Weekly Market Recap (06-10 November)

Saudi Arabia and Russia
reaffirmed their commitment to extra voluntary oil supply cuts until the end of
the year.

Fed’s Cook (dove – voter)
touched on the rise of long-term yields and the risks around real estate:

• Expectations of
  near-term policy rates do not appear to be driving long end.
• Residential and
  commercial property prices remain above levels historically associated
  with fundamentals.
• If commercial
  mortgage delinquency rates force sales, committal real estate prices
  ‘could decline sharply’.
• Business borrowing
  is at high levels, but measures of debt servicing capacity remain strong
  overall due to profits and limited impact of high rates so far.
• In terms of debt,
  household sector looks quite resilient, though there are emerging signs of
  stress for those with weak credit.
• Vulnerabilities
  among non-banks could amplify stress of tightened financial conditions and
  slowing economy.
• Fed cannot
  anticipate all risks but can build resilience to shocks; particularly
  important to enhance resilience of large banks.
• We are determined to
  reach 2% inflation objective.
• Hope current policy
  enough to return inflation to 2%.

ECB’s Holzmann (hawk –
voter) reaffirmed his commitment to hike rates further if needed as he remains
cautious on the inflation outlook:

• I definitely belong
  to those that think we should be very careful, that we should stand ready
  to hike again if needed.
• Not really worried
  about the growth outlook because despite rate hikes, we still have
  stagflation.
• It could be much,
  much worse and we are in pretty good shape there.
• Don’t expect any
  reduction in rates soon, eventually it will happen but for the time being
  I don’t see it.
• We need to stay
  vigilant.

BoE’s Pill (neutral – voter)
expressed his concern about keeping restrictive policy for too long:

• UK inflation remains
  too high.
• UK rate policy does
  remain restrictive.
• Sees more signs of
  slowing activity.
• Higher UK rates are
  hitting the supply side.
• BOE is still working
  to bring inflation down to 2%.
• We are going to see
  UK inflation for 2 more comparable levels with the rest of the world in
  pretty short order.
• We can’t make
  promises about monetary policy outlook.
• We need to retain
  agility on monetary policy.
• We still do not know
  economic implications of conflict in Middle East.
• Causing demand
  constraint can be painful, but it is crucial to we get inflation back to
  target.
• MPC feels it needs
  to keep rates restrictive at least for a while.
• It is premature to
  talk about cutting rates.
• Middle of next year
  does not seem totally unreasonable for considering rate stands.
• As things change
  over those 9 months, we might need to reconsider monetary policy stance.
• If we have
  restrictive policy for too long, we risk creating recession and pushing
  inflation below target.
• Equilibrium interest
  rate is still probably positive.
• Interest rates in
  the future will probably be higher than in the pre-Covid era.

The Fed released the
Senior Loan Officer Opinion Survey (SLOOS) for Q3

• Banks reported
  tighter lending standards and weaker demand for commercial and industrial
  loans across all firm sizes in the third quarter of 2023.
• Commercial real
  estate loans also saw tightened standards and reduced demand.
• Residential real
  estate loans and home equity lines of credit experienced stricter
  standards, except for government-backed residential mortgages, which
  remained unchanged.
• Demand for all
  categories of residential real estate loans weakened, with significant net
  shares of banks reporting a decline.
• Credit card, auto,
  and other consumer loans saw tightened lending standards and a weakening
  demand.
• Special questions
  revealed banks were less likely to approve credit card and auto loans for
  borrowers with lower FICO scores compared to the beginning of the year.
• Economic outlook,
  risk tolerance, credit quality, and funding costs were the primary reasons
  banks cited for tightening lending standards.

Fed’s Kashkari (hawk –
voter) expressed his concern about undertightening:

• Undertightening will
  not get us back to 2% in a reasonable time.
• Have concerns about
  inflation ticking up again. That’s what I’m worried about.
• Some prices and
  wages data indicate that inflation could be settling somewhere north of
  2%, and that would be very concerning to me.
• I need more
  information to come to a firm decision on interest-rate steps moving
  forward. I am not ready to say we are in a good place.
• Economy has proved
  to be very resilient, inflation has come down.
• Making progress on
  inflation, job market is strong.
• Fed has more work to
  do to get inflation under control.
• American consumers
  continue to spend.
• Need to finish the
  job on lowering inflation.
• ‘Nervous’ over
  declaring premature victory over inflation.
• US economy is so far
  ahead of foreign economies.
• Have to let
  inflation and labour data guide us.

Japanese September wage
data beat expectations:

• Average Cash Earning
  YoY 1.2% vs. 1.0% expected and 1.1% prior.
• Real wages
  (inflation adjusted) YoY -2.4%.
• Overtime pay YoY
  0.7% vs. 0.2%.

The RBA raised the cash
rate by 25 bps as expected:

• Board remains
  resolute in its determination to return inflation to target.
• CPI inflation is now
  expected to be around 3½ per cent by the end of 2024 and at the top of the
  target range of 2 to 3 per cent by the end of 2025.
• Board judged an
  increase in interest rates was warranted today to be more assured that
  inflation would return to target in a reasonable timeframe.
• Whether further
  tightening of monetary policy is required to ensure that inflation returns
  to target in a reasonable time frame will depend upon the data and the
  evolving assessment of risks.
• Still significant
  uncertainties around the outlook.
• Services price
  inflation has been surprisingly persistent overseas and the same could
  occur in Australia.
• To date, medium-term
  inflation expectations have been consistent with the inflation target, and
  it is important that this remains the case.
• High inflation is
  weighing on people’s real incomes and household consumption growth is
  weak, as is dwelling investment.
• Wages growth has
  picked up over the past year but is still consistent with the inflation
  target, provided that productivity growth picks up.
• Weight of
  information suggests that the risk of inflation remaining higher for
  longer has increased.

The Eurozone PPI for
September fell further into contraction:

• PPI Y/Y -12.4% vs. -12.5%
  expected and -11.5% prior.

Fed’s Goolsbee (dove –
voter) reaffirmed his “wait and see” stance as he sees progress on inflation:

• If the rise in long
  term yields is coming from term premia, we have to take that into account.
• You cannot answer
  what number on long-term yield equals enough tightening.
• We are also getting
  positive supply-side developments in the economy.
• The economy is weakening.
• Job market is
  getting into better balance.
• So far, the slowdown
  is what you would want, toward a more balanced growth and sustainable
  level.
• Inflation has come
  down a lot.
• We might equal the
  fastest drop in inflation in the last century.
• As long as we are
  making progress on inflation, the topic is then only how long we keep
  rates at this level.
• Inflation is more
  important part of the mandate right now.
• I don’t like pre-committing
  what rates will be at the next meeting.
• Still a lot of data
  to parse before then.
• My conditions for
  Fed being done with rates are that we are clearly back on path to get
  inflation back to 2%.
• So far, we are on a
  good path on inflation, but not done yet.
• Priority for
  changing rates stances inflation rate.
• Financial conditions
  clearly matter, but market doesn’t get to tell the Fed what to do.
• There is possibility
  of the “golden path” that allows us to get inflation down
  without recession.

Fed’s Waller (neutral –
voter) clearly sees the labour market cooling down:

• Labor market is cooling
  and getting close to average from before the pandemic; it’s ‘clearly
  calming down’.
• Labor supply also
  appears to be normalizing back to pre-pandemic levels.
• ‘Everything was
  booming’ in Q3 GDP, Fed is watching that closely.
• In central banking
  terms, move up in 10-year yields was an ‘earthquake’.
• Policymakers are
  mulling what drove long-term yields higher.
• What people have in
  mind now is for prices to return to earlier levels, and that is not going
  to happen.

Fed’s Logan (hawk –
voter) is watching carefully the long term rates:

• All of us have been
  surprised by resilience of US economy.
• Inflation remains too high.
• The core question is
  if financial conditions today are sufficiently restrictive.
• Labor market is still
  too tight.
• Still looks like
  trending towards 3% inflation.
• We’ll need to see
  tight financial conditions to bring inflation to 2%.
• My expectation is
  we’ll see growth slow, but we’ve been wrong before.
• Key question on
  long-term rates is what was driving it.
• If it was on the
  back of strong economic growth, FOMC would have to deliver on expectations.
• If rise in long end
  driving by term premium, it could do some of the Fed’s work.
• Will watch to see if
  retracement of long rates continues.

Fed’s Bowman (hawk –
voter) remains willing to hike rates further:

• Fed funds rate
  currently appears restrictive, financial conditions have tightened since
  September.
• Some tightening is
  due to long end, which can be volatile.
• Don’t yet know
  effects of tightened financial conditions on economic activity.
• I remain willing to
  support raising policy rate at future meeting.
• Inflation remains high.
• Labor market supply
  and demand may be coming into better balance.

ECB’s Nagel (hawk –
voter) remains wary of inflation risks:

• Wage growth and
  decreasing labour supply will keep up pressure on inflation.
• Imperative to remain vigilant.
• We still face risks
  that inflation outlook could turn out higher than expected.
• This discussion (on
  when interest rates can be cut) is not helpful. It is much, much too early.
• Inflation is a
  greedy beast, a very greedy beast.
• When we have to deal
  with a beast that is so stubborn, we have to be even more stubborn.

PBoC Governor Pan
Gongsheng touched on the central bank monetary policy and its future
objectives:

• Shifting economic
  growth model is more important than pursuing high growth rate.
• China’s economy
  continues to improve, 5% growth target expected to be successfully
  achieved.
• China’s economic
  growth momentum improves recently, production and consumption recover
  steadily, employment and consumer prices stable.
• Monetary policy will
  pay more attention to cross-cyclical and counter-cyclical adjustments in
  next stage.
• Will always keep
  prudent monetary policy, support stable growth of real economy.
• Will provide a good
  monetary and financial environment to stabilize price, promote economic
  growth and expand employment.
• Will resolutely
  guard against overshooting risks of yuan exchange rate.
• Will resolutely deal
  with behaviours that disrupt market order.
• Will prevent the
  formation of one-sided and self-reinforced market expectations.
• Spillover effect of
  property market adjustments on the financial system are generally
  manageable.
• Will guide financial
  institutions to keep stable financing channels open through property
  credit, bonds.
• Some provinces are
  making plans to resolve risks of small and mid-sized banks.
• Supports LGFVs to
  become market-oriented firms which do not rely on government credit and
  are financially independent and sustainable.
• The central bank
  will provide emerging liquidity support to areas with relatively high debt
  burdens when necessary.
• Will strictly
  control new govt-invested projects in areas with high debt burdens.
• Will guide financial
  institutions to resolve debt risks through debt extension and replacement
  more to come.

ECB’s Kazaks (hawk – non
voter) reaffirmed the central bank commitment to bring inflation back to target
but expressed uncertainty around the outlook:

• We are committed to our
  target of 2% and we shall deliver it.
• Our current outlook
  forecasts that we will achieve it in the second half of 2025.
• We are very clear on our
  target and of course we are determined, and we shall reach it.
• We cannot exclude the possibility that further rate increases might be
  necessary.
• But we simply don’t know, so we will do the best we can, we will not hold
  the rates at very high levels a minute longer than necessary.

ECB’s Lane (dove – voter)
welcomed the progress on inflation but added that progress in underlying
inflation wasn’t enough.

ECB’s Makhlouf (dove –
voter) highlighted the “huge uncertainty” that the central bank must navigate
and new risks that could emerge:

• Early signals of the
  impact of inflation and monetary tightening on borrower resilience are
  becoming visible among tracker mortgages, personal loans and certain
  corporate lending segments.
• Having said that
  there is huge uncertainty as to what lies ahead. A large part of monetary
  tightening has yet to be passed through to the financial system and to the
  economy; and while some risks are fading, new risks are emerging.

The Eurozone Retail Sales
for September slightly missed expectations:

• Retail Sales M/M -0.3%
  vs. -0.2% expected and -0.7% prior.
• Retail Sales Y/Y -2.9%
  vs. -3.1% expected and -2.1% prior (revised from -1.8%).

The BoC release the
Minutes of the October Monetary Policy Meeting:

• Members were divided
  on whether rates would need to be hiked again.
• Some members of
  governing council felt it more likely than not that overnight rate would
  need to rise further.
• Other members felt
  5% would likely be enough to bring inflation to target.
• There was a strong
  consensus that with increasing evidence of falling inflation, BoC should
  be patient.
• Agreed to revisit
  need for rate hike at future decisions, after seeing more data.
• The lack of downward
  momentum in underlying inflation caused considerable concern, could mean
  more time needed or that policy not restrictive enough.
• Agreed overall
  inflationary risks had increased.
• Persistence in core,
  elevated expectations, wage growth and atypical corporate pricing
  behaviour indicate high inflation is becoming entrenched.

The BoJ released the
Summary of Opinions report of the October Monetary Policy Meeting:

• Sustainable and
  stable achievement of the price stability target is not yet envisaged with
  sufficient certainty at this point, and thus the Bank needs to patiently
  continue with monetary easing under yield curve control.
• Will continue with
  the framework of yield curve control and the negative interest rate
  policy, at least as long as it is necessary for maintaining the price
  stability target of 2 percent in a stable manner.
• To confirm that this
  aim has been achieved, it is necessary to carefully examine future
  developments in wage hikes and whether the virtuous cycle between wages
  and prices is operating from both sides.
• Extremely high
  uncertainties surrounding economies and financial markets at home and
  abroad, it is appropriate for the Bank to increase the flexibility in the
  conduct of yield curve control, so that long-term interest rates will be
  formed smoothly in financial markets in response to future developments.
• There is still a
  distance to go before achieving the 2 percent target with the virtuous
  cycle between wages and prices, it is important for the Bank to keep
  supporting the momentum for wage hikes through continuation of monetary
  easing.
• In this situation,
  the Bank should maintain the framework of yield curve control while
  modifying the conduct of it.

The Chinese inflation
data disappointed once again as deflation remains present:

• CPY Y/Y -0.2% vs. 0.1%
  expected and 0.0% prior.
• CPI M/M -0.1% vs. 0.0% expected
  and 0.2% prior.
• Core CPI Y/Y 0.6% vs.
  0.8% prior.
• PPI Y/Y -2.6% vs. -2.7%
  expected and -2.5% prior.

Fed’s Harker (neutral –
voter) continues to support the “wait and see” approach:

• Says he supported
  the steady interest rate stance at latest FOMC meeting.
• Fed will stay higher
  for longer, no sign of near-term rate cuts.
• Now is a time to
  take stock of past rate hikes’ impact.
• Next Fed rate choice
  “could go either way” depending on the data.
• Labor market is
  moving into a better balance.
• Unemployment rate to
  rise to 4.5% in 2024 before falling.
• Confident consumers
  will help achieve a soft landing.
• Unclear yet whether
  consumers have expended spending power.
• No recession seen,
  but growth is likely to cool off.
• Inflation steadily
  falling, to hit 3% in 2024, 2% after.

ECB’s de Guindos (dove –
voter) continues to support the “higher for longer” stance highlighting the
negative growth outlook:

• We are not there
  yet. We will see how things evolve month by month, but our approach now is
  to keep interest rates at this level long enough to reach our target.
• Any discussion about
  lowering interest rates is clearly premature.
• We believe that, if
  interest rates are maintained at their current levels, inflation will
  continue to fall and converge towards our target.
• Our most recent
  projections indicated some downside risks to growth; some of these risks
  have now started to materialise and this will have an impact on inflation.
• It might be
  premature to say it, but leading indicators point to the growth outlook
  being somewhat more negative than we previously projected.
• As regards
  inflation, the evolution may not be very different from what we projected
  in September.

Fed’s Goolsbee (dove –
voter) highlighted the tightening from higher long term rates and how that
could increase the risk of overtightening:

• The historical
  evidence suggests that long rates, even more than short rates, have a very
  substantial effect on real economic performance in a number of predictable
  areas—construction, investment, consumer durables.
• If that is
  sustained, the Fed will have to think about the tightening impact of those
  credit conditions on economic performance and would there be dangers of
  overshooting.

ECB’s Centeno (dove –
voter) reaffirmed his “wait and see” stance:

• We are at a plateau in
  terms of interest rates.
• Monetary policy is
  working and helping inflation to come down.

Fed’s Barkin (hawk – non
voter) is debating whether the Fed has done enough and he’s not equating the
increase in long term rates to rate hikes:

• Whether more is
  needed from the Fed remains to be seen.
• We are making real
  progress on inflation.
• The job isn’t done,
  inflation remains too high.
• Not yet convinced
  inflation on a smooth glide path to 2%.
• Will need economic
  slowing to beat inflation.
• Any downturn will be
  less severe than past recessions.
• I don’t see us as
  done yet.
• I have a hard time
  declaring ‘sufficiently restrictive’ at any point in time.
• Long-term rates have
  loosened but I don’t think of them as a policy variable or equate them to
  rate hikes.
• A return to elevated
  inflation will mean we need to look hard if we need to do more.
• Core issue on
  whether another rate hike is needed is inflation.
• I anticipate more
  disinflation on goods.

BoC’s Rogers talked about
the importance of adjusting to higher rates as she sees a world with
persistently higher rates:

• Canadians are
  feeling some pressure as they adjust to higher rates.
• It’s easy to see a
  world where rates are persistently higher.
• It’s important for
  people and businesses to adjust to a potentially higher-rate environment.
• Adjusting early and
  bit by bit lowers the risk of abrupt steps later.
• Adjustment to higher
  rates is well underway globally, there is less wiggle room for the global
  financial sector in the event of a shock.
• Canadians are
  adjusting as they feel some pressure and juggle effects of inflation and
  higher rates.
• Data suggest most
  Canadian businesses can service existing debt as servicing costs rise and
  revenue growth slows.
• Bank is watching
  high levels of fixed-payment mortgage debt, given that 60% of mortgages
  holders must renew by end-2026.
• Most mortgage
  holders still expect they can deal with higher payments when they renew.
• BoC is not yet
  talking about reducing rates.
• Does expect house
  prices will likely come off a bit more.

Fed’s Paese (non voter)
leans on the hawkish side as she pushes back on the market’s rate cuts pricing:

• Too soon to rule out
  further US rate hikes.
• Central bank still
  has time to decide next step.
• Watching 10-year
  yield for signals on financial conditions.
• Too soon to declare
  victory on inflation.
• Local contacts
  report better balance in jobs market.
• Not sure public
  expectations are aligned with likely Fed policy path.

The US Initial Claims
slightly beat expectations, but Continuing Claims continue to increase
steadily:

• Initial Claims 217K
  vs. 218K expected and 220K prior (revised from 217K).
• Continuing Claims
  1834K vs. 1.820K expected and 1818 prior.

Fed Chair Powell (neutral
– voter) remains totally committed to bring inflation down to target as he’s
keeping all the options on the table:

• We are not confident
  that we’ve achieved sufficiently restrictive policy.
• If it becomes
  appropriate to tighten policy further, ‘we will not hesitate’.
• We will continue to
  move carefully, decide meeting by meeting.
• Attentive to risk
  that stronger growth could undermine inflation progress, which could
  warrant a monetary policy response.
• We expect GDP growth
  to moderate in coming quarters but remains to be see.
• Labor market tight
  but coming into better balance.
• The US economy has
  been stronger than expected this year.
• Economy has been ‘remarkable’.
• US economy may be structurally
  more resilient to higher rates, but I don’t see evidence yet.
• It’s hard to draw a
  ‘direct line’ from things like higher bond yields to a monetary policy
  response.
• The Fed is “not
  going to ignore” a significant bond tightening, but do not have to
  make a decision now.
• There are many
  candidate explanations for higher bond rates, says there are 5-6 good ones.
• We won’t ignore
  higher yields but don’t have to make a decision now.
• The bigger mistake
  is not getting rates high enough.
• R-star is not a
  particularly useful way to think about policy.

The New Zealand
Manufacturing PMI fell further into contraction:

• Manufacturing PMI 42.5
  vs. 45.3 prior.

ECB’s Vujcic (neutral –
voter) has a soft landing as the base scenario but keeps all the options on the
table:

• If our current
  projections materialize, then we will have a soft landing with a low
  sacrifice ratio, meaning without a recession and without a significant
  increase in unemployment.

• We cannot be certain
  that it will stay that way until we reach our goal, but in my view the
  soft landing is still a central scenario.
• However, we have to
  stand ready either for a possibility of rate increases or rate cuts,
  depending on incoming data in 2024.

The UK GDP for Q3 beat expectations
although growth was flat:

• GDP Q3 Y/Y 0.6% vs.
  0.5% expected and 0.6% prior.
• GDP Q3 Q/Q 0.0 vs.
  -0.1% expected and 0.2% prior.
• GDP September M/M
  0.2% vs. 0.0 expected and 0.1% prior (revised from 0.2%).
• GDP September Y/Y
  1.3% vs. 1.0% expected and 0.5% prior (revised from 1.3%).

The University of
Michigan Consumer Sentiment survey missed expectations by a big margin with inflation expectations continuing to climb:

• Consumer Sentiment 60.4
  vs. 63.7 expected and 63.8 prior.
• Current conditions
  65.7 vs. 69.5 expected and 70.6 prior.
• Expectations 56.9 vs.
  59.5 expected and 66.0 prior.
• 1-year inflation expectations
  4.4% vs. 4.2% prior.
• 5-10 year inflation
  expectations 3.2% vs. 3.0% prior.

The
highlights for next week will be:

• Monday: Japan
  PPI.
• Tuesday: UK Jobs
  data, German ZEW, NFIB Small Business Optimism Index, US CPI.
• Wednesday: Japan
  GDP, Australia Wage data, China Industrial Production and Retail Sales, UK CPI,
  US PPI, US Retail Sales, PBoC MLF.
• Thursday: Australia
  Jobs data, US Jobless Claims, US Industrial Production, NAHB Housing Market
  Index, New Zealand PPI.
• Friday: UK
  Retail Sales, Canada PPI, US Building Permits and Housing Starts.

That’s all folks. Have a
great weekend!