Sample Category Title

The advance estimate from Statistics Canada was that September Canadian manufacturing sales edged down 0.1% from August, despite another monthly surge in petroleum and coal prices. Manufacturing prices were up ~1% in September on a seasonally adjusted basis by our count, implying the volume of sales (excluding price impacts) declined even more after already contracting 0.7% in August. Indeed, economic growth in Canada is starting to look substantially softer. Consumer related sectors have weakened significantly – retail sales are tracking below Q2 levels to-date in Q3 and hospitality services (like restaurants and hotels) have flatlined. But cooling demand globally is also filtering down supply chains and slowing manufacturing output with the broader economy on track for another small quarterly decline in Q3.

Across the border, spending among US consumers has been much more resilient. Retail sales grew at an average pace of 0.5% per month in Q3, almost double the rate in pre-pandemic 2019. Next week’s October data will be among the first indications of how much of that momentum carried into Q4 (and the important holiday shopping period). We continue to expect strength in consumer spending to wane. October marked the restart of the student loan repayment program, and labour market conditions in the U.S. are starting to deteriorate. Employment growth has remained positive, but the rise in the unemployment rate over the last three months is similar to what has usually been seen at the start of a downturn in labour markets. The U.S. Fed will be watching next week’s October U.S. CPI report closely. Inflation pressures ticked higher in September – breaking a string of softer price growth readings. But a drop in gasoline prices should push headline year-over-year CPI growth lower in October. Core CPI in September was propped up by a larger increase in the owner’s equivalent rent index but that was not expected to be repeated this month. As indicated by Powell in his speech at the IMF yesterday, the Fed is still willing to hike interest rates further if needed. But we continue to expect slower consumer spending and deteriorating labour market conditions will keep the central bank on the sidelines, before pivoting to gradual rate cuts in the second quarter of next year.

Week ahead data watch

Canadian manufacturing sales likely inched down 0.1% in September, primarily driven by lower sales in metal and transportation equipment subsectors and despite a sharp price-led increase in petroleum sales.

Core wholesale sales are expected to remain unchanged from the prior month, in line with Statistics Canada’s early estimate. The preliminary estimate showed sales in auto and food subsectors with the largest increases, offsetting a pullback from machinery and equipment sales.

We anticipate U.S. retail sales to edge down 0.3% in October. Gasoline station sales likely fell on lower prices.

We look for a pullback in industrial production (-0.2%), with lower outputs in manufacturing and utility sectors.

Monday, Nov 13, 2023

Tuesday, Nov 14, 2023

Wednesday, Nov 15, 2023

Thursday, Nov 16, 2023

Friday, Nov 17, 2023

Markets

Fed Chair Powell’s comments at the IMF’s annual research conference echoed through today’s trading session amid an empty eco calendar. He provided several hawkish accents to the same underlying message from the early November policy meeting. In doing so, he managed to push back against the (rate) correction that followed so far this month. First, he argued that the easy disinflation gains are over, warning that getting back inflation to the 2% target from current levels will be a much tougher challenge and “a long way to go”. This is a warning that policy rate cut bets in Q2 2024 seem premature. The Fed won’t be fooled by monthly head fakes, keeping policy restrictive until they are absolutely sure that inflation will return to the 2% target. Second, if it becomes appropriate to tighten policy further, the Fed will not hesitate to do so. The US central bank walks a tightrope between overtightening and doing too little in case of feeling too comfortable by a few months of good data. An additional rate hike doesn’t seem to the preferred scenario for the moment but the Fed is attentive to the risk that stronger growth could undermine further progress in restoring balance to the labour market and in bringing inflation down. Finally he touched on the topic of tighter financial conditions, Powell said that the Fed would not be ignorant to a significant tightening but that the effect on policy would largely depend on how long the market move lasted. German Bund yields had some catching up to do compared with yesterday’s US yield increases. They currently add 2.8 bps (30-yr) to 5.5 bps (5-yr) with the belly of the curve outperforming the wings. Intraday gains had been double these amounts though with momentum fading after 10-yr yields failed to take out the week tops in Germany (2.76%) and the US (4.67%). The trade weighted dollar’s comeback bumped into the 106 big figure with EUR/USD treading water near 1.0680. European stock market currently lose 0.5%-1%, but intraday losses had been bigger. From a technical point of view, both European (EuroStoxx50) and US (S&P 500, Nasdaq) indices failed to take out October tops and breaking the ruling sell-on-upticks pattern. Sterling initially avoided more weakness on a flat Q3 GDP print (vs -0.1% Q/Q), but details didn’t provide much comfort. Add the risk-off market climate and you and up with EUR/GBP testing the 0.8754 October top. We hold our view for a bullish break in the FX pair.

News & Views

Czech inflation jumped from 6.9% to 8.5% y/y in October. Given the mere 0.1% m/m increase, the reacceleration was exclusively due to last year’s low comparison base, when a sharp decline in prices for household electricity (energy savings tariff) was recorded. The monthly increase was mainly driven by seasonally more expensive clothing and higher food prices, while housing costs fell thanks to lower electricity, gas and heating prices. The headline figure topped the Czech National Bank’s 8.3% Autumn forecast but core inflation came in slightly lower than expected (4.3% vs 4.2% actual value). Commenting the numbers, the CNB said the latter reflected a “fading of growth in prices of foreign inputs and a cooling of domestic demand.” The CNB isn’t worried about this headline uptick. The aforementioned base effect drops out in January 2024 and will prompt a reading close to the 2% target. The Czech koruna initially extended minor gains before paring them again. EUR/CZK is currently trading slightly weaker around 24.52. Front end Czech swap yields rose in a kneejerk move but are now down 5 bps on the day. The numbers confirm KBC Economic’s view of the CNB starting the cutting cycle in December with a 25 bps move.

Price pressures in Hungary returned into the single digits for the first time since April 2022. The 9.9% y/y increase in October was a sharp drop from the 12.2% reading the month before and was helped lower by a negative 0.1% m/m outcome. Consensus stood at a 0.3% m/m and 10.4% rise. The Hungarian central bank (MNB) core inflation estimates eased too but all of them remained (well) above 10%, varying between 10.9% and 11.9%. The MNB recently lowered the policy rate by a more-than-expected 75 bps to 12.25%. Additional rate cuts will follow but their size is determined by the disinflationary process and the Hungarian forint. As the former went more swiftly and the latter even appreciated to the strongest level in three months after today’s numbers (EUR/HUF 377.3), there’s a real possibility the MNB is readying a 100 bps cut later this month. Money markets price in such a move at the two remaining policy meetings of the year. Hungarian swap yields tumble more than 10 bps at the front of the curve.

• US inflation numbers the next event to shake up Fed bets
• Pound traders lock gaze on CPIs after BoE’s hawkish hold
• Aussie awaits jobs report and Chinese data, Japan’s GDP also on tap

Can US CPIs convince investors about one more Fed hike

After taking a strong hit last Friday due to the disappointing US employment report, the dollar staged a shy recovery this week as several Fed officials noted that the stellar performance of the US economy keeps the door open to further rate increases. Just on Thursday, Fed Chair Powell said that they “are not confident” that interest rates are high enough to signal the end of their fight against inflation.

However, despite the recovery in the greenback, investors remained largely unconvinced that another hike may be on the table. According to Fed funds futures, they are assigning only a 20% probability for one last quarter-point increase by January, while pricing in around 80bps worth of rate cuts by the end of next year.

Maybe market participants expect inflation to pull back again, especially after the retreat in oil prices during October, and the economy to weaken going forward. Indeed, the Atlanta Fed GDPNow model estimates a 2.1% annualized growth rate for Q4, but in an environment of high interest rates and a stellar acceleration to 4.9% in Q3, this slowdown appears quite normal.

With all that in mind, next week, the spotlight is likely to turn to the US CPI data for October on Tuesday. The headline rate is expected to have pulled back to 3.3% y/y from 3.7% and the core one to have ticked down to 4.0% y/y from 4.1%. That said, considering that the PMIs for October suggested softer price pressures, the risks may be tilted to the downside, and with the y/y change in oil prices turning negative again, headline inflation could continue to soften going into year-end.

This could add credence to investors’ belief of no more rate hikes and several cuts for next year and perhaps hurt the dollar. However, as long as data relating to economic growth continues to suggest that the US economy is performing better than its major counterparts, any retreat in the greenback may just be a corrective phase. This could be confirmed if Wednesday’s retail sales and Thursday’s industrial production for October continue to point to a resilient US economy.

UK jobs and CPI data to affect the pound’s fate

The UK also releases inflation data next week, on Wednesday. The headline CPI rate is anticipated to have slumped to 4.9% y/y from 6.7%, and the core one to have slid to 5.6% y/y from 6.1%. Nonetheless, according to the PMIs, prices charged by companies accelerated to a three-month high in October. Thus, in contrast to the US CPI data, there may be upside risks surrounding the UK numbers. Tuesday’s employment report for September could also be important as the average weekly earnings print may provide a glimpse of where inflation may be headed in upcoming months.

Last week, the BoE kept rates steady but noted that they remain willing to further raise them if there is evidence of more persistent inflationary pressures.  Yet, investors see only a 15% probability of another hike. Ergo, data pointing to stickier-than-previously-expected inflation could boost that number, but even if they don’t, they may prompt investors to scale back some basis points worth of rate cuts anticipated for next year; not because of a brighter economic outlook but on fears that cutting massively to support the economy may result in inflation getting out of control, which could in turn lead to deeper economic wounds down the road. This, combined with cooler US inflation, could help Cable return above the key barrier of 1.2310 and perhaps emerge above its 200-day moving average. The nation’s retail sales for October are also coming out on Friday.

Aussie sets for volatility, Japan’s GDP to reveal contraction

The aussie has been under pressure this week following the RBA’s dovish hike, as well as data and developments adding to concerns about China’s economic outlook. The probability of another hike at the December gathering is a coin toss, and thus traders may seek clarity in Australia’s employment numbers for October on Thursday. With the unemployment rate resting at historically low levels, labor conditions remain tight. The September data pointed to some cooling, but should next week’s numbers point to strength, the probability of a December hike may increase and the aussie could rebound.

However, any recovery could stay limited and short-lived if the Chinese numbers released the previous day add to the woes surrounding the world’s second largest economy. On Wednesday, investors will digest China’s industrial production, retail sales and fixed asset investment, all for October.

Japan’s preliminary GDP for Q3 is due to be released the same day. According to a Reuters poll, the Japanese economy likely shrank during the quarter, marking the first contraction in four quarters. Many analysts believe that the BoJ will phase out its ultra-loose policy next year, but a negative GDP figure could prove a challenge for the Bank’s plans and perhaps prompt traders to push the yen lower.

The "higher for longer" narrative about interest rates was toned down in a week with little concrete news about the economy, based on recent indicators that inflation is coming down. Not least last Friday's US labour market report pointed in that direction, with job growth in October below expectations and downward revisions of the two preceding months, hourly earnings increasing just 0.2% in October, and private sector average working hours decreasing 0.3%. During the week, we have in general seen both a declining trend in bond yields and positive sentiment in equity markets. However, central banks have been eager to say that the inflation problem should not yet be considered solved, not least Fed Chairman Jerome Powell, who sent that message on Thursday, leading to a partial reversal of the previous market moves.

Helpful for the inflation outlook, oil prices have again dropped to around USD 80 per barrel. We see this as mostly another sign of markets becoming more convinced of a cooling world economy.

As central banks around the world emphasised during the week, it is still too soon to conclude that inflation has been vanquished. Wage growth in most Western countries remains above what is consistent with 2% inflation, including the US, by other measures than the hourly earnings from the job report. In the US this week, the Senior Loan Officer Opinion Survey showed that banks are not to the same extent as earlier experiencing declining credit demand, although it is clear that financial conditions are still a drag on activity and that credit standards are still being tightened. The Reserve Bank of Australia actually hiked its rates by 25bp to 4.35% for the Cash Rate as it saw especially services inflation being more persistent than anticipated. The Polish central bank had been expected to cut rates this week, but did not do.

In China, however, deflation talk has returned to the headlines after CPI declined 0.2% y/y in October. This was driven by a 30% decline in pork prices, and we do not expect deflation to persist, but core inflation is low at 0.6% y/y and more economic stimulus is likely. Already in the coming week, there is a chance of a rate cut on Wednesday when we will also be following the meeting between Presidents Xi and Biden for signs of improvement in China-US relations. Also on Wednesday, a range of interesting Chinese data is released, not least home and retail sales.

Globally, the most important data release in the coming week will likely be US CPI where we expect energy prices to pull headline inflation lower. We see the underlying price pressure as moderate if still to the high side of the Fed's target. However, the October number could be distorted by the auto workers' strike leading to temporarily higher car prices and the effect from health insurance premiums.

The UK labour market report will be watched for signs of easing in the stubbornly high wage growth. Data from this week showed a stronger than expected economy with GDP unchanged in Q3 and growing 0.2% in September. In principle, it will also be important to see how the labour market more broadly is developing, but the data for employment and unemployment is currently "experimental".

Full report in PDF.

So, the USD turned up recently as investors again looking to sell it as Powell signaled that more hikes can be needed in the future, but it will depend on the data. As a result, US yields stabilized and stocks hit resistance while DXY comes higher and can still target the pre-NFP levels. This can be important short-term level; if it DXY goes above 106.40 then I think EUR and GBP will see more weakness. In fact, looking at the 4h time frame on cable and only three wave rally from the low, with wave (C) failing at the upper corrective channel, it appears that bearish trend is still here and ready to resume, especially if a price drops below 1.2190 bearish level. Then I think 1.2030 can come back in play.

ECB President Christine Lagarde, speaking at a Financial Times event, warned that the recent phase of quick disinflation might be nearing its end, with the potential for near-term inflation re-acceleration. This caution comes amid the possibility that the dampening effect of high energy prices on year-on-year comparisons may soon diminish.

Lagarde emphasized the need for vigilant monitoring of energy prices, suggesting that the current headline inflation figure of 2.9% shouldn't be taken for granted. "We should not assume that this respectable 2.9 headline number is something that should be taken for granted and for long," she stated.

Lagarde also alerted to the likelihood of seeing "a resurgence of probably higher numbers going forwards." She highlighted that even if energy prices stabilize, the dissipating base effect could lead to higher inflation figures in the early months of the coming year.

Despite these challenges, Lagarde reiterated her confidence in ECB's current interest rate policy. She believes that maintaining the current rate for a sufficient duration "will make a significant contribution to bringing inflation back to our 2% target."

However, she was quick to add a caveat, indicating that ECB's stance might need reevaluation in the face of major unforeseen shocks: "If major shocks come up, depending on the nature of the shocks, we'll have to revisit that."

Daily Pivots: (S1) 150.94; (P) 151.17; (R1) 151.56; More...

Range trading continues in USD/JPY and intraday bias remains neutral at this point. Another falling leg could be seen as consolidation from 151.69 extends, but further rally is expected as long as 148.79 support holds. Firm break of 151.69 high will resume larger up trend. However, decisive break of 148.79 will indicate rejection by 151.93 key resistance, and bring deeper fall through 147.28 support.

In the bigger picture, immediate focus is on 151.93 resistance (2022 high). Rejection by 151.93, followed by sustained break of 145.06 resistance turned support will argue that rise from 127.20 has completed, and turn outlook bearish for 137.22 support and below. However, sustained break of 151.93 will confirm resumption of long term up trend. Next target will be 61.8% projection of 102.58 to 151.93 from 127.20 at 157.69.

Daily Pivots: (S1) 0.8992; (P) 0.9017; (R1) 0.9053; More....

Intraday bias in USD/CHF stays neutral as range trading continues. On the downside, below 0.8952 will target a test on 0.8886 support first. Break there will resume whole decline from 0.9243 to 0.8815 fibonacci level. However, break of 0.9111 will resume the rebound from 0.8886 instead, and target 0.9243 resistance.

In the bigger picture, outlook is mixed up by the deeper than expected pull back from 0.9243. Yet there was no follow through selling after hitting 0.8886. On the upside, break of 0.9243 resistance will revive the case of medium term bottoming at 0.8851, and turn outlook bullish. However, sustained break of 61.8% retracement of 0.8551 to 0.9243 at 0.8815 will argue that larger decline from 1.0146 is ready to resume through 0.8551 low.

Daily Pivots: (S1) 1.2187; (P) 1.2248; (R1) 1.2283; More

Intraday bias in GBP/USD remains on the downside at this point. Corrective rebound from 1.2036 could have completed at 1.2426 already, just ahead of 38.2% retracement of 1.3141 to 1.2036 at 1.2458. Deeper fall would be seen back to retest 1.2036/68 support zone first. However, on the upside, break of 1.2307 minor resistance will dampen this bearish case, and turn intraday bias neutral first.

In the bigger picture, price actions from 1.3141 medium term top are seen as a correction to up trend from 1.3051 (2022 low). Strong rebound from 38.2% retracement of 1.0351 to 1.3141 at 1.2075 will argue that it's a sideway pattern only. However, sustained break of 1.2036 will indicate that it's a deeper correction that would target 61.8% at 1.1417 before completion.