Core central bankers have a difficult task ahead, trying to chart a course to start to unwind pandemic stimulus while addressing rising inflation pressures amid widening and varying impacts from supply chain disruptions. Policy decisions from the ECB, BoJ, and BoC are front and center this week, with the FOMC and BoE next. None are expected to hike rates yet, but the BoC, BoE, and FOMC are looking to start or continue slowing QE purchases in the near future.
Key Drivers for the Week of Oct. 25, 2021
TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.
- Focus on monetary policy meetings from ECB, BoJ, BoC this week, FOMC, BoE next
- Inflation, Hyperinflation & Stagflation fears
- Supply chain issues continue getting worse
- U.S. GDP to highlight Q3 slowdown, home sales, durables, income, spending on tap
- Facebook, Microsoft, Amazon, Apple, McDonald’s, Coke lead big earnings slate
- Treasury’s $183 bln in 2-, 5-, 7-year auctions could see tough sailing
- BoC to keep rate unchanged but likely to announce end of QE; MPR and GDP due
- BoJ seen on hold, but likely to trim 2021 GDP outlook; heavy month-end data slate
- ECB on hold, may send dovish signal even as PEPP seen ending in March
- Eurozone Q3 GDPs, ESI economic confidence, CPI reports highlight
- German Ifo business climate, GfK consumer confidence, HICP, jobless numbers
- UK CBI distributive trade data, consumer credit; BoE meeting in November is “live”
On the other hand, there is a risk the ECB sends dovish signals and pushes back against market expectations for rate hikes later in 2022. The BoJ is expected to revise down its 2022 growth projection and hence is unlikely to give any indication of slowing its corporate funding program yet. There’s plenty of data this week that will help provide some guidance for the policy decisions.
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It has been tough sailing for bond markets over the past several months. Inflation worries, growth concerns, supply constraints, and more hawkish central banks have had conflicting impacts on yields, but ultimately the bears have won. And the rise in rates has generally picked up again over the past month as QE tapering nears, energy prices take off, and the “transitory” nature of price pressures is questioned with central bankers acknowledging prices could be elevated for longer than expected.
Mohamed El-Erian, an economist, warns market participants and the public that things will get worse before getting better. He believes inflation will remain at four to five percent. El-Erian is one of many economists who have expressed concerns that the current level of inflation will continue.
Federal Reserve officials have stated this week that they are still waiting for signs of inflation. Chris Waller, a member of the Federal Reserve Board of Governors, stated that the Fed will be able to better determine if inflation has been transitory in the coming months. Waller stated that if inflation continues to rise through the rest of the year, then a more aggressive policy response other than tapering might be necessary in 2022. This likely means raising interest rates. It could reduce inflation, but also slow down economic growth. This is just one reason why I believe the Fed doesn’t have any other options.
The San Francisco Fed anticipates that core inflation will be slightly higher next year. Consumer Price Index (CPI), which is currently at a 14-year peak of 5.4%, has been overwhelming consumer concern that prices will rise beyond what the Fed can manage. On average, the price of all energy sub-categories has increased by 24.8%. On an unadjusted 12-month basis, gasoline alone has increased 42.1% by September 2021. Food is on the other side, however, up 4.6% overall, with certain meats and beans growing more strongly.
The Federal Reserve’s Beige Book compiles data from every Fed bank and branch director across the country to provide commentary on economic conditions. The October issue’s national aggregates show that the growth rate has slowed over the past 45 days because of COVID-19 concerns and supply-chain disruptions. Real estate activity has slowed slightly and loan demand has remained flat. Price increases were experienced in all regions of the country, including energy. Although some people expect prices to decrease over the next 12 months, most believe that a rate increase will occur sooner than expected if inflation doesn’t ease.
The Federal Reserve Bank of Atlanta has again downgraded its real GDP estimate for 2021’s third quarter to 0.5%. This is a continuation of a troubling trend over recent months. It was 1.2% on October 15, 6% in August and 14% in May. Blue-chip banks still forecast a 4% increase in GDP. Atlanta Fed economists say that growth indicators have declined across the board. This indicates that consumers are reducing their spending in response to inflation.
Analysts at Goldman Sachs stated that they disagreed with Atlanta Fed’s GDP growth estimates. They said, “In our opinion, [the Atlanta Fed projection] seems too pessimistic about net trade and investment.” This could be because Atlanta Fed’s current GDP is volatile historically due to consistently inaccurate forecasts. For example, going into the COVID locks, the Atlanta Fed repeatedly overestimated economic resilience. This led to weekly downward revisions in quarterly growth and, again, an overestimation of economic recovery.
Moody’s Analytics recently stated that supply chain problems will only get worse before they improve. One analyst believes that the supply chain supporting global economic growth may not be able to recover fast enough to meet consumer demand. Gina Raimondo, U.S. Secretary for Commerce, recently said that she is optimistic that the holiday season will alleviate supply chain problems in the U.S. Moody’s analysts disagree with Raimondo’s and the Biden administration. They claim that there are a number of issues that “have combined for an ideal storm where global production will suffer because deliveries aren’t made in time, prices and costs will rise, and that GDP growth will not be as strong as it should.”
We should remind you that economists continue to warn of recession as we head into winter. Given the Atlanta Fed’s August forecast of 14% GDP growth in Q3 2021 (which was 0.5% in October), future cuts to Q4 could well be seen as economic contraction.
U.S. preliminary Q3 GDP (Thursday) will be the focus of the economic data amid expectations for a steep slowing in growth. That could make for a difficult dilemma for the FOMC at its November 2-3 policy meeting and could see the Fed hold off on announcing QE tapering later in the month. Other reports this week include home sales, durable orders, income, consumption, the ECI and confidence numbers. The earnings calendar is also very heavy, while the Treasury auctions $183 bln in 2-, 5-, and 7-year notes.
We expect Q3 GDP growth to slow to 2.8% from Q2’s 6.7% pace, and after the 6.6% clip from Q1. Supply chain bottlenecks sharply curtailed activity last quarter despite the massive stimulus spending. Vehicle shortages capped consumption growth and net exports subtracted a hefty -$72 bln as an estimated 9.0% gain in imports greatly outpaced an estimated 0.9% rise in exports. Inventories likely added sharply to growth as a -$168.5 bln liquidation rate in Q2 was likely followed by a smaller -$20.2 bln pace in Q3. As for prices, the index should post a 5.0% increase, also due to supply constraints, after a 4.3%Q2 pace.
New home sales for September (Tuesday) are projected to increase 4.1% to a 770k pace, following an August rise to 740k from 729k in July. We’re seeing rapid growth in demand for new homes in 2021 due to the pandemic and supported by record-low mortgage rates. September durable goods orders (Wednesday) are projected falling -1.1% with weakness in transportation orders. September personal income (Friday) should edge up 0.3% after the 0.2% August increase based on the earnings jump in the jobs report. Consumption is expected to rise 0.5% following the 0.8% prior pop. The spending index has been choppy due to various pandemic issues.
The employment cost index, ECI (Friday), is estimated to increase 0.8% Q/Q in Q3, after a 0.7% gain in Q2. An as expected result would push up the 12-month figure to 3.2% y/y from 2.9% y/y in Q2, and would be a 13-year high, another sign of the inflation problem. October consumer confidence should dip slightly further to 109.0 after a drop to a 7-month low of 109.3 in September amid weakness in the expectations component. Other confidence measures have softened this month. The October IBD/TIPP index fell to a 13-month low of 46.8. The preliminary reading from the University of Michigan survey slipped to 71.4 from 72.8 in September. And the Langer consumer comfort index dropped to a 51.4 average in October, from the prior month’s 56.1 average.
Treasury supply is back on tap this week with the $183 bln in 2-, 5-, and 7-year note auctions on Tuesday, Wednesday, and Thursday, respectively. These could be tough maturities to sell given they are closely tied to the FOMC’s policy stance. While rates have risen significantly, it is not clear if they have cheapened sufficiently to bring in anything better than mediocre demand. One potential saving grace could be expectations the Treasury will announce reductions in nominal coupon volumes in November.
The wi 2-year tested 0.53% on Friday before closing at 0.495%. A stop in this range would be the highest since February 2020, but the January 2020 award rate was nearly 66 bps higher. The wi 5-year popped to 1.270% on Friday and closed at 1.215%. Award rates here would be the highest since the January 2020 rate of 1.448%. And the wi 7-year cheapened to 1.550% and closed at 1.485% last week and also would be the highest since January 2020’s 1.570%.
The earnings slate is loaded with a number of heavy hitters, starting out Monday with Facebook, along with Southern Copper, Kimberly-Clark, Cadence Design, Otis, Canon, Restaurant Brands, Logitech, Crown Holdings, Lennox, and Universal Health. Tuesday includes Microsoft, Alphabet, Visa, Eli Lilly, Novartis, Texas Instruments, UPS, Advanced Micro, Raytheon, HSBC, GE, S&P Global, 3M, Lockheed Martin, Chubb, Sherwin-Williams, Capital One, Waste Management, UBS, Twitter, MSCI, Centene, ADM, Suncor Energy, Ameriprise Financial, Corning, PACCAR, TransUnion, Principal Financial, Markel Corp., Entegris, IDEX Corp., Fortune Brands, Hasbro, and F5 Networks. On Wednesday there are Thermo Fisher, Coca-Cola, McDonald’s, Sony, ServiceNow, Bristol-Myers Squibb, Boeing, GlaxoSmithKline, ADP, GM, Old Dominion, CME, Edwards Lifesciences, Norfolk Southern, Twilio, Ford, General Dynamics, KLA Corp., eBay, Align Technology, Spotify, Raymond James, Amphenol, Kraft Heinz, O’Reilly Automotive, Xilinx, Pinterest, Hilton, Aflac, Garmin, Hess, Yandex, United Rentals, Yum China, International Paper, Teledyne Technologies, Cincinnati Financial, Avery Denison, Arch Capital, Nomura, and BioMarin Pharmaceuticals. Thursday has Apple, Amazon, Mastercard, Comcast, Merck, Shell, Shopify, Starbucks, American Tower, Sanofi, Caterpillar, Stryker, Altria, ICE, Illinois Tools Works, Northrop Grumman, Keurig Dr Pepper, Carrier Global, Newmont, American Electric Power, Republic Services, Baxter International, ResMed, Yum! Brands, Hershey, Excel Energy, CBRE, Seagen, West Pharmaceuticals, Hartford Financial, Sirius XM, VeriSign, Bio-Rad Labs, Carlyle Group, SS&C, CMS Energy, Textron, Check Point Software, Zendesk, Eastman Chemical, Mohawk Industries, Molson Coors, and DaVita. The on Friday we get Exxon Mobil, Novo Nordisk, Chevron, AbbVie, Charter Communications, Aon, ICICI Bank, Colgate-Palmolive, L3Harris, Weyerhaeuser, Imperial Oil, Cerner, Church & Dwight, Shaw Communications, Cboe.
In Canada, it is the Bank of Canada’s policy decision that is the centerpiece this week. The BoC (Wednesday) is expected to hold its policy rate steady at 0.25%, which would match widespread expectations. However, the call on QE is a bit less certain — we now expect them to announce the effective end of QE as the emergency conditions that existed when QE was implemented no longer exist. Notably, inflation is elevated and here to stay, the labour market has recovered and the housing market is, to use a technical term, bonkers.
An end to QE will of course exacerbate already pronounced worries in the market that aggressive rate hikes are on the way in 2022 — we would not be surprised if the BoC provides some assurance that such a scenario is (still) not their base case. Recall that the bank has been clear, up to now, that they don’t see the possibility of a rate hike until late next year. Also, the Bank releases its Monetary Policy Report, which will provide updated growth and inflation projections. As for data, August GDP (Friday) is projected to bounce 0.7%, matching Statistics Canada’s estimates, after the -0.1% July dip.
The pandemic driven supply constraints remain front and center in Asia and indeed, globally. Growth forecasts in the region have been downgraded, while price pressures and ongoing shortages of key manufacturing goods do not bode well for local economies in Q4. This week’s data slate has the usual month-end deluge from Japan, including unemployment, industrial production, retail sales and Tokyo CPI. The BoJ meets and is widely expected to keep policy unchanged. China’s docket is empty, while elsewhere, production, trade, prices and growth data are on tap.
In Japan, the BoJ meets (Wednesday, Thursday) and there are no expectations for a change to the -0.1% rate target. But, weak exports, along with supply chain issues throughout the region and indeed the world, should see the Bank downgrade its growth forecast for the remainder of this fiscal year (ending March 31, 2022). The inflation outlook is a little more uncertain. There is risk for a modest upgrade given CPI measures inched up in September with the national headline CPI y/y rate at 0.2%, in positive territory for the first time since August 2020, with the core rate at 0.1%, above 0% for the first time since March 2020.
For data, the September services PPI (Tuesday) is slated. It rose 1.0% in August. The index has not posted a decline since January. The contraction rate in retail sales (Thursday) is expected to slow to -4.0% y/y in September, from -4.7% for large retailers, and -2.5% y/y from -3.2% overall. The remainder of the reports are out Friday. October Tokyo CPI is expected unchanged at a 0.3% y/y clip overall, having rebounded from -0.4% in July and August. Prior to the September bounce, headline prices had posted 11 straight monthly declines.
We also expect a steady 0.1% y/y on a core basis. Core prices had been in deflation from August 2020 through July 2021. September unemployment should remain unchanged at 2.8% for a third month, having fallen from 3.0% in May. The job offers/seekers ration at 1.14 as it was previously. Preliminary September industrial production is penciled in dropping -3.0% m/m from -3.6% in August. This would be a fourth negative monthly print this year. We expect October consumer confidence to continue to improve and project an increase to 38.5 from 37.8 in September. Confidence has been on the rise, albeit modestly, since the decline to 34.1 in May as Covid cases in Japan have plummeted since their peak in late August. September housing starts and construction orders are also due.
Taiwan September industrial output (Monday) is expected to slow to a 12.0% y/y rate from 13.7% previously. It has slowed from 18.0% in June. September leading indicators are due Wednesday. Preliminary Q3 GDP (Friday) is penciled in dipping to a 6.5% y/y rate from 7.4% in Q2 and 9.3% in Q1. South Korea October consumer sentiment (Wednesday) is forecast inching up to 104.5 after rising to 103.8 previously. This would be an 8th straight print above 100. Advance Q3 GDP (Wednesday) likely eased to a 4.5% y/y pace after jumping to 6.0% previously, which was the fastest since December 2010. September industrial production (Friday) should ease to 3.0% y/y from 9.6% in August.
Malaysia September trade (Thursday) is forecast to see the surplus to widen to MYR 25.0 bln from 21.4 bln previously. Thailand September exports (Monday) should rise 9.0% y/ from 8.9% in August. September manufacturing production (Tuesday) is forecast falling to a -6.0% y/y from -4.2% previously. The September trade deficit (Friday) is expected to narrow to -$1.0 bln from -$1.2 bln. The September current account deficit (Friday) is predicted to have narrowed to -$2.0 bln from -$2.5 bln. Hong Kong’s September trade deficit (Tuesday) is projected widening to HKD -27.0 bln from -26.3B. Singapore September CPI (Monday) is estimated firming slightly to 2.5% y/y from 2.4%. September manufacturing production (Tuesday) is expected to slow to 9.0% y/y from 11.2% previously. September unemployment (Thursday) is seen easing to 2.6% from 2.7%.
Australia’s calendar has Q3 CPI on Wednesday, expected at an unchanged 0.8% q/q. Q3 trade prices (Thursday) should see import prices at up 2.0% from 1.9%, and export prices up 9.0% from 13.2% previously. Q3 PPI (Friday) should remain steady at 0.7%. There are no events from the RBA this week. New Zealand has the September trade report on Wednesday, where the previous NZ$2.1B deficit should narrow to NZ$200 mln.