Week in review
Intense speculation over what the Fed will do and uncertainty over how much is priced kept markets trading in a relatively tight range through most of the week. European peripheral spreads have started widening again as sovereign concerns have started to re-surface. Reports late Friday afternoon that the Portuguese government has reached an agreement with the socialists on the 2011 budget should provide some relief to markets. Reports that the US Administration is considering extending middle income tax cuts permanently and higher income tax cuts temporarily may also provide some boost to sentiment.
The macro calendar does not get any more packed than this. We kick off with the usual monthly global PMIs, in particular the China PMI and US ISM (slight moderation is expected for both, more details below). We get our final GLI reading as well, which is important to watch for confirmation of stabilizing momentum. The initial reading showed a positive uptick after four months of negative momentum.
The US mid-term elections is on Tuesday, followed by the all important FOMC meeting on Wednesday. Our US economists’ baseline view is for a program of about $500 bn in Treasury purchases, to be accomplished over a period of about six months, but it is quite possible that a program of similar implied size might instead be specified in terms of a monthly purchase rate. In either case, there should be a clear indication that the program could extend beyond the initial commitment. Ultimately, our US economists expect the cumulative easing to reach a possible $2trn..
We also have important central bank meetings on either side of the FOMC decision, with the latter weighing heavily on the individual response functions. The RBA meets the day before the FOMC and it is likely that they hold rates steady (although our Australia economists think they go ahead with a hike in December). BOE, ECB and BOJ are all scheduled to meet soon after the FOMC. The BoJ meeting was advanced to allow an earlier start of its asset purchases program. For the MPC, our UK economists do not expect an announcement of additional QE. Policymakers around the world will no doubt be closely watching the market reaction following the FOMC decision.
We end the week with the key non-farm payrolls release. We expect the headline at +50k and private sector payrolls at +75k, below consensus at +60k and +80k respectively. We and consensus expect the unemployment rate to stay unchanged at 9.6%.
Overall, whether or not the FOMC outcome is seen as dovish enough relative to market expectations will dictate the immediate price action. But if global cyclical indicators show further signs of global decoupling, the backdrop of Fed easing plus the expected political buy-in for burden sharing in adjusting global imbalances means the underlying dominant macro theme that will persist after the dust settles is likely one of broad USD weakness still.
Monday Nov 1
Global PMIs (Oct) PMI releases around the world will give us the latest update on ‘global decoupling’. On the China PMI, we expect slight moderation on seasonality. Consensus is expecting unchanged at 53.8.
Korea CPI, trade (Oct) We expect inflation in October to remain elevated at above 3%, despite the recent normalization of vegetable prices. On exports, we believe growth will be robust at around 25% yoy.
US ISM (Oct) We expect a moderation to 53.0, below consensus of 54.0
US PCE Core price index (Sep) We expect a slight rise of +0.05% mom versus consensus expectations of +0.1%.
US personal income and spending (Sep) We expect a flat reading for income and +0.2% for spending vs consensus at +0.2% and +0.4% respectively
Tuesday Nov 2
European final PMI (Oct) The flash readings showed a surprise improvement to 54.1 from 53.2.
India central bank meeting We think the Reserve Bank of India will hike the policy repo and reverse repo rates by 25 bp each in the upcoming policy meeting, in-line with consensus.
Australia central bank meeting Following the benign September quarter CPI report, markets have pared back expectations of a rate hike. While we agree that the Board will find it difficult to publicly justify a move and our central forecast is for an 'unchanged' outcome, we think the economic case for a 25bp rate hike can still be made. We expect a hike in December.
US Midterm Elections
Wednesday Nov 3
ADP employment (Oct) Consensus expects a rebound to +20k from -39k previously.
ISM non-manufacturing (Oct) We expect 53.0 versus consensus of 53.5.
US FOMC decision Although changes in the statement designed to provide greater commitment to low short-term interest rates are possible, the centerpiece is likely to be a return to large-scale asset purchases. Our baseline view is that the FOMC will announce a program of about $500 bn in Treasury purchases, to be accomplished over a period of about six months, but it is quite possible that a program of similar implied size might instead be specified in terms of a monthly purchase rate. In either case, we expect a clear indication that the program could extend beyond the initial commitment.
Thursday Nov 4
Indonesia central bank meeting We expect the central bank to stay on hold, in-line with consensus.
Czech monetary policy meeting No change to rates expected, in-line with consensus
ECB meeting No significant changes in policy are expected. The ECB will likely acknowledge that the overall data has been quite encouraging since the last meeting but also to caution against any premature ‘all clear’.
UK MPC meeting Our UK economists expect no additional QE purchases by the BoE.
US Jobless claims Consensus is expecting initial claims to creep back up to 445k after the surprise drop to 434k last week.
Friday Nov 5
BoJ Meeting The November monetary policy meeting was advanced, to allow the bank to start its asset purchases sooner. The BoJ will be watching the market reaction to the preceding FOMC meeting but even in the event of a major market reaction, our Japan economists see little room for additional measures by the BOJ, in part because it has not yet begun implementing its comprehensive easing measures. However, we do think the BOJ may respond by clearly reiterating its monetary easing stance.
Spain Industrial production (Sep) The recovery in Spanish IP is still virtually non-existent as production levels remain only marginally above their recession-time trough. We do not expect this sluggish trend to change any time soon, and we expect IP in September to have recorded only a minor +0.3%mom increase.
US Nonfarm payrolls (Oct) We expect headline at +50k and private sector payrolls at +75k, below consensus at +60k and +80k respectively. We and consensus expect the unemployment rate to stay unchanged at 9.6%
Canadian payrolls (Oct) Consensus expects a 10k gain in jobs after last month’s decline of -6.6k.
Fed’s Bernanke, Evans, Fisher, Bullard, Kocherlakota, Lacker, and Plosser speak at Atlanta Fed Conference
From Goldman's Tan/Stopler dynamic duo