Macroeconomics: The Day Ahead for 27 October

The ECB policy meeting and US advance Q3 GDP dominate the day’s proceedings, though with big tech earnings delivering a series of disappointments, all eyes will be on Amazon, Apple and Intel, which along with economic bellwether Caterpillar will be the headliners on a very busy for US and European earnings. There are the modestly better than expected South Korea Q3 GDP and the still very downbeat, but marginally better than expected German GfK Consumer Confidence, while ahead are also Italian confidence surveys, the UK CBI Retailing survey, US Durable Goods Orders, weekly jobless Claims and the KC Fed Manufacturing survey, and Canada’s CFIB Business Barometer. Tonight also brings the BoJ policy meeting, even if a modestly weaker USD does alleviate some of the immediate pressure on both the JPY and JGB yields, and by extension on the BoJ. But as the continued weakness of the Chinese Yuan, and in the EM space a 200 bps rate hike in Egypt more than amply demonstrate, the mooted Fed pivot is by no means a panacea for all currencies and countries that have been labouring under the pressure of a strong USD.

– ECB –

The ECB is expected to hike all its rates by 75 bps, taking the Depo Rate to 1.50% and the Refi Rate to 2.0%, with a further 50 bps seen in December, and a further 25 bps in February. It will also likely make changes to what it pays on bank deposits at the ECB, given that excess liquidity remains sky high at 4.67 Trln, and it is likely to reintroduce a tiering system, which would see around EUR 900 Bln excluded from being remunerated; alternatively (as has already been suggested by Centeno and Simkus), it could also change TLTRO III terms to reduce the effective subsidy that is currently being paid to banks. While QT has been put on the table for discussion, it is likely that the ECB will stick to the line that it will start once rate ‘normalization’ has been completed, and conditional on financial stability being preserved. On current market pricing that would mean after February, and presuming that it will remain passive, this would imply a pace of just under EUR 30 Bln/month.

US Q3 GDP is expected to expand for the first time since Q4 2021, though the expected 2.3% SAAR pace (vs. Q2 -0.6%) is likely to be disappointing in the detail in contrast to Q1 and Q2. Personal Consumption is expected to slow to 0.9%, and Final Sales to Domestic Buyers to around 0.5%, with Housing Investment set to post a double-digit fall, Business CapEx to post a marginal increase, while Net Exports provide a big boost, though only thanks to a sharp drop in Imports (Goods Trade Balance also due this week), and Inventories as ever a sizeable wild card.

As for the BoJ, no changes are expected to either the Call rate or its determination to defend its commitment to the 10-yr JGB yield target of 0.0% +/- 25bps, leaving markets focussed on its forecast update, which are likely to see GDP for the current and next fiscal year revised down, but inflation revised up. It will likely underline that even if core CPI hit 3.0%, it would need to see a marked acceleration in wage growth to ease back on monetary easing. The question then becomes how it addresses JPY weakness, beyond a commitment to intervention to lean against volatility. It has been very clear that while it can see that a weaker JPY will increase cost-push pressures, and is likely to be a drag on real personal consumption, but a much more acceptable scenario than the negative consequences of a rate hike. Let there be no mistake that as and when any chink in this long-held BoJ view appears or is even mooted, the impact on markets around the world will make the recent turmoil in UK markets look like a walk in the park.