The Week in Review – Week Ended November 6,

2022

• US – ISM Manufacturing (Tue) & Services (Thu)

• US – Federal Reserve Rate Decision (Wed)
• US – Trade Balance (Thu)
• US – Non-Farm Payroll Employment (Fri)
• Eurozone – Consumer Prices (Mon)
• Australia – Reserve Bank of Australia Rate Decision (Tue)
• UK – Bank of England Rate Decision (Thu)
 US – ISM Manufacturing (Tue) & Services (Thu)
• The ISM manufacturing index posted a 50.2 reading, representing
the percent of companies reporting expansion for October. That
was slightly better than the Dow Jones estimate for 50.0 but 0.9
points lower than in September.
• One uplifting piece of news from the data was that the prices
index fell another 5.1 points to a 46.6 reading, demonstrating a
reduction in inflationary pressure. Order backlogs also declined,
dropping 5.6 points to a 45.3 reading, while supplier deliveries fell
5.6 points to 46.8 and employment edged higher to 50.0.
• On the services side, the headline number for October posted
slightly weaker than expectations, coming in at 54.4 against
forecasts of 55.5 and a previous print of 56.7.
• Employment came in weaker which – from a Fed perspective in
terms of tackling employment pressures – was a plus, with the
contractionary reading of 49.1 handily off from a previous 53 and
market calls for 51.6, but new orders continue to shrink and prices
continue to rise.
• The new orders index had been expected to post a 58.8 number,
off from 60.6, but instead came in even softer at 56.5; still in
expansion territory, but notably weaker.
• Prices paid continued their climb, meanwhile, although pleasingly
not to the extent expected. The October number 70.7 was higher
than September’s 68.7, but below consensus calls of 71.3.
 US – Federal Reserve Rate Decision (Wed)
• As widely expected, the US central bank raised its short-term borrowing
rate by 75 basis points to a target range of 3.75%-4%, the highest level
since January 2008.
• Of perhaps more interest to the markets, however, was any language
indicating that this could be the last 75 basis point move. The new
statement did seem to hint that such a policy change may be on the cards,
saying that in weighing future hikes the Fed “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.”
• However, the statement did also maintain the language pertaining to more
hikes, and expanded on previous versions, saying “The Committee
anticipates that ongoing increases in the target range will be appropriate in
order to attain a stance of monetary policy that is sufficiently restrictive to
return inflation to 2 percent over time.”
• Fed Chair Powell also subsequently dismissed the idea that the Fed may be
pausing soon, calling it “premature”, though he said he expects a
discussion at the next meeting or two about slowing the pace of tightening.
• There was also tacit acknowledgment that the runway is shortening for the
elusive ‘soft landing’ to be accomplished, with the expected terminal rate
for hikes now higher than it was at the September meeting, as inflation
data has thus far remained resilient to tightening.
• It’s now essentially a coin toss as to whether we see a 50 or 75 basis point
rise at the FOMC’s next meeting in December, with current market pricing
indicating that the fed funds rate will top out near 5% before the rate hikes
cease.
 US – Trade Balance (Thu)
• The US Census Bureau and the US Bureau of
Economic Analysis jointly announced that the
goods and services deficit in September was -$73.3
billion, up $7.6 billion from the -$65.7 billion
revised August level.
• This marked the first time in six months that the
deficit had widened, as import growth outstripped
exports during the month, a reversal that is
expected to continue as imports rebound and
weaker growth abroad and a stronger dollar weigh
on demand for US goods and services. Exports
declined for the first time in eight months, while
imports rose for the second time in six months.
• In keeping with recent data elsewhere in the
economy, price growth has begun to roll over, as
both the import and export price indices declined
for the third straight month in September. In real
terms, goods imports rose 2.1% while real goods
exports slid -0.8%.
 US – Non-Farm Payroll Employment (Fri)
• Total nonfarm payroll employment increased by 261k in October;
ahead of the 200k consensus expectation but lower than the
upwardly-revised 315k in September
• The unemployment rate ticked up two tenths to 3.7%, with
notable job gains occurring in health care, professional and
technical services, and manufacturing being offset by
pronounced weakness in construction, warehousing and finance.
• Despite the top line strength, underemployment rose a tenth to
6.8% and average hourly earnings dropped from 5% to 4.7%, YoY.
On a monthly sequential basis, however, earnings rose 0.4%; up
from 0.3% a month ago and ahead of 0.3% expectations.
• The labor force participation rate also dipped from 62.3% to
62.2%. This would go some way to explaining the higher
unemployment rate, and so what would be ostensibly good news
in terms of upcoming Fed thinking should instead be taken with a
pinch of salt.
• Perhaps a little surprising was the fact that hurricane Ian had “no
discernible effect” on the numbers.
• All things considered, this print does little to impact the Fed’s
calculus when it meets again in December. We are still looking at
what amounts to full employment in the US, with wages growing
below the level of inflation.
 Eurozone – Consumer Prices (Mon)
• Euro area annual inflation leapt in October to 10.7%
from 9.9% in September, according to a flash
estimate from Eurostat.
• Energy continued to exert strong upside pressure,
coming in at 41.9%, YoY, ahead of the 40.7% level
seen in September.
• It was by no means the sole culprit, however, with
followed by food, alcohol & tobacco showing YoY
growth of 13.1%, compared with 11.8% in
September, while non-energy industrial goods (6.0%,
compared with 5.5% in September) and services
(4.4%, a tick higher than the 4.3% seen in
September).
• The core ‘X F,E,A,T’ number came in slightly ahead of
expectations at 5.0%. The market had sought a 4.9%
reading, after seeing 4.8% a month ago.
• Unlike the US, where recent data points to having
rolled over on inflation, the Euro area is still in search
of that peak.
Australia – Reserve Bank of Australia Rate Decision (Tue)
• The Reserve Bank of Australia (RBA) decided to increase the cash rate
target by 25 basis points to 2.85% at its meeting last Tuesday. It also
increased the interest rate on Exchange Settlement balances by 25 basis
points to 2.75%.
• Admitting that inflation in Australia is too high at 7.3% YoY, the highest it
has been in more than three decades, RBA Governor Phillip Lowe
attributed global factors to explain much of this high inflation, but also
said that “strong domestic demand relative to the ability of the economy
to meet that demand is also playing a role.” This last point is arguably the
central tenet of Modern Monetary Theory (MMT) inasmuch as the point
at which inflation is deemed problematic under MMT is when the level of
money in the economy (leading to inflation) gets ahead of the productive
capacity of the workforce.
• The RBA now forecasts peak inflation to hit around 8% later this year,
before dipping to 4.7% in 2023 and a little over 3% in 2024, as a
combination of supply constraint easing, softer global demand and
commodity price pullbacks combine to ease the pressure.
• The Bank’s central forecast for GDP growth has been revised down a little,
with growth of around 3% expected this year and 1.5% in 2023 and 2024.
• The unemployment rate was steady at 3.5% in September, around the
lowest rate in almost 50 years, and both job vacancies and job ads are at
very high levels, although employment growth has slowed over recent
months as spare capacity in the labor market has been absorbed. The
RBA forecast is for the unemployment rate to remain around its current
level over the months ahead, but to increase gradually to a little above
4% in 2024 as economic growth slows.
 UK – Bank of England Rate Decision (Thu)
• In its largest hike since 1989, the Bank of England raised interest rates
by 75 basis points last Thursday, and warned of a prolonged recession
as policymakers sought to temper market expectations for further
aggressive monetary policy tightening.
• The MPC voted by a majority of 7 to 2 to increase Bank Rate by 75
basis points, to 3%. The two outliers counterbalanced one another,
with one member preferring to increase Bank Rate by 50 basis points,
to 2.75%, and the other member favoring an increase to Bank Rate by
25 basis points, to 2.5%.
• In a classic piece of establishment understatement, the accompanying
committee statement noted that “Since the MPC’s previous forecast,
there have been significant developments in fiscal policy.” Yes – zero
progress, yet significant developments.
• Presumably keen not to get their prints on the train wreck that could
unfold in the Autumn Statement scheduled for 17 November, the MPC
was keen to stress that its current forecast does not incorporate any
measures that Jeremy Hunt may announce in this statement.
• UK GDP is now projected to decline by around 0.75% over the second
half of 2022, reflecting the squeeze on real incomes from surging
energy and tradable goods prices, and is projected to continue to fall
throughout 2023 and the first half of 2024, as “high energy prices and
tighter financial conditions weigh on spending,” the Bank said.
• It is now expected that the fallout in the labor market will presage a
rise in unemployment to 6.5% by 2025.
 The Week Ahead – Week of November 7, 2022
• US – Mid-Term Elections (Tue)
• US – Consumer Prices (Thu)
• US – Consumer Sentiment, U. of Michigan (Fri)
• China – Trade Balance (Mon)
• UK – Q3 GDP (Fri)
 US – Mid-term Elections
• While clearly not an economic release, a mid-cycle election in the
United States seems like something that it would be remiss to
ignore, especially with the House, Senate and indeed country as
divided as it currently stands.
• This election won’t be a game-changer for financial markets
grappling with inflation and recession threats, but it could spark
some relief moves in the dollar and stocks.
• The smart money is behind the Democrats losing control of
Congress. The party currently holds a slim majority in the House
of Representatives, while the Senate is split 50-50, with Vice
President Harris’s tiebreaker vote giving the Democrats control of
this chamber too.
• Opinion polls and betting markets place the probability that
Republicans will take back the House at around 85%. The Senate
race is too close to call, however, with both opinion surveys and
bookmakers viewing it essentially as a coin toss.
• Historically speaking, a divided Congress tends to benefit stock
markets since it limits the scope for passing anti-business
legislation, such as tighter regulations or higher corporate taxes.
As the chart shows, stocks have always been higher six months
after a midterm election. Indeed, this has been true over the last
seven decades.
• In terms of Fed policy, a split Congress would serve to limit the
government’s ability to roll out new spending, which – all else
being equal - argues for slower growth and softer inflation.
 US – Consumer Prices (Thu)
•In contrast with the Eurozone and UK, where we still appear to
searching for the summit, US headline CPI has been slowly coming
down from its summer peaks of 9.1% and may well have rolled over
for good. Most of the expected cooldown in price pressures is linked
to the decline in transportation and fuel costs, and it’s in these areas
that we’ve seen respite.
•The same cannot be said for core prices, though, which have
continued to trend higher, hitting a 40 year high of 6.6% in
September. The uncertainty in this area revolves around the bigger
and ‘stickier’ categories, such as owner’s equivalent rent (OER) and
medical care, which combined account for roughly 40% of the entire
CPI basket.
•Companies have thus far had a good deal of success in passing on
the increases in their costs to consumers, and it is now starting to
make itself felt in underlying core prices, and squeezing consumer
incomes further.
•Thursday’s US CPI number is expected to be key in deciding whether
we see another Fed raise of 75 basis points next month, or whether
we start to price in the prospect of a slowdown in the pace of rate
hikes, from 75 basis points per meeting to a slower pace of 50 basis
points or even 25 basis points next year.
•Current market expectations are seeking a headline CPI of 8%
against the aforementioned September print of 8.2%, while at the
core level analysts are looking for a YoY print of 6.5% against a prior
reading of 6.6% in September.
 US – Consumer Sentiment, U. of Michigan (Fri)
• Consumer sentiment data from the University of Michigan is
released on Friday, providing early insight on the state of play in
November, as it is released just 11 days into the month. Last
month saw an upside surprise to the headline sentiment index,
with a modest increase in optimism, and November’s version
may provide more of the same. This latest report may be similar
to last month's increase, as cheapening gas prices weave their
outsized magic on the US consumer psyche, amid the storm of
an economy going toward a recession. All is not sunshine and
roses, though, as the consensus forecast is for a slight -0.3
decrease, leaving sentiment at a historically low 59.6.
• Inflation expectations are the most closely watched
subcomponent of this release, as they allow the Fed to assess if
inflation is becoming ingrained in the mindset of households.
• This will be the first of two such readings the Fed will see
between now and the December FOMC meeting. Chair Powell
focused on expectations in his August 2022 speech at Jackson
Hole, and again pointed to these expectations during the Q&A
portion of the November FOMC post-meeting press conference,
so they are clearly seen as a key part of the equation.
• The Federal Reserve will be watching these indicators keenly for
evidence that its four consecutive 75 basis point hikes are
affecting consumers and dampening their inflation concerns.
 China – Trade Balance (Mon)
• Last month China’s September trade numbers were unexpectedly delayed by a
couple of weeks. Officially, this was claimed to be due to the quite bizarre
reason that the required sign-off on the releases could not be obtained, as
anyone who is anyone was at Xi’s victory lap party.
• The delay prompted concerns that the data was likely to paint a really ugly
picture of the China economy, so when the numbers that were belatedly
released came in slightly ahead of expectations, many smelled a rat. There is
little doubt that they probably don’t offer an accurate reflection of the problems
facing the Chinese economy as Covid cases continue to surge and winter
approaches.
• The extent to which the COVID Zero policy is affecting both China and the world
cannot be overstated. The Hang Sang leapt 5.2% on Tuesday on the mere rumor
- circulated through social media and since denied by the government, - that a
‘reopening committee’ was being established to discuss ways to wind down
anti-virus controls, and Chinese equities continued their strength throughout
the week, despite the denials.
• The real head-scratcher here ought to be: if they DON’T actually have a
committee set up for this eventuality, why not?! But I digress…
• Imports in September saw a modest increase of 0.3%, unchanged from August,
while exports also rose 5.7%, beating expectations of a 4% increase, and down
from 7.1% in August. For October, a softening of exports to 4.3% is expected,
while imports are likewise pegged to decline to 0.1%. The combined effect
would see a widening of the trade surplus from $84.74 billion to $95.95 billion,
or 13.2%
• Domestically, consumer demand continues to look tepid even as industrial
production improves. The recent manufacturing and non-manufacturing PMIs
for October also point to a weak economy, with both sliding into contractionary
territory.
 UK – Q3 GDP (Fri)
• UK economic growth data for the third quarter will be released on
Friday. Putting it mildly, the UK economy is not in a very good place at
the moment. Recently released Bank of England revised forecasts
indicate the economy is likely in recession already, and that
recessionary conditions are set to last throughout 2024. With this Q3
2022 GDP data release, we ought to see irrefutable evidence that the
recession is indeed under way. With inflation still in search of a peak,
and additional interest rate hikes locked and loaded in the chamber,
the UK recession could be one of the more severe recessions to
materialize in the years ahead.
• Consensus forecasts estimate that the economy contracted -0.5%
QoQ in Q3, while the YoY growth is set to slow from a previous 4.4%
level to a far more modest 2.1%.
• The most recent revision to UK Q2 GDP from -0.1% to 0.2% may well
have offered the opportunity for the UK government to say that the
UK economy is in better shape than originally feared, but hardly gave
them license to sound the trumpets.
• This first iteration of Q3 GDP on Friday is unlikely to fully capture the
extent of the pain facing a lot of consumers in the UK right now. PMIs
have been trending lower for months, while in August and September
retail sales fell off a cliff, dropping by -1.7% and -1.4%.
• The recent monthly GDP numbers offer scant solace, with July
expanding by 0.1%, while August saw a -0.3% contraction. September
is unlikely to be much better, given the extra bank holiday for the
Queen’s funeral, which means we could see a contraction of -0.5%.