US PPI for final demand rose 0.5% mom in September, above expectation of 0.4% mom. PPI less foods, energy, and trade services increased 0.2% mom, the fourth consecutive advance. PPI goods rose 0.9% mom while PPI services rose 0.3% mom.
For the 12 months period, PPI rose 2.2% yoy, above expectation of 1.6% yoy. That’s the largest annual increase since April’s 2.3% yoy. PPI less foods, energy and trade services was up 2.8% yoy.
ECB Governing Council member Pablo Hernandez de Cos noted that market pricing indicated a clear understanding of the central bank’s communication, finding its intended policy path to be credible.
“They are interpreting well that there might be a need for the current rate to remain in the current (setting) for sufficiently long,” he mentioned”
“They are also expecting that rates will decline, which for me is a kind of a confidence of the market that we will fulfil our mandate,” he added.
However, De Cos voiced concerns about unforeseen challenges that might arise, emphasizing the high level of uncertainty surrounding economic prospects. New shocks could dictate different policy decisions by the ECB.
Offering insight into the economy, de Cos observed a potential dip in the near-term, hinting at a possible negative outcome for the third quarter. Despite this near-term pessimism, he expressed a lack of alarm, reassuring that a recovery is on the horizon for next year, driven by rejuvenating real incomes.
ECB Governing Council member Klaas Knot acknowledged the recent strides the central bank has made towards achieving its inflation target, but he emphasized that there’s still “a long and winding road ahead”. Nevertheless, expressing contentment with the current policy stance, he mentioned, “I do believe that policy at this moment is in a good place.”
Knot did not shy away from underscoring ECB’s readiness to take further action if needed, affirming, “we will remain vigilant and we stand ready to adjust interest rates even more if the disinflation process were to stall.” He emphasized that ECB has a “credible prospect” of achieving its inflation target by 2025.
Highlighting challenges in the short term, Knot pointed out that the eurozone is currently grappling with economic stagnation. While the manufacturing sector is already in a recession, the services sector is also beginning to feel the pressure.
Nevertheless, Knot views this slowdown as “desirable in a way.” Despite the immediate hurdles, Knot remains optimistic about the medium-term outlook, suggesting that growth is poised for a rebound in the foreseeable future.
ECB’s latest Consumer Expectations Survey for August paints a picture of an economy where consumers anticipate higher inflation rates but remain pessimistic about economic growth.
Specifically, the survey indicates that median inflation expectations for the next 12 months have risen from 3.4% to 3.5%. A similar uptrend was observed for the three-year horizon, with expectations inching up from 2.4% to 2.5%.
Household income expectations for the next year showed a slight increase, moving from 1.1% to 1.2%. However, a contrasting sentiment emerged for spending , with expectations slightly decreasing from 3.4% to 3.3%.
In terms of economic growth, the mood appears somewhat bearish. The survey revealed that median expectations for growth over the coming 12 months have declined, shifting from -0.7% to -0.8%.
Fed Governor Michelle Bowman acknowledged in a speech the progress made in curbing inflation. However, she quickly pointed out “inflation remains well above the FOMC’s 2 percent target.”
She highlighted the robust pace of domestic spending and the prevailing tightness in the labor market. These factors indicate that “the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC’s goal.”
Shifting her attention to the broader challenges faced by central banks, she elucidated, “As they have confronted price stability challenges, central banks have also faced new financial stability risks.”
Specifically, she cited concerns related to the substantial fluctuations in interest rates amidst an environment characterized by sustained, heightened inflation.
Moreover, Bowman emphasized the potential risks arising from geopolitical tensions, explaining how they can instigate “greater financial market volatility.” She also underscored the indirect impacts such tensions could have, including influencing economic activity and inflation.
In a speech, RBA Assistant Governor, Chris Kent, indicated that while the effects of previous monetary tightening have not yet been fully realized, “some further tightening ” might be on the horizon to keep inflation in check.
Kent asserted that the policies currently in place are beginning to stymie demand growth, a crucial step towards mitigating inflation.
“The lags of transmission mean that some further effects of rate increases to date are still to be felt through the economy, which will provide further impetus to lower inflation in the period ahead,” he added.
However, with inflation persisting at elevated levels, Kent hinted at the necessity for additional measures. “The Board is paying close attention to economic developments here and overseas, and some further tightening of monetary policy may be required to ensure that inflation, which is still too high, returns to target in a reasonable timeframe.”
San Francisco Fed President Mary Daly noted overnight that the risks of over-tightening versus under-tightening are currently “roughly balanced”.
The tightening of financial conditions, as indicated by surging treasury yields, may influence the extent of Fed’s policy adjustments.
Daly noted, “If that’s tight, maybe the Fed doesn’t need to do as much. That’s why I said, depending on whether it unravels, or whether the momentum in the economy changes, that could be equivalent to another rate hike.”
However, Daly remains watchful, indicating that depending on economic momentum and other variables, “that could be equivalent to another rate hike.”
Beyond domestic considerations, Daly expressed concerns about “geopolitical uncertainty,” noting its potential impact on the US economy.
The repercussions of international events on elements like oil prices and export demand are being closely monitored by the Fed. She encapsulated the Fed’s vigilant stance by stating, “It’s part of a large dashboard of data”
Minneapolis Fed President Neel Kashkari expressed a sense of bewilderment regarding recent surge in 10-year Treasury yields. He noted yesterday, “The 10-year Treasury yield has gone up quite a bit. It’s a little bit perplexing what is driving them to go up as much as they have in recent months.”
He outlined a spectrum of possible explanations, from growing investor optimism about long-term economic strength to expectations of a more aggressive Fed stance on curbing inflation. Additionally, the rise in debt issued by the federal government could be another influencing factor.
“It is that combination of factors that is a little bit puzzling right now,” Kashkari commented, reflecting the multifaceted nature of the economic signals currently at play.
The relationship between inflation and long-term yields was another topic Kashkari addressed. He acknowledged the potential of elevated long-term yields to aid in reining in inflation, saying, “It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down.”
However, he introduced a caveat – if these yields are reflective of changed expectations about the Fed’s actions, a conformity to these anticipations might be necessary to sustain the yields.
“But if those higher long-term yields are higher because their expectations about what we’re going to do has changed, then we might actually need to follow through on their expectations in order to maintain those yields,” he added.
Looking to the immediate future, Kashkari reiterated what he shared last month, suggesting there’s a 60% chance Fed would implement one more rate hike this year.
Atlanta Fed President Raphael Bostic made a clear stance today, expressing confidence in the prevailing policy rate’s ability to bring inflation down to the desired 2% mark. In his words, “I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%.” Contrary to some speculations about further hikes, he stated, “I actually don’t think we need to increase rates anymore.”
Bostic’s comments come at a crucial juncture when the market is closely monitoring the bond market dynamics, especially recent sharp rise in Treasury yields. Responding to queries about the possible impact of rising Treasury yields on the Fed’s policy approach, Bostic highlighted that the present rates are “clearly” on the restrictive side, hinting at a visible slowdown in economic activities. He also hinted at more repercussions from the Fed’s past hikes that might manifest in the near future.
In addition to domestic economic indicators, Bostic also touched upon the geopolitical developments, particularly the recent violent episodes in Israel. Recognizing the potential of such geopolitical events to infuse further uncertainty in the global economic landscape, Bostic underscored the need for the Federal Reserve to remain agile. He emphasized the importance of being nimble and ready to adapt in light of rapidly evolving global scenarios.
Japan’s Nikkei index surged by 2.43% upon reopening after a long weekend, logging the largest single day gain in 11 months. Conventional wisdom might suggest that heightened geopolitical tensions typically dampen investor sentiment. However, the dynamics observed in the Japanese market unfold a contrasting narrative.
The ascendancy in Nikkei is attributed, in part, to significant gains witnessed in the oil sector. Oil explorer Inpex saw an impressive 8.6% spike, while Japan Petroleum Exploration soared by 10.7%. These gains align with the rally in oil prices globally, stimulated by the escalating conflict in the Middle East.
The unexpected positive response of Japanese stocks to the geopolitical unrest has fueled a debate among market observers. Some argue that the intensifying situation in the Middle East might lead to reconsideration on Fed’s policy path. There’s a burgeoning perspective that Fed might hold off on further rate hikes, given the potential economic uncertainties injected by the conflict.
Technically, today’s rebound in Nikkei argues that corrective pattern from 33772.89 (Jun high), could have completed with three waves down to 30487.67. That came after drawing support from 38.2% retracement of 25661.89 to 33772.89 at 30674.48. Next focus is 55 D EMA (now at 32149.24) Sustained trading above there will solidify this bullish case and target retesting 33772.89 high.
In an interview with franceinfo radio, ECB Governing Council member Francois Villeroy de Galhau affirmed that the current interest rates, pegged at a historical high of 4% after ten consecutive hikes, are positioned at a “good level”. Furthermore, Villeroy added that the prevailing economic climate doesn’t warrant additional rate hikes.
However, Villeroy didn’t mince words when expressing his apprehensions about the escalating oil prices. The surge in prices this week can be attributed to potential disruptions in supply, catalyzed by the military confrontations between Israel Palestinian Islamist group Hamas. Such geopolitical tensions have historically influenced global oil prices. A notable instance from the past is the 1973 Yom Kippur War, which had a significant bearing on oil price dynamics.
Addressing this historical context, Villeroy remarked, “I don’t think that we are today in a similar situation (as the Kippur War) but we must of course remain very vigilant.” He went on to underscore that such events amplify the existing economic uncertainty.
Australia NAB Business Confidence for September remained stable at a level of 1. Meanwhile, a decline was observed in Business Conditions, which slid from 14 to 11. A deeper dive into the components reveals trading conditions receding from 19 to 16, profitability conditions from 14 to 8, and employment conditions registering a dip from 10 to 8.
Notably, growth in labor costs saw a deceleration, moving from a 3.2% quarterly rate down to 2.0%. Additionally, purchase costs experienced a slowdown from 2.9% to 1.8%. Both final product prices and retail prices exhibited moderated growth rates, with the former decelerating from 1.7% to 1.0% while the latter remained unchanged at 1.8%.
NAB Chief Economist Alan Oster remarked, “the economy has remained in reasonable shape through the middle of the year.” He went on to note the +1 index points underscores that firms are somewhat ambivalent regarding their future prospects, with views split evenly regarding the outlook.
However, there was a silver lining in the inflation scenario. Oster highlighted that “the survey showed some positive signs for inflation with cost pressures and price growth easing in the month.”
Even though the imminent Q3 CPI release is anticipated to reflect strong inflation for the quarter, Oster noted, “the September survey results suggest the momentum of some of the key cost pressures driving inflation may have started to step back in a welcome sign for the broader inflation outlook.”
Australia’s Westpac Consumer Sentiment Index showed a positive move, climbing 2.9% from 79.7 to 82 in October. Despite the uptick, a score of 82 still paints a subdued picture, correlating with a decline in per capita spending.
One of the more pressing concerns for consumers remains the prospective upward movement in mortgage interest rates. The post-October RBA decision survey indicated that 63% of consumers anticipate mortgage interest rates to climb in the forthcoming year. This figure marks a substantial rise from 52.3% in September. N
Notably, however, these numbers don’t match the heightened concerns recorded when RBA was in an active rate-hiking mode, where readings ranged between 70-80%. Meanwhile, optimism for a rate cut next year has dwindled; only 7% of consumers now hold that expectation, down from 15% the previous month.
The upcoming November 7 meeting of RBA is earmarked as a significant event, with a revised set of forecasts to accompany the Statement on Monetary Policy.
Westpac shared their viewpoint on the evolving situation: “While the RBA may need to revise its near-term forecasts for headline inflation up, on its own this will probably not be enough to trigger a further rate rise.”
The September quarter CPI, slated for release on October 25, is now in sharp focus. Westpac added, “If, however, there are further surprises in the September quarter CPI, due October 25, the next few meetings could be a little more live than the one in October.”
BoE MPC Catherine Mann emphasized the significance of the duration of inflation in guiding her future policy decisions.
Mann pointedly remarked, “Going forward, a very important ingredient for my decision-making is the duration of inflation, and how long it is exceeding target.”
The MPC member expressed concerns that prolonged inflation above the target could lead to a “drift” in medium-term expectations. Monetary policy “has to be more aggressive, because it has to address both a drift in expectations as well as the actual inflation above target,” Mann further elaborated.
Mann also warned of the challenges that could arise if inflation remains persistently above the target. “If inflation gets embedded for longer above target, then getting it to target is going to require more policy action for longer and that I’d rather not have to do because people become backward looking,” she said.
In the context of future economic shocks, Mann anticipates an “upward bias” in inflation, suggesting that a higher neutral rate of interest is “a very plausible outcome.”
Fed Vice Chair Philip Jefferson shared in a speech overnight the insights onchallenges posed by rising real long-term Treasury yields. He pointed out the complexities faced by policymakers when determining the direction of monetary policy amidst such changes.
Jefferson stated, “In part, the upward movement in real yields may reflect investors’ assessment that the underlying momentum of the economy is stronger than previously recognized and, as a result, a restrictive stance of monetary policy may be needed for longer than previously thought.”
However, he was quick to add a caveat, underscoring the nuances associated with interpreting yield movements. Jefferson added, “But I am also mindful that increases in real yields can arise from changes in investor’s attitudes toward risk and uncertainty.”
Jefferson assured his approach would be comprehensive and adaptive. “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” he noted.
Vice Chair’s will weight the “totality of incoming data in assessing the economic outlook and the risks surrounding the outlook”.
Highlighting the delicate equilibrium that is to be maintained, Jefferson encapsulated the current scenario as a “sensitive period of risk management.” Here, the dichotomy lies in “balance the risk of not having tightened enough, against the risk of policy being too restrictive.”
Dallas Fed President Lorie Logan pointed out the role of higher term premiums, noting their impact on term interest rates. “Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal”.
Logan elaborated on this delicate interplay, stating, “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate.”
Further expanding on this, Logan remarked, “Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”
This suggests a potential offsetting force; should term premiums rise, the economy could experience a natural cooling, thereby alleviating some of the pressure on Fed to intervene.
However, Logan also emphasized the importance of understanding the root causes behind shifts in long-term interest rates. “To the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more.”
Inflation, as has been the case for many months, remains a focal point of concern. Logan made it abundantly clear that inflation hovering above comfort levels is a significant risk. “Inflation remains too high, the labor market is still very strong, and output, spending, and job growth are beating expectations,” she acknowledged.
High inflation, according to Logan, is the predominant risk that requires meticulous attention. “We cannot allow it to become entrenched or reignite,” she warned.
Logan’s remarks also encapsulated a vigilant and adaptive approach to monetary policy. “I will be carefully evaluating both economic and financial developments to assess the extent of additional policy firming that may be appropriate to deliver on the FOMC’s mandate,” she affirmed.
ECB Vice-President Luis de Guindos highlighting the “enormous uncertainty” that geopolitical tensions are injecting into the financial markets and the broader economy, in light of the heightened conflicts between Israeli and Hamas forces in Gaza.
“The macroeconomic environment is subject to enormous uncertainty.” He further stressed the heightened unpredictability by noting, “Nobody knows what is going to happen in the future,” particularly in light of the recent events over the weekend.
De Guindos still anticipates a downturn in both headline and core inflation. However, he urged stakeholders to remain vigilant. His concerns stemmed mainly from “the evolution of oil prices, the depreciation of the euro and the evolution of unit labor costs”.
Investor confidence in Eurozone appears to be staying on shaky ground, as evidenced by the dip in Sentix Investor Confidence from -21.5 to -21.9 for October. While this decline was milder than the anticipated drop to -24.0, it still casts a shadow on the economic climate of the region.
The more granular aspects of the report offer a mixed picture. Current Situation Index slipped from -22.0 to a low of -28.0, a trough not seen since November 2022. Conversely, Expectations Index, which forecasts sentiments for the coming six months, exhibited a rally, climbing from -21.0 to -16.8, marking its zenith since April.
Sentix noted, “The economic situation in the Eurozone remains difficult.” While the uptick in Expectations Index could provide a glimmer of hope, Sentix tempers this optimism by clarifying that it “does not yet indicate a turnaround.” Instead, it might simply imply a slowing down in the waning momentum.
Additionally, Sentix noted investors perceive ECB as somewhat hamstrung in its ability to intervene. The bank’s typical proactive stance in assisting a faltering economy is “not yet discernible.”
Shifting focus to Germany, the data presents a narrative akin to Eurozone. The Overall Investor Confidence experienced a minor lift, moving from -33.1 to -31.1. Yet, this was counterbalanced by Current Situation Index, which not only fell from -38.3 to -39.5 but also reached its nadir since July 2020. On a positive note, Expectations Index saw a boost, rising from -27.8 to -22.3.
As geopolitical tensions escalate, markets are swiftly reacting, with notable rises observed in Gold, Oil, and Swiss Franc at the beginning of the week. The eruption of hostilities between Israel and Hamas following a sweeping incursion by the Palestinian group into Israeli towns has sounded alarms worldwide, drawing unequivocal condemnation from Western nations, introducing a fresh element of uncertainty into the global financial markets.
The immediate impact of these developments is most palpable in Gold. The precious metal’s resurgence marks short-term bottoming at 1810.26, just above 1804.48 medium-term support. If the ongoing geopolitical crises further deteriorate, we might see a continued upswing in the precious metal’s price. However, a significant barrier awaits at the 1900 handle, slightly above the 1892.76 support turned resistance. Return to normalized sentiment will inevitably refocus market attention on the anticipation of persistently high Fed interest rates and towering benchmark treasury yields, potentially exerting downward pressure on gold again.
In tandem with gold, WTI crude oil has also responded to the geopolitical shockwaves, posting robust gains. With 77.95 support remains unbreached, there’s an absence of concrete confirmation pointing towards reversal of the rally initiating at 63.67. However, it’s worth noting a marked attenuation in upside momentum recently, as seen in D MACD. Even though a more substantial rise isn’t off the table in the short term, the ceiling is likely to be established below 95.50 resistance, for an extended phase of range trading.
The currency markets are not immune to these developments either. EUR/CHF pair is emblematic of the shifts underway, with a decisive break of 55 D EMA arguing that that recovery from 0.9513 has completed at 0.9691. This comes on the heels a rejection by medium-term falling trend line resistance. If the pair fails to recapture ground above 55 D EMA in the coming days, deeper descent is likely on the cards, potentially surpassing the 0.9513 low to resume the broader downtrend originating from 1.0095.
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Fed minutes show majority leaning towards further rate hike
In the minutes from Fed’s September 19-20 meeting, while “a majority of participants” believed another rate increase might be in order, a contrasting view was held by “some” who deemed no further hikes necessary.
A unanimous consensus was evident among all attendees that the existing policy stance needs to “remain restrictive for some time”. The chief rationale behind this unified sentiment is to ensure that inflation trends downwards in a sustained manner to Fed’s target.
An interesting shift in communication strategy was proposed by “several participants”. They emphasized that discussions and subsequent messaging should transition from deliberating the potential height of rate hikes to determining the duration for which rates should be maintained at these elevated, restrictive levels.
In terms of gauging risks, participants “generally judged” that challenges to fulfilling the Fed’s mandates had become “more two sided”. However, a lingering concern persists. Despite this balanced view of risks, “most participants” continued to see upside risks to inflation.
Full FOMC minutes here.