Today’s podcast

Overview: Fed speakers remain hawkish

• Dull day Friday, but bad w/e news as China tries to manage its Covid
• Oil falls sharply as China demand weighs as does other issues (WTI -2.4%)
• Yields rise as Fed talk remains hawkish, Powell speaks on 30 November
• 2/10s curve inverts further to -71.0bps, the most inverted in forty years
• This week: RBA’s Lowe, RBNZ, FOMC Minutes, ECB Minutes, Global PMIs

Friday was a dull day as far as data or news events were concerned. Treasury yields though did rise following hawkish commentary from the Fed’s Collins, who seemingly put a 75bp hike back on the table for December (“But 75 still is on the table, I think it’s important to say that as well”; markets have 52bps priced). The 10yr rose 6bps to 3.83%, while there was a sharper 8bps lift for 2yr yields to 4.53%. The lift in nominals was entirely reflected in reals with the 10yr TIP yield up 8.3bps to 1.57%, while the implied inflation breakeven fell -2.6bps to 2.27%. US 2/10s curve inverted further to -71.0bps, its most inverted in forty yields. The fall in breakevens partly reflected the sharp fall in oil prices with WTI -2.4% on a combination of China demand concerns, and reduced oil capacity through a US pipeline. Across the pond European debt markets saw a smaller rise in yields despite hawkish ECB commentary, with the first TLTRO repayment smaller than expected (€296bn vs. 600 expected). Equities rose in choppy trade with the S&P500 +0.5%, though did fall -0.7% over the week. The USD was firmer with higher rates giving support (DXY +0.2%) with most pairs weaker, including the AUD -0.4% to 0.6657. GBP was one exception, up 0.5% to 1.1901.

As for the week ahead, its relatively quiet with the US out for Thanksgiving on Thursday (equity and bond markets close), while markets also close early on Friday with many likely taking a long weekend too, not to mention the World Cup. Instead, markets are likely to focus on Chair Powell’s upcoming speech on 30 November on “on economic outlook and the US labor market” at Brookings. Could Powell use this again to push back against market pricing for cuts in 2023 and the lift in equity markets over recent weeks? Note flows data suggest nearly $23bn went into global equities over the latest weekly reporting period, the largest in 35 weeks. While markets price a Fed Funds Rate of 5.07% by mid-2023, they are also pricing in 41bps worth of cuts in 2023. One hint perhaps came from Bostic who spoke on the weekend, and while saying he saw a further 75-100bps worth of cuts, also pushed back against cuts (“…if unemployment rises uncomfortably — it will be important to resist the temptation to react by reversing our policy course until it is clear that inflation is well on track to return to our longer-run target of 2%”). In Australia it is also quiet with only Governor Lowe speaking on Tuesday on “Price Stability, the Supply Side and Prosperity”.

First to Fed speak which seemed to be the catalyst for the lift in yields. Boston Fed President Collins suggested 75bps was still in play for December – note markets price around 52bps for the December meeting. Colins noted: “But 75 still is on the table, I think it’s important to say that as well.” That comment by itself sounds hawkish, but Collins overall was more cautious and also expressed confidence that policymakers can tame inflation without doing too much damage to employment (see Collins: Parsing the Pandemic’s Effects on Labor Markets for details). Instead, it was likely that comment coming after a bevy of Fed Speakers during the week that added a hawkish hue to it. Recall the Fed’s Bullard on Thursday stating the appropriate zone for the Fed Funds rate could be in the 5-7% zone (see Bullard: Getting into the Zone).

The Fed’s Bostic also spoke on Saturday and while the sound bite was certainly less hawkish than Bullard (“If the economy proceeds as I expect, I believe that 75 to 100 basis points of additional tightening will be warranted”), he also pushed back aggressively on the Fed cutting in 2023 unless inflation was on track to return to 2% (“On the other hand, if economic conditions weaken appreciably — for example, if unemployment rises uncomfortably — it will be important to resist the temptation to react by reversing our policy course until it is clear that inflation is well on track to return to our longer-run target of 2%”). (see Bostic: From Academia to the FOMC: The Journey of One Fed President). Note Chair Powell is scheduled to speak on the economic outlook and the US labour market at Brookings on 30 November.

The big move on Friday and over the week was oil prices. WTI was down some -2.5% and it has fallen by more than 10% over the past week. The near-term outlook for oil has deteriorated with contango emerging (upward sloping curve) with uncertainty around China’s demand given surging COVID cases. Some traders also noted reduced capacity of Shell’s Zydeco oil pipeline which connects oil pipelines in Houston and Port Neches. As for China’s Covid surge, China recorded its first official death from the virus since May with a 87-year old man dying in Beijing. Analysts continue to cite low vaccination rates among the elderly as being a big hurdle to re-opening; only 66% of those aged 80 and above are fully vaccinated, and only 40% have had a booster. Beijing has surged residents in its most populous district (3.5m people) to stay at home on the weekend and on Monday. Chongqing is also reported to be under defacto lockdown. The press have taken a more hawkish approach to zero-Covid since mid-last week, noting China isn’t relaxing or “lying flat.”

ECB speakers were also out in force on Friday. ECB President Lagarde repeated the mantra that the policy rate might need to head into restrictive territory to drive inflation back down to target, even given the rising risk of recession, “withdrawing accommodation may not be enough”. Bloomberg reports that momentum is lacking for another aggressive 75bps hike next month and the ECB may step down to a 50bps hike, according to its sources, as long as this month’s inflation reading doesn’t produce another upside surprise. The ECB Minutes which are out this week will be parsed closely for any discussion of QT with the ECB’s Knot stating the sooner QT begins, the lower the peak inflation and terminal rate will be. Also on Friday the first TLTRO repayment came in lower than expected at €296bn against €600bn expected. The lower repayment probably explains why European yields were resilient to the rise in global yields (German 10yr -0.6bps to 2.01%).

Finally data was very second-tier on Friday with only US existing home sales which fell 5.9% m/m. Since January existing home sales have fallen by around 32%.

Coming up this week:

• Australia: Quiet week with only a speech by RBA Governor Lowe of note. Dr Lowe is giving the annual dinner address to CEDA on Tuesday night with the title of the speech ‘Price Stability, the Supply Side and Prosperity’. Given the title it could be an opportunity to clarify the RBA’s approach and commitment to its price stability mandate. We would expect the messaging to suggest a pause is not on the table in the near term, especially after strong Q3 wages data and a 3.4% unemployment rate. NAB expects a string of 25bp hikes in December, February and March, taking the cash rate to 3.6% (see our recent Weekly: Is the RBA as dovish as they sound? for details). Markets currently price 20bp for December and a terminal rate of 3.8 by mid-2023. Elsewhere during the week, there is an opportunity on Thursday to hear from the RBA review panel, which could give some insight into what issues are the most open to reform.
• Offshore:
• NZ: RBNZ meets on Wednesday’s and our BNZ colleagues see a line ball call between the RBNZ’s MPC hiking 75 or 50 basis points. It depends on how much weight the Bank puts on the recent evidence of exceptionally strong (core) inflation, versus the many leading indicators that are promising some relief in due course. We have opted for 75bps, which would take the OCR to 4.25%. But this is not with any strong conviction, and we could understand if the Bank suffices with a 50bp move on the day. As for what November’s MPS will forecast as a peak on the OCR, we would guess something in the top half of the 4s.
• US: Quiet week with the Thanksgiving Day Holiday on Thursday (stock and bond markets are closed) and markets also close early on Friday, meaning liquidity is likely to be thin. Over the past week. Fed speakers have been pushing back against the market reaction to the recent lower-than-expected CPI report, and this week’s FOMC Minutes on Wednesday will also likely add to the flavour of the Fed continuing to hike rates and seeing terminal rate that is higher than that given back in September. Markets currently fully price a 50bp hike at the December meeting and a terminal rate of 5.0% by May 2023, higher than the 4.9% seen after the CPI figures. Other data pieces include the October Durable Goods and Jobless Claims – all out on Wednesday given Thanksgiving on Thursday. Also note its Black Friday sales on Friday so expect anecdotes around strength/or the lack of it in sales.
• CH: China’s 1- and 5-year LPR rate are seen unchanged on Monday, but most focus remains around the COVID situation. Official case counts at their highest in six months, including record infections in Beijing and Guangzhou. There have been some tweaks at the margin recently, but with 80+ third dose coverage at just 40%, authorities are unlikely to be comfortable with community transmission going into winter. Most analysts still think China is likely to start its pivot after the winter from March/April 2023.
• EZ/UK: Global PMIs on Wednesday the main focal point, while the ECB Minutes on Thursday could garner greater than usual attention. Interest is in whether there is anything more to add on early Governing Council discussions around QT beyond the statement that it will not stop reinvesting principal payments under the Asset purchase programme until an extended period has past when the first rate hike (last July). Something for (further) discussion at the 15 December meeting? Markets price a 30% chance of a 75bp hike and a terminal rate of 3.0% by mid-2023.  EU energy ministers also hold a meeting on Thursday to discuss measures on energy costs, including a potential cap on natural-gas prices, as Winter approaches.

Coming up today (very quiet):

• NZ: Credit Card Spending: Not usually market moving and no consensus available. Prior was 0.7% m/m.
• CH: Loan Prime Rate: No changed expected to either the 1yr (3.65%) or 5yr rate (4.30%).
• EZ: German PPI/ECB Speak: Sensitivity to inflation indicators remain high with the PPI consensus at 42.1% y/y. There are also plenty of ECB speakers: Vasle, Holzmann, Centeno, and Bundesbank head Nagel.
• UK: BoE’s Cunliffe: Unlikely to be market moving with Cunliffe speaking on DEFi digital currencies.
• US: Fed’s Daly: We have heard a lot from Daly recently, but she is speaking again on ‘price stability’ with Q&A.

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