Markets were not spooked by Halloween as equities climbed significantly higher while rates and the index of fear (the VIX) declined during the week. The market moves were driven by weaker US data, dovish market perceptions of the Fed, and a better outlook for the US treasury as it now expects to slow the pace of longer-term bonds issuance.
The Bank of Japan (BoJ) used Halloween to “trick or tweak” and tweaked its yield curve yield curve control policy (YCC) by redefining the 1% cap on 10-year JGB yields as a reference rather than a rigid bound. This was likely the last, step ahead of dismantling the YCC altogether. However, the BoJ still needs confirmation that inflation has sustainably moved above the 2% target before they are ready to take bigger steps to normalisation. They are slowly recognising higher inflation is not temporary and moved their inflation forecast significantly higher for the fiscal year 2024 to 2.8% from 1.9%.
Economic data from the US showed weaker than expected ISM manufacturing driven by lower new orders, production and employment, reversing some of the more positive signals seen over the past months. ADP employment change was also lower than expected, while JOLTs job openings continue to signal quite resilient labour markets. The latter was also visible in the Conference Board wage index that rose 1.2% in Q3 vs 1% in Q2.
The Federal Reserve decided, as expected, to keep the Fed Funds target range unchanged at 5.25-5.50%. Powell delivered a balanced message with dovish undertones. The recent strong labour market data that has lifted inflation expectations provided Powell an option to deliver a more hawkish message, but he did not consider it necessary and said that inflation expectations remain “in a good place”.
In the euro area, inflation and GDP data corroborated the ‘soft-landing’ narrative. Headline inflation fell significantly again to 2.9% y/y from 4.3% and core inflation ticked down to 4.2% y/y from 4.5%. Base effects drove the yearly growth rate down but the underlying inflationary momentum again showed positive signs with core inflation increasing just 0.11% m/m s.a. from 0.17%. GDP growth in the third quarter was -0.1% q/q which is not a bad as one could fear given the significant monetary policy tightening.
In China, October PMIs from both NBS and Caixin disappointed. Manufacturing PMI fell to 49.5 (consensus 50.2) from 50.2 and service PMI dropped to 50.6 (consensus 52.0) from 51.7. The lower service PMIs raise concerns over the consumer engine in China.
Bank of England (BoE) left the bank rate unchanged at 5.25% in line with expectations. The BoE lowered growth and near-term inflation projections amid pushing back against market pricing of rate cuts. We continue to expect the peak in the Bank Rate to have been reached and see another rate hike as unlikely at this point.
Next week, focus is on comments from the Fed and the flash University of Michigan survey. In Japan, we look out for September wage figures while China releases trade data and CPI. The reserve bank of Australia meeting on Tuesday is interesting as market pricing is split 50/50 on the probability of a hike/ no hike. On Friday, we receive UK GDP.
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