Macroeconomics: The Day Ahead for 7 November

As the aftermath of the US elections continues to reverberate across markets and geopolitics with the House vote as yet not decided, there are a barrage of central bank policy meetings, with the Fed and the BoE headlining, but also decisions in Sweden, Norway and Peru, and a goodly volume of central bank speakers. A new political crisis is never far away either, as yesterday’s decision by the German Chancellor to fire Finance Minister Linder and thereby break up the chronically fractious ‘traffic light’ coalition, leaving the SPD and Greens as a minority government making deals with the CDU/CSU to pass legislation (above all a stimulus budget), and a Bundestag confidence vote due in January, which will lead to an early election in Q1. Statistically there are China Trade, Japan’s Labour Cash Earnings, Philippines Q3 GDP, German Industrial Production & Trade and Swedish GDP to digest, while ahead lie Eurozone Retail Sales, Mexican CPI, US weekly Jobless Claims and Q3 Non-farm Productivity. Earnings are equally plentiful, with NT&T and SMIC featuring in Asai, while Europe looks to ArcelorMittal, BT, Daimler Triukc, Iveco, Munich Re, Veolia and Verbund, while across the pond Halliburton, Hershey, Tapestry and Warner Bros Discovery feature, and Brazil awaits Petrobras. Govt bond supply takes the form of multi-maturity sales in France and Spain. Yesterday’s dramatic FX, bond yield and equities move will obviously continue to have ripple effects, but the assumption that either the ECB or the BoE might be more aggressive in cutting rates looks to be faulty, above all given the inflationary risks from weaker currencies. It should be noted that the last time that US 5-yr yields rose more than 10 bps on the day, while German 5-yr yields fell more than 5 bps was during the GFC (on five occasions), and that there were only five other occasions when this happened since the fall of the Iron Curtain.

** China – Oct Trade Balance **

– A much larger than expected Trade surplus came on the back of a surge in Exports, while Imports shrank due to continued weakness in domestic demand, above all for oil. The Export surge looks to be a function of companies stocking up ahead of the introduction of further trade tariffs, though notably the bulk of the strength came from exports to Japan, South Korea and ASEAN, with exports to the US and EU dipping. In all likelihood, with Trump winning the US election, Exports will likely remain robust during the rest of Q4, but tail off sharply in Q1 2025, per se adding to the pressure on the Chinese authorities to ensure its latest round of stimulus measures get traction to counter that drop-off in demand.

** Sweden & Norway – Rate decisions **

– The Riksbank continues to diverge further from the ECB, slashing rates by 50 bps to 2.75% as expected, and signalling the likelihood of a further 25 bps cut in December and again in H1 2025. This was no surprise given that today’s CPI while higher than expected, remains below target, and following the unexpected -0.1% q/q drop in Q3 GDP, which along with other indicators suggest that the easing that it has undertaken thus far has not generated any traction. Notably it cited the SEK as a potential risk to the policy outlook, which to a large extent was inevitable, particularly after yesterday’s dollar surge. Norway’s Norges Bank is by contrast expected to hold rates at 4.50% and continue to signal little immediate prospect of rates being cut.

** U.K. – BoE rate decision **

– The BoE is expected to cut rates a further 25 bps to 4.75%, though there is likely to be some dissent from the hawks who had voiced concerns on the inflation outlook prior to the Budget, which they will view as only adding to upside inflation and wage settlements risks. But the focus will be on its messaging on the policy, as much as its updated forecasts, which will perhaps not fully account for the upward shift in Gilt yields since the budget, let alone the slide in the GBP and its potentially inflation impact, even if the MPC ss primarily focussed on domestically generated inflation trends and risks. The new GDP forecasts will above all be watched for the extent of their continued divergence with the more upbeat, though hardly “punching out the lights” estimates from the OBR last week, and the narrative on inflation, wages and employment given the minimum wage and NIC measures. Bailey & Co’s press conference will doubtless see a barrage of questions about the rise in gilt yields, which to some extent will offset further easing. As with the Fed meeting later in the day, there may well be a degree of obfuscation around budget impacts on policy, with data dependency likely to be trotted out as a way of circumventing questions that sail too close to the political sphere of influence.

** U.S.A. – Fed rate decision **

– This will not be a comfortable meeting for the FOMC, and especially not for Jerome Powell, whose press conference will doubtless see a long line of questioning about his own future as Fed chair, and political interference in monetary policymaking. A further 25 bps is expected, which the Fed will deliver a) because that is what is priced into markets, which are now only pricing in a further 25 bps cut at the January meeting, and b) because regardless of the election (on any outcome), a hold decision after cutting 50 bps in September would in effect be an implicit admission that the September move was a mistake. The FOMC will perhaps be relieved that it is not publishing a fresh set of economic projections, though it will be interesting to see how it assesses the balance of risks to its forecasts. Markets are also expecting some form of update on its balance sheet reduction programme, even though Fed speakers that have recently opined on the topic of QT have indicated that they see no immediate need to lay out a timeline for ending QT, which the loosening in US financial conditions also argues against, though some may argue that some US money market indicators suggest that the risk of money market ‘plumbing’ problems are growing. As for the election aftermath and the outlook for US fiscal, trade and regulatory policies, much depends on the outcome for the House election, which appears to be leaning towards the Republicans retaining control. While a clean sweep would appear to stave off the risk of yet another debt ceiling crisis, there are quite deep divisions within the Republicans on how to finance an extension of the 2017 tax cuts, as the very conservative head of the Senate Finance Committee Crapo (sic! Ed.) has found out over the past year. The focus in terms of trade tariffs inevitably falls on China, but the impact on the EU, UK, Canada and Mexico, and indeed Japan and South Korea should not be underestimated. Hefty tariffs on China of the order of 60% suggested by Trump during the election campaign would be inflationary, as any basic understanding of ‘comparative advantage’ underscores.