.
• UK
  monetary policy was in a difficult phase amid “stubbornly high” price
  pressures.
• Had
  to resist temptation to declare victory on inflation battle as October print
  remains high.
• There’s slower growth in activity and employment.
• Key indicators that BoE are focusing on i.e. services inflation, pay
  growth remain at “very elevated levels”.
• The
  challenge is to ensure that there is enough persistence in restrictive monetary
  policy to bring inflation down.

ECB’s Holzmann (hawk –
voter) pushed back against rate cuts expectations as he still sees high
inflationary pressures:

• The chances of
  another rate hike are no smaller than that of rate cuts.
• We still have high
  inflation pressures.
• There are differing
  expectations within the ECB in terms of what can yet happen.
• That is influenced
  to a point by how high inflation is in each country.
• My suggestion on
  PEPP would be to reduce reinvestments step by step starting from March.

ECB’s President Lagarde
(neutral – voter) reaffirmed their “wait and see” stance:

• We have already done
  a lot on rates, can now observe.
• The battle against
  inflation is not over.
• We are not declaring
  victory yet.
• We are seeing
  progress on inflation.

ECB’s de Guindos (neutral
– voter) highlighted the stagnation in the Eurozone economy:

• Euro area economy is
  stagnating in 2nd half of 2023.
• Q4 GDP will likely
  be similar to Q3.
• Risks tilted to the
  downside.
• Current level of rates
  held for long enough will likely tame inflation going forward.

The Canadian Retail Sales
beat expectations:

• Retail Sales
  September 0.6% vs. 0.0% expected and -0.1% prior.
• Retail Sales ex auto
  0.2% vs. -0.2% expected and 0.2% prior (revised from 0.1%).
• Retail Sales ex auto
  and gas -0.3% vs. -0.3% prior.
• October advanced estimate 0.8%.
• Retail Sales Y/Y 2.7%
  vs. 1.7% prior (revised from 1.6%).

The S&P Global US
PMIs were basically in line with expectations with a slight miss in the
Manufacturing PMI and slight beat in the Services PMI:

• Manufacturing PMI
  494. Vs. 49.8 expected and 50.0 prior.
• Services PMI 50.8 vs.
  50.4 expected and 50.6 prior.
• Composite PMI 50.7 vs.
  50.7 prior.

Key line from the report:
“As a result of subdued demand and decreasing backlogs, companies reduced
their workforce for the first time since June 2020, affecting both service
providers and goods producers.”

The
highlights for next week will be:

• Tuesday: Australian
  Retail Sales, US Consumer Confidence.
• Wednesday: Australian
  Monthly CPI, RBNZ Policy Decision, US GPD Q3 2^nd Estimate.
• Thursday: Japan
  Industrial Production and Retail Sales, China PMIs, Switzerland Retail Sales,
  Eurozone CPI and Unemployment Rate, Canada GDP, US Core PCE, US Jobless Claims.
• Friday: Japan
  Jobs data, China Caixin Manufacturing PMI, Switzerland GDP, Canadian Labour
  Market report, Canada Manufacturing PMI, US ISM Manufacturing PMI

That’s all folks. Have a
nice weekend!