Week ahead: Will the Fed signal a pivot?

All eyes are on the Federal Reserve in a busy week for central banks. Whilst it’s clear the US central bank plans to raise rates again, the whole market is thinking about only one thing: when pivot? Any hint the Fed is thinking about thinking about slowing the pace of its hikes will be jumped on as a signal to expect a pivot.

Then it’s the turn of the Bank of England to raise rates, with markets uncertain as to how large a hike will be delivered. With the Halloween fiscal statement pushed back to November 17^th and upgraded to an Autumn Statement, the Bank will not have all the relevant forecasts to hand, but this won’t stop it from hiking; the only question is by how much.

Here are the week’s key events:

Monday

European inflation data is the highlight on the economic data front. Having risen to 10% in September from 9.1% in August the trend is pushing up. Any EUR crosses and European stock markets will be sensitive to the data as it is likely to drive expectations for the European Central Bank’s next policy move after it raised interest rates last week. Traders should also look to Chinese manufacturing and services PMIs, Italian GDP figures – the first for the new government – and the Chicago PMI in the US. Meanwhile, with the Autumn Statement pushed back to November, UK interest lies in mortgage approvals and lending data.

Tuesday

The Reserve Bank of Australia is tipped to raise interest rates again but the question is by how much. Market participants are uncertain whether the RBA goes for 25bps or 50bps and this goes to the heart of the debate over whether central banks are starting to question the aggressive pace of tightening we have seen in recent months. The Bank of Canada last week blinked with a smaller-than-expected hike.

Minutes from the last RBA meeting show there was a "finely balanced" debate over hiking by 50bps or 25bps, but the committee settled on the latter because "the cash rate had been increased substantially in a short period of time and the full effect of that increase lay ahead". RBA Deputy Governor Bullock added later in a speech: "The international economic environment has also deteriorated quite sharply.” On this, a 25bps hike seems more likely - potential AUD upside should it go bigger.

Meanwhile, manufacturing PMIs are due including the US ISM report. JOLTS jobs openings will be pored over for signs of stress in the labour market that would support the Fed pivot narrative. New Zealand labour market data is due after the US close – or Wednesday morning local time.

Earnings: Eli Lilly, Newmont Corp, Pfizer, Advanced Micro Devices, Airbnb, Mondelez, Uber.

Wednesday

The Federal Reserve is the main event with markets fully braced for another 75bps hike, a fourth straight bumper raise which would take the fed funds rate to 4%. What is less certain is what comes next. Although there are some signs of a slowdown in the economy and consumer confidence is very low, the labour market remains pretty strong and so far the Fed has not made much of a dent in inflation. Core PCE inflation surged for a second straight month in September to 6.6%, but Fed officials might be seeing forward-looking data that points to a slowdown.

“The time is now to start planning for stepping down,” San Francisco Fed President Mary Daly said a week ago. Jerome Powell is yet to comment and there is a lot riding on his remarks in the press conference that follows the rate statement. The task for the Fed as it gets closer to its terminal rate around 4.75% will be to slow the pace but convince markets it’s not done. Markets have been buoyed by hopes the Fed is close to the point of pivoting, so the risk is that the Fed stays the course for longer and hikes beyond 5% - providing the labour market holds up and inflation remains elevated. However, the impact from rate hikes is yet to be really felt such has been the breakneck speed of tightening, so we could start to see things in the economy as we head into 2023 that allows the Fed to slow down and stop. The problem for the Fed is that as soon as it hints at the pivot, inflation expectations rise.

Earnings: Estee Lauder, Etsy, Liberty Global, Qualcomm, Roku.

Thursday

The Bank of England is up next in a busy week for central banks. It’s also expected to raise rates by 75bps. The appointment Jeremy Hunt as chancellor, subsequent rollback of the mini-Budget measures and the arrival of Rishi Sunak in Number 10 has sent gilt yields falling and the pound higher – boosted macro trends and a weaker dollar. This gives the Bank more wriggle room and it is likely to go for 75bps rather than 100bps as had been anticipated in the wake of the mini-Budget in September.

The Bank is somewhat acting blind after the government pushed its Autumn Statement back to November 17th, although it will have a steer from the Treasury and OBR for the likely economic projections it needs to factor into its own calculations.

Bank officials have stressed the need to hike but also have sought to tamp down expectations. Deputy governor for monetary policy Ben Broadbent gave an interesting speech last week in which he pushed back against notion the MPC would hike all the way to 5% as implied by markets. The remarks was the most assertively direct attempt to say the market has overdone it when pricing rate hikes by the Bank. Markets will also be focused on the Bank’s gilt selling agenda.

Earnings: Barrick Gold, Moderna, Amgen, Block Inc, Coinbase, Illumina, PayPal, Starbucks, Twilio, Virgin Galactic.

Friday

German factory orders and French industrial production figures are the main event at the start of the European session. ECB president Lagarde is also due to speak. The highlight for the North American session is the US nonfarm payrolls report, which will be important for the Fed’s data-dependent policy making heading into December: a soft payrolls number supports the pivot argument, whilst a strong report gives the Fed plenty of room to keep on hiking. Also watch for Canadian employment figures and the Ivey PMI.