Markets
There’s a huge week in front of us in terms of central bank meetings, eco data, geopolitics and supply. Starting off with central banks, the Bank of Japan (Tuesday), Fed (Wednesday) and Bank of England (Thursday) convene. Last week’s temporary break of USD/JPY above the 150 mark suggests that the BoJ meets at gunpoint. Rumours in the run-up to the meeting about upward revisions to inflation forecasts (>=2% for fiscal year 2023 & 2024) and about further loosening its Yield Curve Control policy further underline expectations that a next step in the policy normalization should/will be taken. If not, the Japanese yen risks sliding at a pace no FX intervention can call an immediate end to. The Japanese 10-y bond yield this morning touched 0.9% for the first time in over a decade, coming narrowly close to the current maximum (100 bps) deviation around the 0% yield target. The US Federal Reserve will skip on hiking its policy rate for a second meeting straight. US economic data since the September Fed meeting scream for the final (flagged) hike because of way better-than-expected growth data, but Fed-governors joined forces to downplay such action as the yield increase at the long end of the curve (tightening of financial conditions) substitutes for such move. We believe that Fed chair Powell will keep the option open for December (currently 20% market implied probability) or risk a further increase in inflation expectations which since that same Fed talk rose to match the (March) YTD high at 2.5%. The US 2-yr yield is at risk of losing the 5% mark in case of a dovish skip (not our preferred scenario). The Bank of England is expected to deliver a dovish hold with its new Monetary Policy Report likely to paint a very bleak economic outlook (high recession risk; rising unemployment). The central bank has a tendency to err on the soft, growth-supporting, side. Given that UK inflation dynamics are still worse off than in EMU or US, this combination risks backfiring via GBP-weakness. Last week, EUR/GBP took out first resistance around 0.87. We see more upward potential towards 0.90 by year-end. The eco calendar starts light today with only EC confidence data, but rapidly heats up: EMU CPI inflation, Q3 GDP and US consumer confidence (tomorrow), US ADP employment, JOLTS job openings and manufacturing ISM on Wednesday, US weekly jobless claims and Q3 unit labor costs on Thursday and payrolls and services ISM on Friday. Amid this complex of central bankers, figures and the intensifying Israeli-Hamas conflict, the US Treasury on Wednesday releases its quarterly refunding statement. It serves as this week’s biggest wildcard. At the previous announcement in August, the Treasury stepped up its issuance for the first time in more than two years (to $103bn refunding). A new step-up is anticipated this time around with additional focus on the means the Treasury wants to use (more bills or more long term funding).
News and views
First managing director of the IMF, Gita Gopinath, in an op-ed for the Financial Times called upon governments to restrain their fiscal spending. They acted as “insurers of first resort” in response to Covid and the energy crisis but this added a heavy burden on already high levels of debt. Many challenges lie ahead including large ageing-related spending needs for advanced economies and sizeable public investment for developing countries. Combined with a rise in defense spending, the resurgence of industrial policies with expensive price tags (ie deglobalization and subsidization) and climate-related investment, she estimates additional spending over current levels could surpass 7-8% by 2030. “With record-high debt levels, higher for longer interest rates, and growth prospects at their weakest in two decades, restraint is required.” Standing at the center of global finance, Gopinath singled out the US to put its fiscal house in order but others should heed the IMF’s advice as well. In what we dub as “The fiscal reset”, Gopinath said governments can no longer be insurer of first resort for all shocks. Depleted fiscal buffers must be rebuilt and enlarged. Any future response to shocks should be better targeted and temporary. Second: revenues need to keep up with spending. A minimum corporate tax is advisable while tax loopholes must be closed. Carbon pricing must also be on the table as both a catalysator and funding measure for the climate transition. Lastly, Gopinath said fiscal frameworks need strengthening. Many countries have regulation in place but deviations from them are the rule rather than the exception. Debt containment requires credible plans that are better aligned with annual budgets and anchored on spending targets.
