Week Ahead Preview: highlights include FOMC, NFP, BoE, RBA, Norges Bank, OPEC+

NOTE: Previews are listed in day-order

COP26 (SUN)

Climate is the overarching theme at the upcoming summit in Glasgow, UK. Several leaders including US President Biden and French President Macron have confirmed their attendance, but the Russian and Chinese Presidents will be notable absentees. China, the world's largest CO2 producer, will likely be represented by vice-environment minister Zhao Yingmin. Russia will be represented by the “Special Representative of the Russian President for Relations with International Organizations to Achieve Sustainable Development Goals”, Anatoly Chubais, according to TASS. Geopolitics will likely not take much precedence at the COP26, although discussions on the sidelines cannot be ruled out. Thus, ING suggests “the number one thing to watch for at COP26 is to what extent countries strengthen their carbon mitigation policies.”, i.e., the measure of commitment country by country. Other things to watch out for would be: Will there be more plans aimed at greening the economy within COVID support, any updates on carbon markets, and to what extent countries are willing to go to phase out coal. A draft document showed that the leaders said they will "do their utmost" to avoid building new unabated coal plants.

JAPAN LOWER HOUSE ELECTION (SUN)

The Japanese Lower House elections will take place on October 31st. The ruling party is on track to maintain a majority, according to Nikkei. In terms of the parliament breakdown, the lower house has 465 seats in total, with 233 seats needed for a majority. The current configuration goes as follows: LDP (276), Komeito [coalition partner] (29), CDP (109), Japanese Communist Party (12), NipponIshin (11), others (24), vacancies (4). The LDP-led ruling coalition is seen holding onto the majority of lower house seats. “The LDP's chances of securing a 233-seat majority as a single party depend on close races in about 40% of single-seat districts”, Nikkei reported, “If the party loses 44 seats, the resulting coalition could prove problematic for the Kishida administration.” Komeito is expected to hold onto 29 seats, LDP’s main opposition CDP is expected to gain alongside the Japanese Communist Party, whilst the Japan Restoration Party (NipponIshin) is seen nearly tripling its seats.

US ISM MANUFACTURING PMI (MON)

The consensus looks for the manufacturing ISM to ease back a touch to 60.4 from 61.1 in October. As a proxy, the Markit flash manufacturing PMI data for October disappointed expectations, printing at 59.2 against an expected 60.3, and easing from the 60.7 in September. Markit said operating conditions faced by manufacturers continued to improve in October, albeit at the slowest pace of improvement since March. "The slower improvement in conditions reflected a weaker expansion in output and a moderation in order book growth during October," while "Factory production rose only modestly, with the pace of increase the slowest since July 2020 as output continued to be hampered by supply chain issues and shortages." The data also revealed a record lengthening of suppliers’ delivery times, and these issues were among factors that prompted firms to further increase buying activity and inventories.

RBA POLICY ANNOUNCEMENT (TUE)

The upcoming RBA announcement could prove to be more interesting than envisioned earlier this month. The Cash Rate is expected to be maintained at 0.10bps, but the yield target and yield target bond will gain focus – with some suggesting the RBA is gearing up to make some tweaks. To recap, the main development has been the repercussions of the recent CPI release – although the headline Q/Q matched forecasts and Y/Y missed forecast, the Trimmed and Weighed metrics topped forecasts and entered the RBA’s 2-3% target range, prompting some major banks to bring forward their Cash Rate hike expectations. Further, the RBA refrained from defending the Apr 2024 yield on its yield-target bond twice in the week before the meeting, which topped 0.58% in Friday’s trade vs the RBA’s 0.10% yield target. Some analysts have suggested that the choice not to defend the yield is paving the way for a tweak in the upcoming statement. ANZ expects the RBA to eliminate its Apr 2024 YCC target at the upcoming meeting.

NEW ZEALAND HLFS UNEMPLOYMENT (TUE)

Markets expect the Q3 Household Labour Force Survey (HLFS) Unemployment Rate to remain at 4.0%, with Job Growth to slow to 0.2% from 1.0% in Q2, alongside the Participation Rate (seen at 70.2% vs prev. 70.5%), whilst the Labour Cost Index Q/Q is forecast at 0.5% (vs prev. 0.9%). Analysts at Westpac expect the unemployment rate to fall to 3.8%, suggesting the latest COVID lockdowns could distort the figure lower, although a strong result is expected barring that effect. The bank cites monthly employment indicators pointing to a strong lift in job numbers in recent months, whilst Jobseeker benefit numbers were lower on average over the quarter. “Crucially, we expect [unemployment rate and wage growth] to be stronger than what the RBNZ assumed in its most recent forecasts in August. If we’re right, that would further bolster the case for a series of OCR hikes over the coming months”, the bank said.

FOMC MEETING (WED)

The Fed is expected to formally announce the tapering of its asset purchases at the November confab, while Chair Powell will be eager to distance the connection between tapering and future rate hikes. The existing USD 80bln/month of Treasury purchases, and USD 40bln/month of MBS purchases are expected to be reduced by USD 10bln/month and 5bln/month, respectively; the NY Fed’s next monthly purchases schedule is due to be released on November 12th, and the taper implementation will likely be reflected in that update. In the Q&A, Powell will likely face questions on the connection between tapering and eventual lift-off, amid the continued aggressive market pricing for tightening (both in USD markets and abroad), the hawkish commentary from some regional Fed Presidents, as well as on the (yet to be proven) "transitory" nature of inflation as supply chains remain the limiting factor on growth. The Fed Chair will be cautious to give too much away with regards to future tightening plans, stressing the independence of hike and tapering decisions, as not to upset the taper process, on which he will likely stress the flexibility of the tapering providing the Fed optionality to cut faster/slower depending on evolving conditions. Key talking points will centre around the increasing upside risks to inflation, with risks that near-term rises bring the risk of unanchoring longer-term inflation expectations from their 2% target, which would threaten the Fed's accommodative policy stance to reach full employment; there remains a risk the Fed will have to walk back on its "transitory" argument. Indeed, Powell and the rest of the FOMC have already begun easing their tone on transitory, expressing the possibility of more sustained price pressures, thus, the Nov FOMC remains a more formal outlet to express those inflationary risks.

US ISM SERVICES PMI (WED)

As a proxy, the Markit flash services PMI rose to 58.2 in October, topping expectations for 55.1, and above the prior 54.9. Markit noted that the rate of expansion was the strongest since July. Growth was underpinned by a solid pick-up in the inflows of new work, which is associated with stronger demand conditions as COVID fears eased. "Concurrently, service providers recorded more intense capacity pressures amid reports that firms were struggling to cope with growing sales due to labour issues and supplier delays," Markit wrote, "notably, the rate of backlog accumulation was the most marked in 12 years of data collection." The data also showed companies lifting workforce numbers at the quickest rate since June, though there was some commentary that some firms were having issues filling open positions. And on the inflation front, pressure was still evident: "The rate of input price inflation accelerated to the second-fastest on record, and was only slightly weaker than May’s peak," the data-compiler wrote, "higher transportation costs, wages, supplier fees and material prices were cited by panellists as the primary drivers of inflation in October." Accordingly, firms raised average charges for the seventeenth consecutive month.

OPEC+ MEETING (WED)

Traders expect a continuation of the 400k BPD/m increase in production. Expectations have been massaged publicly by the Russian and Saudi oil heads, who both clearly signalled intentions to roll over the current deal. The Nigerian and Algerian oil ministers also took that stance. The meeting comes against the backdrop of elevated oil prices and accompanying outside calls (from the US and India recently) for OPEC+ to subdue prices and lessen the impact on consumers and company margins. The latest MOMR saw a cut to the 2021 demand growth forecast amid slowing global growth, indicating caution heading into the meeting.

BOE POLICY ANNOUNCEMENT (THU)

The upcoming BoE policy announcement is set to be one of the more interesting ones in recent memory as expectations of a move on rates have heightened since the prior meeting. As it stands, markets currently fully price in a 15bps hike to 0.25% at the upcoming meeting with 32bps worth of tightening priced in by year-end. In contrast to this pricing, economists generally expect no change to the Bank Rate, with 47 of 59 surveyed by Reuters looking for the rate to be held at 0.1%, whilst 11 look for a 15bps hike to 0.25%; one outlier looks for a full 25bps increase to 0.35%. The main takeaway from the September meeting was the MPC’s judgement that developments since the August announcement appeared to have strengthened the case that some modest tightening of monetary policy over the forecast period was likely to be necessary. Since then, comments from Governor Bailey (October 17th) led to a repricing of expectations for UK tightening with the policy chief noting that although monetary policy cannot solve supply-side problems, the Bank will have to act and must do so if “we see a risk, particularly to medium-term inflation and to medium-term inflation expectations”. These remarks were then followed by a slight softening in CPI to 3.1% Y/Y from 3.2%, although new Chief Economist Pill still warned that inflation was likely to rise close to or even slightly above 5% in early 2022. However, tempering expectations of imminent action at the more dovish end of the spectrum, external member Tenreyro remarked that raising interest rates to counter increasing prices in areas such as energy and semiconductors would be “self-defeating” if those rises prove to be one-offs. Furthermore, external member Mann has suggested that rate hikes “can wait”. Reasons for caution also emanate from uncertainty over the conclusion of the furlough scheme and a downgrade at its September meeting to its Q3 growth outlook. With a lack of forthcoming commentary from MPC members, the balance of views on the MPC is hard to judge and as such, regardless of the outcome, the announcement will likely impose volatility on UK assets. HSBC forecasts that in the end, the MPC will vote 7-2 in favour of standing pat on rates with Saunders and Ramsden (who voted for an early end to bond purchases in September) the only dissenters in the hike camp. HSBC cautions that such an outcome could pose some credibility issues for the Bank however, given the lack of pushback from Governor Bailey on current market pricing. In the accompanying MPR, SocGen notes that focus will be on the MPC's assessment of the output gap, on which, the Bank notes "it is a toss-up as to whether the supply side or the demand side will be revised down by the greater amount. In that case, we would not expect much change to the output gap projections".

NORGES BANK POLICY ANNOUNCEMENT (THU)

Expected to keep the Key Policy Rate as-is at 0.25% following the 25bp hike from 0.00% and commencement of the tightening cycle in September. An unchanged policy announcement on the rate is expected, as guidance in September was that the “policy rate will most likely be raised further in December”; additionally, the Norges Bank typically avoids making significant policy alterations at interim meetings such as the November gathering. In September, hawkish guidance was justified by normalisation in the economy suggesting that the current level of accommodation is no longer required and developments since that meeting seemingly indicate that the recovery process is continuing. As such, focus for the meeting will be on any verbal updates to the aforementioned guidance towards a December hike, particularly the ‘likely’ phrasing for any fresh inference into the stance at this point in time. Finally, Governor Olsen is to step-down in February 2022 and we are awaiting insight as to who his replacement will be.

US LABOUR MARKET REPORT (FRI)

The consensus looks for 395k nonfarm payrolls to be added to the US economy in October after 194k in September, which would be a cooler rate of growth than the three- and six-month average rates at 550k/month and 583k/month, respectively. The October unemployment rate is expected to stay at 4.8% after falling from 5.2% last month, while the other slack measures will be assessed for clues on the proximity of "full employment" as questions grow around the ability of the labour market to return to a size similar to pre-COVID. The Fed itself is divided on whether the millions of side-lined US workers will return or not – hawks are doubtful and thus believe full employment is close. October's NFP will print two days after the FOMC where the Fed is all but certain to announce tapering of its asset purchases; however, employment reports will still be critical as part of the broader evolution of data, which if too divergent, could serve to accelerate/decelerate the pace of tapering, not to mention their importance in gauging the road to full employment, and as a result, eventual rate lift-off. For October, Credit Suisse (SIX:CSGN), which itself sees payrolls printing +350k, believes the headwind from the summer surge in COVID cases is easing and most lead indicators for the labour market are improving. "Business surveys point to a better pace of hiring, with the PMI services employment index rising to a 5-month high of 54.3", its analysts say, "initial claims for unemployment insurance have resumed their decline, reaching new post-pandemic lows." CS also notes the unemployment rate has fallen by a dramatic 110bps in just three months. On expiring unemployment benefits, the bank notes that they are not having a large impact on headline job gains, "but it does appear to be boosting the rate that unemployed workers accept jobs, which should help to solidify the improvement in the unemployment rate." While on wage growth the analysts expect the strength to continue, but caveat "average hourly earnings has outperformed other (typically higher quality) measures of wages, such as the Atlanta Fed wage tracker and the employment cost index, so some relative moderation is likely."

CANADIAN LABOUR MARKET REPORT (FRI)

Canadian bank RBC expects Canada to add jobs for the fifth straight month in October, though warns that the rate of job additions may cool to around 50k from 157k in September. The September data was underpinned by a healthy increase in labour force participation, which lifted overall participation by 0.4ppts to 65.5%; "that was likely aided by some people rolling off support programmes in mid-September and the return to in-person schooling, and we expect some modest further labour force gains in October as well," the bank writes. RBC looks for the industry breakdown to show continued improvement in the services sector, and also expects another pick-up in hours worked. The bank will be watching the wages metric closely, noting that the BoC is focussed on whether what it currently sees as one-off price rises becomes something more persistent; further strength in the wages metric would be significant, RBC says.