The most important Economic events this week from the 1st to the 5th of NOV 2021

Tuesday, November 02, 2021 - 05:53
Point Trader Group
The most important Economic events this week from the 1st to the 5th of NOV 2021

Reducing, not raising, interest

On November 3, the FOMC is likely to formally announce a reduction in its asset purchases, beginning in mid-November and ending by June 2022. Specifically, we expect a decrease in net purchases of $10 billion per month in Treasuries and $5 billion in Treasuries. per month for mortgage-backed securities (MBS).

Back in December 2020, the FOMC said it would continue to purchase net assets at a pace of at least $80 billion in Treasuries and $40 billion in mortgage-backed securities per month until “additional significant progress” is made. Towards achieving maximum employment rates and inflation targets. The minutes of the September FOMC meeting stated that most participants believed the "extra significant advance" criterion for inflation had been met, and that the employment criterion was likely to be met soon. At his press conference in September, President Powell said that for him, it would likely be appropriate to taper off in November assuming the September employment report was "reasonably good." While payrolls disappointingly increased by 194K in September, the large upward revision (+169K) over the past months means that the backlog is likely to be good enough to start tapering off. The economy recovered more than half of the job losses from pre-pandemic levels that existed in December 2020, and that was when the Federal Open Market Committee began its guidance on “extra significant progress” on asset purchases and recovered nearly 80% of the job losses that existed in April. 2020. Recent comments from Federal Reserve officials, including from President Powell, were supportive of the November announcement.

Regarding the tapering pace, President Powell said in September that there was broad support from the FOMC for the tapering process to end by mid-2022. The minutes of the FOMC meeting in September indicated general support for the illustrative tapering path that includes a reduction in purchases in value $10 billion per month for Treasuries and $5 billion per month for mortgage-backed securities. In our view, the Fed will continue to reinvest assets maturing for at least two years after net asset purchases have ceased, although the FOMC has said nothing about its long-term plans for the size of its balance sheet.

There will be no new set of macroeconomic forecasts or 'dot chart' next week, and they will come at the December 14-15 meeting. In September, the "point chart" of interest rate expectations shifted, as the Federal Open Market Committee was evenly split on whether to raise by the end of next year, with the median forecast predicting three hikes of 25 basis points in 2023 and three more hikes in 2024. Since then, financial markets have raised their interest rate hike expectations and are now fully pricing in a 25 basis point rate hike by October 2022. We expect President Powell to use his press conference to back off on this, focusing on the upper end of the rate hike. The Fed said it won't raise interest rates until three preconditions are met: maximum employment, inflation at (or above) 2%, and inflation on track to moderately exceed 2% for some time. With the pace of salary gains in September, it will take more than two years before employment returns to pre-pandemic levels, not to mention the trajectory of the pre-pandemic trend.

We still expect the first rate hike in the first half of 2023, followed by a second rate hike in the second half of 23 and two more in 2024. Given the strict preconditions for the first hike, one might expect after the first hike a fairly rapid normalization of rates with Federal Open Market Committee. Drop 2.5% over the long term. However, in 2023, the annual rotation of voting members will lead to a peaceful transition, and the economy's sensitivity to higher interest rates, favoring a cautious approach.


What about the Bank of England?

On November 4, the MPC will simultaneously publish its monetary policy decision, the MPC meeting minutes and the November Monetary Policy Report. We expect the MPC to vote 6-3 to keep the bank rate at 0.10%, and 7-2 to keep its target stock of asset purchases at £895 billion, which it expects to reach by the end of the year. After several hawkish comments by senior BoE officials, we cannot rule out the possibility of a small raise (15 basis points) next week already.

Back in August, the BoE indicated that a very modest rate-raising cycle, totaling just 50 basis points over the next three years, would be enough to return inflation sustainably to the 2% target. In September, the MPC left monetary policy on hold, but said the developments had "reinforced" the case for tightening policy. On October 17, Bank of England Governor Andrew Bailey said the Monetary Policy Committee "will have to act" to reduce inflationary pressure. Last week, the Bank of England's new chief economist, Howe Bell, said, in his opinion, that the decision on a rate hike next week would be "perfectly balanced".

Judging from recent MPC members' comments, we expect Michael Saunders, Dave Ramsden and Hu Bill to vote on a rate hike next week. Looks like Governor Bailey is close to joining them. In contrast, Jonathan Haskell, Silvana Tenreiro and Catherine Mann seem in a hurry to tighten policy, while we hear little from John Cunliffe (usually doves) and Ben Broadbent (centre), adding to the uncertainty surrounding next week's decision.

The hardening shift was driven by rising actual and projected inflation. Headline CPI inflation eased slightly in September, to 3.1% from 3.2%, 0.1 point above the Bank of England's forecast for August. Inflation is set to rise sharply in October, to around 4%, due to a jump in the regulated price ceiling for electricity and gas prices and a rise in value-added tax on hospitality. New is the recent rise in gas and oil prices, as well as the possibility that supply bottlenecks will continue into next year. The fall budget has done little to cushion the rising cost of living. Thus, the MPC will have to significantly adjust inflation expectations for the coming year. BoE chief economist Howe Bell said inflation is likely to rise to "5% or slightly higher" early next year. The Bank of England still expects high inflation to be temporary, but there is growing concern in the central bank that it may fuel inflation expectations. The 5-year inflation swap has risen to levels above those aligned with the inflation target.

The Bank of England is likely to revise its GDP growth forecast, partly reflecting its higher starting point, after upward revisions to previous data, and partly reversing the recent slowdown, with GDP contracting 0.1% per month in July and rising just 0.4% per month in August. Key to policy expectations will be their updated assessment of the supply side of the economy. He'll probably say there's little spare capacity in the economy, although we disagree.

Based on recent MPC members' comments, we have revised the BoE's call. We expect the MPC to hold off on a bank rate hike next week, given the uncertainty about the impact of the end of the holiday and fiscal tightening, as well as the high level of COVID-19 cases. We now expect a 15 basis point rate hike in December, followed by a 25 basis point hike in May and again in November 2022, bringing the bank rate back to its pre-pandemic level of 0.75%. This is much more than what the MPC indicated just two months ago, but not as much as the market is currently pricing in. We believe that the rate hike is likely a policy error, as higher inflation is likely to be temporary.


US jobs report

Friday, November 5 - We expect payrolls to rise by 400K and the unemployment rate to fall by 0.1 percentage point to 4.7% in October. Average hourly earnings growth is likely to remain solid at 0.3% per month, amid a persistent labor supply shortage. The rise in salary gains is likely to be driven by the leisure and hospitality sector, reflecting the decline in new COVID-19 cases, as evidenced by a moderate recovery in indicators such as restaurants, hotel occupancy and travel. The significant downward impact from local government education payrolls that occurred in September was driven by seasonal adjustment and should not be repeated in October.




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