US non-farm payroll employment grew 261k in October, well above expectation of 200k. Prior month’s figure was also revised sharply higher from 263k to 315k. Monthly job growth has averaged 407k thus far in 2022.
Unemployment rate rose from 3.5% to 3.7%, above expectation of 3.6%. Number of unemployed persons rose 306k to 6.1m. Labor force participation rate, dropped -0.1% to 62.2%. Average hourly earnings rose 0.4% mom, above expectation of 0.3% mom.
ECB President Christine Lagarde said in a speech that after increasing interest rates by 200bps, “we expect to raise rates further”. He added that, “withdrawing accommodation may not be enough to bring inflation back to our target”. But how much further to go, and how fast, will be determined by a few factors.
The first and most important factor is “inflation outlook”. The second factor is “corresponding policy stance and its transmission lags into demand and inflation”.With the lag in transmission and prevailing uncertainty, “the rate path ahead will look different depending on the contingencies we face.”
BoE Chief Economist Huw Pill told CNBC, “Our current assessment is that we don’t think interest rates would need to rise as high as markets are pricing precisely because it would produce a slowdown in the economy that is bigger than we need to get these prices under control.”
“That is why the message has been, yes, maybe the market was pricing in too aggressively over this period of turmoil where bank rate is headed. What we are seeking, are always seeking is to find that balance that gets us back to the 2% inflation target without generating unnecessary and costly problems in the real economy,” he said.
He added that the challenge is to “ensure that inflation, particularly this domestically generated inflation, is evolving consistent with our target in a sustainable way”. At the same time, “also to avoid that we overshoot in the opposite direction and generate a slowdown that is not required.”
The question for us is, even as headline inflation begins to fall, have we done enough with monetary policy to contain those underlying or persistent dynamics on inflation to ensure that they end up consistent with our target over time? And I think the answer to that is, we still think there’s more to do to control that domestically driven wage-price cost dynamic.”
Eurozone PPI rose 1.6% mom, 41.9% yoy in September, below expectation of 1.7% mom, 42.0% yoy. For the month, industrial producer prices in Eurozone increased by 3.3% in the energy sector, by 0.9% for non-durable consumer goods, by 0.4% for capital goods and for durable consumer goods and by 0.1% for intermediate goods. Prices in total industry excluding energy increased by 0.4%.
EU PPI rose 1.5% mom, 41.4% yoy. The highest monthly increases in industrial producer prices were recorded in Bulgaria (+9.2%), Slovakia (+8.9%) and Italy (+3.5%), while the largest decreases were observed in Ireland (-18.9%), Estonia (-3.9%) and Greece (-2.4%).
Eurozone PMI Services was finalized at 48.5 in October, down from September’s 48.8, a 20-month low. PMI Composite was finalized at 47.3, down from prior month’s 48.1, a 23-month low. Looking at some member states, Germany PMI Composite dropped to 45.1 (29-month low), Italy to 45.8 (22-month low), Spain to 48.0 (9-month low), France to 50.2 (19-month low), and Ireland to 52.1, (2-month low).
Joe Hayes, Senior Economist at S&P Global Market Intelligence said:
“After a weak third quarter of PMI and official GDP data, the latest survey results for the start of the fourth quarter suggest the eurozone economy is now headed for a winter recession. High inflation is dampening demand and hurting business confidence. Fears that the energy crisis could intensify over the winter period are also feeding uncertainty and weighing on decision-making.
“Nonetheless, the ECB will want to continue with monetary tightening to contain inflation. October PMI data suggest inflationary pressures remained extremely elevated across the eurozone. We did, however, see some dovish tones in the rhetoric surrounding the ECB’s October policy decision, clearly showing that the Governing Council are concerned by the rapidly deteriorating economic outlook. A substantial worsening of economic conditions in the coming months may give policymakers a difficult decision to make with regards to the path of monetary tightening, for fear of being too aggressive and prolonging the downturn.”
US non-farm payroll employment data is the major focus of the day. Markets are expecting the job market to grow 200k in October. Unemployment rate is expected to tick up from 3.5% to 3.6%.
Looking at related data, ADP report showed solid 239k growth in private employment. ISM manufacturing employment also improved from 48.7 to 50.0. However, ISM services employment dropped notably from 53.0 to contractionary reading of 49.1. Four-week moving average of initial jobless claims rose slightly from 207k to 219k. The set of data overall suggests that job market should remain tight.
As per market reaction, USD/CAD would be an interesting one to watch considering that Canada will also release job data. For now, near term outlook stays bullish for another rise through 1.3976 to resume larger up trend. However, break of 1.3494/3501 support will complete a head and should top pattern (ls: 1.3832; h:1.3976; rs: 1.3807). In the case, deeper correction would likely be seen back to 1.3207 resistance turned support, before USD/CAD find renewed buying.
In the Statement on Monetary Policy, RBA noted that after a sequence of 50bps and 24bps rate hikes, “the Board recognised that interest rates had already been increased significantly in a short period of time”.
“In an uncertain environment, slowing the adjustment of policy allows time to assess the effects of the increases to date and the evolving economic outlook,” it added.
The Board expects that “interest rates will need to increase further”, but “monetary policy is not on a pre-set path”. The size and timing of future interest rate hikes will be determined by incoming data and assessment of the outlook of inflation and labor market.
In the new economic projections, year-average GDP growth forecast for:
Year-end forecasts for headline CPI for:
Year-end forecasts for trimmed mean CPI for:
Year-end forecasts for unemployment rate for:
US ISM Services PMI dropped from 56.7 to 54.4 in October, below expectation of 55.2. That’s also the lowest reading since May 2020. Looking at some details, business activity/production dropped from 59.1 to 55.7. New orders dropped from 60.6 to 56.5. Employment dropped from -3.9 to 53.0. Prices rose from 68.7 to 70.7.
ISM said: “Growth continues at a slower rate for the services sector, which has expanded for all but two of the last 153 months. The sector had a pullback in growth for the second consecutive month in October due to decreases in business activity, new orders and employment.”
“The past relationship between the Services PMI and the overall economy indicates that the Services PMI for October (54.4 percent) corresponds to a 1.5-percent increase in real gross domestic product (GDP) on an annualized basis.”
US initial jobless claims dropped -1k to 217k in the week ending October 29, slightly above expectation of 215k. Four-week moving average of initial claims dropped -500 to 219k.
Continuing claims rose 47k to 1485k in the week ending October 22. Four-week moving average of continuing claims rose 30k to 1418k.
BoE raises Bank Rate by 75bps to 3.00%. The decision was made by 7-2 votes. Swati Dhingra voted for 50bps hike while Silvana Tenreyro voted for just 25bps hike.
Tightening bias is maintained as “should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.”
But there are “considerable uncertainties” around the outlook. If outlook suggests more persistent inflation pressures, the Committee will “respond forcefully”.
In the updated central economic projections, four-quarter GDP is projected to contract -.19% in 2023 Q4, and then -0.1% in 2024 Q4, before growing again in 2025 Q4. CPI is projected to peak at 10.9% in 2022 Q4, then slow to 5.2% in 2023 Q4, and 1.4% in 2024 Q4. Unemployment rate is projected to rise notably from 3.7% in 2022 Q4 to 4.9% in 2023 Q4,5.9% in 2024 Q4, and then 6.4% in 2025 Q4.
UK PMI Services was finalized at 48.8 in October, down from September’s 50.0. PMI Composite was finalized at 48.2, down from prior month’s 49.1. Both readings were the lowest levels since January 2021.
Tim Moore, Economics Director at S&P Global Market Intelligence:
“UK service providers reported the steepest drop in business activity for 21 months in October as household spending cutbacks and shrinking business investment combined to dent new order volumes…
“Stubbornly high inflation, increased borrowing costs and worries about the UK economic outlook all contributed to weaker business optimism in October… Aside from the slump at the start of the pandemic, the degree of confidence across the service economy is now the lowest since December 2008.”
ECB President Christine Lagarde said the central bank cannot just mirror Fed’s policy moves.
“We have to be attentive to potential spillovers,” said. “We are not alike and we cannot progress either at the same pace (or) under the same diagnosis of our economies.”
“But we are also influenced by the consequences particularly through the financial markets, and to a lesser extent, through trade as well, because clearly the exchange rate matters and has to be taken into account in our inflation projections,” Lagarde said.
ECB Executive Board member Fabio Panetta said in a speech, “at present, the direction of monetary policy is clear”. And, a “further policy adjustment is warranted in order to keep inflation expectations anchored and stave off second-round effects.”
However, “the calibration of our stance should not rely on a one-sided view of risks − especially as we continue normalising our monetary policy in a highly uncertain economic environment,” he added. “And it should remain focused on medium-term inflationary developments.”
“Our policy stance must remain evidence-based and adapt to changes in the medium-term inflation outlook, avoiding an excessive focus on short-run developments and fully taking into account the risks emanating from the domestic and global economic and financial environment,” he emphasized.
“This approach will allow us to successfully navigate the risks we face while avoiding the danger of tripping over unintended effects.”
ECB Governing Council member Martins Kazaks said, “it’s clear that interest rates will need to rise much higher to bring inflation down to the target of 2% over medium term.”
“There’s no need to pause at the turn of the year. The rate increases must continue into the next year — until inflation, especially core inflation, shows a visible slowdown,” he said.
“In my view, recession in the euro area is a baseline scenario, but so far it’s likely to be relatively shallow and brief,” Kazaks said. “And hence insufficient to break the backbone of inflation persistence.”
Swiss CPI rose 0.1% mom in October, below expectation of 0.2% mom. Core CPI (excluding fresh and seasonal products, energy and fuel) was flat at 0.0% mom. Domestic products prices dropped -0.1% mom. Imported products prices rose 0.4% mom. Goods prices rose 0.4% mom while services produces dropped -0.2% mom.
Annually, CPI slowed from 3.3% yoy to 3.0% yoy, below expectation of 3.2% yoy. Core CPI slowed form 2.0% yoy to 1.8% yoy. Domestic products prices slowed from 1.8% yoy to 1.7% yoy. Imported product prices slowed from 7.8% yoy to 6.9% yoy. Goods inflation slowed from 5.9% yoy to 5.7% yoy. Services inflation slowed form 1.2% yoy to 0.9% yoy.
BoE is widely expected to raise interest rate by 75bps to 3.00% today. That would be the eighth consecutive rate rise, and the largest since 1989.
Governor Andrew Andrew Bailey had already indicated earlier that “inflationary pressures will require a stronger response than we perhaps thought in August.” Additionally, Deputy Governor Ben Broadbent also indicated that “the government’s Energy Price Guarantee has the effect of limiting headline inflation and, to that extent, any related strengthening of second-round (and more persistent) effects on domestic inflation.”
There are talks that the Bank Rate would hit 3.50% in December, and tightening will continue to 4.75% next May. Yet, the path forward remains complicated by the uncertainty over the new government’s new budget. Prime Minister Rishi Sunak’s plan on spending cut and tax hike won’t be revealed until a fiscal statement later on November 17. While the new economic projections by BoE may not matter much, the voting today could at least show the bias among MPC members.
Some previews on BoE:
As per market reaction, GBP/CHF would be one to watch. Rise from 1.0183 stalled after hitting 61.8% projection of 1.0183 to 1.1283 from 1.0893 at 1.1574. For now, further rise is expected as long as 1.1283 resistance turned support holds. Firm break of 1.1574 will target 100% projection at 1.1993.
However, sustained break of 1.1283 will argue that whole rebound has completed, and bring deeper fall back to 1.0893 support and possibly below. If happens, that could be a signal of return of Sterling selloff elsewhere.
China Caixin PMI Services dropped from 49.3 to 48.4 in October, below expectation of 49.2. PMI Composite dropped from 48.5 to 48.3. Both were the lowest readings since May.
Wang Zhe, Senior Economist at Caixin Insight Group said: “Both supply and demand contracted to different degrees. The overall employment level increased slightly thanks to an expansion in employment of the services sector. Input costs for all surveyed enterprises rose slightly, while prices charged remained stable. Market sentiment improved but was still below the long-term average.
“Overall, the negative impact of Covid controls on the economy lingered, and the economy was faced with increasing downward pressure. In October, activities in the manufacturing and services sectors continued to shrink, while supply and both domestic and overseas demand contracted. Business costs increased. Service providers were in a better position than manufacturers in terms of prices charged and employment.”
RBNZ Governor Adrian Orr told a parliamentary committee that the central bank has “laser-like focus” on bringing inflation down to target. Yet, he admitted that, “the (inflationary) shocks still arriving through the global economy are significant and this is where people need to think about their own ability to weather an enormous amount of unanticipated activities.”
“Meanwhile around our confidence of having inflation under control – that is very high, because we control the end outcome through the interest rate environment. So, that’s a guessing game. That’s about the things we will have to do to achieve low and stable inflation, subject to the continuing buffering of shocks left right and centre. Resilience and humility,” he added.
US stocks initially jumped after Fed hinted in the statement that pace of tightening could slow ahead. But sentiment reversed after Fed chair Jerome Powell indicated that slower pace of hikes might come soon, Fed could end up at a higher terminal rate.
In short, comparing to last statement, Fed added, “in determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” This is clearly an indication that Fed is going to consider adjusting the pace of interest rate increases.
In the post-meeting press conference, Powell acknowledged, “As we come closer to that level and move further into restrictive territory, the question of speed becomes less important. … And that’s why I’ve said at the last two press conferences that at some point it will be important to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made.”
However, “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” indicating the possibility of higher terminal rate. Also, Powell noted, “It is very premature to be thinking about pausing. People when they hear ‘lags’ think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go.”
More on Fed:
Major US stock indexes closed lower, with development of NASDAQ particularly bearish. Yesterday’s decline suggests rejection by 11230.44 resistance, as well ass 55 day EMA. The fall could be setting up resumption of the whole down trend from 16212.22. Next target will be 61.8% projection of 16212.22 to 10565.13 from 13181.08 at 9691.17. Reaction from there, which is close to 10000 psychological level, will be crucial for the development in the early half of next year.
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Canada employment grew 108k in Oct, unemployment rate steady at 5.2%
Canada employment grew strongly by 108k in October, well above expectation of 11k.
Unemployment rate held steady at 5.2%. Labor forecast participation rate rose 0.2% to 64.9%.
Year-over-year growth in the average hourly wages of employees remained above 5% for a fifth consecutive month in October, rising 5.6% yoy. Total hours worked increased 0.7% mom.
Full release here.