Macro insights

Fed expected to cut rates for third time in a big week of economic data

The economy forces its way onto the US centre stage this week. The Federal Reserve will announce its latest interest rate decision and give a press conference on Wednesday evening. We expect it to cut the Fed Funds Rate again by 0.25% to 1.50-1.75% and announce the resumption of the asset purchase programme it calls ‘organic’ balance sheet growth (as before the financial crisis). With no projections anticipated at this meeting, analysts will focus on Chair Jerome Powell’s press conference. Although he is likely to cast doubt on any future easing, we do not expect him to rule out further support. We foresee a further rate cut in December, although we then expect the rate cutting cycle to pause in 2020.

Third quarter (Q3) US GDP growth data will be announced before the Fed decision. We have maintained a 1.8% annualised rate forecast across this quarter, but acknowledge modest downside risk, consistent with the 1.6% consensus forecast. The employment report and ISM manufacturing survey are also due on Friday. We expect a similar slower pace from payrolls but look for the ISM to confirm nascent signs of bottoming out in other US indicators. However, in the bigger picture, we may look back at last week as a turning point in the impeachment hearings of President Donald Trump. The congressional testimony of US diplomat William Taylor asserted a quid pro quo between withheld state aid to Ukraine and a political investigation, which has to date been denied. The US public pricked up its ears with 53% in favour of initiating impeachment proceedings, according to opinion poll site  

In the Eurozone, attention will focus this week on the preliminary flash estimate of Q3 GDP. We expect euro area growth of 0.1% quarter-on-quarter (qoq), underpinned by 0.3% qoq growth in France, 0.4% qoq growth in Spain, and flat growth in Italy and Germany - the latter will only be released on 14 November. We will also get preliminary inflation data for the Eurozone via the October flash Harmonised Index of Consumer Prices (HICP) on Thursday, with the headline likely affected by energy prices and no change expected to the core number, which excludes energy prices, at 1.0% year-on-year.

Last week the European Central Bank meeting was quite disappointing and did not provide any real forward guidance.  Euro area flash Purchasing Managers’ Indices (PMIs) stabilised at levels consistent with barely positive growth, with the German manufacturing PMI stuck very deep into manufacturing recession territory - and services sentiment declining further.

The weekend was quite busy in terms of political events in Germany. The regional elections in Thuringia saw the Grand Coalition parties performing badly. Meanwhile German Finance Minister Olaf Scholz and his running mate Klara Geywitz made it into the run-off vote in the Social Democrat (SPD) leadership contest with 23% of the vote - slightly ahead of former regional Finance Minister Norbert Walter-Borjans and Saskia Esken at 21%. SPD members will choose between the two partnerships in a vote taking place from 19-26 November. But this process will only provide a recommendation - the official election of the new SPD leader will take place at the next party conference on 6-8 December. Given the low level of support for the SPD currently indicated by polls - around 14%, down from 21% in the last election - our baseline expectation is still for a continuation of the Grand Coalition until the next federal election in 2021.

The Bank of Japan (BoJ) holds its monetary policy meeting on October 30-31 and we believe interest rates will stay on hold. The short-term policy rate target of -0.1% and 10-year yield target of -0.1% and “around 0%” should remain unchanged, while the purchase programme of exchange traded funds and the long-term decrease in net Japanese bond buying is likely to continue. Since its last meeting in September, the BoJ has adjusted its policy to steepen the yield curve, considering the negative impact on consumer sentiment. To do so, it reduced the share of long-term Japanese government bonds (JGBs) in its total net purchases and changed the wording on its monthly JGB purchase operations, suggesting a reduction in frequency when interest rates fall below the BoJ’s tolerance.

Recent surveys and economic data have not been great but are likely good enough for the BoJ not to rush into further monetary easing. In particular, key market variables for the BoJ have improved: depreciation of the yen, a steeper yield curve on JGBs and rising stock prices. However, an extension of forward guidance and/or the official beginning of a “comprehensive review” on the effects of current monetary policy could be announced at this meeting.

In the UK another week sees another pivotal vote in the Brexit saga. Last week Prime Minister Boris Johnson achieved the first Parliamentary majority in favour of a plan for exiting the European Union (EU) with Tuesday’s 329-299 vote in favour of the Withdrawal Agreement Bill. This was followed by a vote rejecting a fast-track approval timetable (308-326), which left the legislation stranded. The EU announced on Friday that it would extend Article 50 and confirmed today new deadline of 31 January.

This moves the debate in the UK towards a General Election. The government has tabled a vote today to call a General Election for 12 December, with some additional time to try to pass the Withdrawal Agreement before Parliament dissolves next week. For this to take place, 434 of the 650 Members of Parliament must vote in favour and is thus reliant on the opposition Labour Party to deliver such an outcome. This could happen, with the Labour Party stating it would only support an early election once a no-deal Brexit is off the table – which it now is. However, the Liberal Democrats have suggested another route to an early election for 9 December, that excludes the preamble of trying to pass the Withdrawal Agreement. This requires a much lower simple majority threshold to pass. Our expectation of a further extension to Article 50 - although not as long as we predicted - to allow for a General Election before year-end now appears to be taking shape. 

In emerging markets, central banks continued to cut interest rates in an effort to support their domestic economies against a backdrop of global growth deceleration. With inflation targets in sight, Turkey lowered its policy rate by a larger-than-expected 250 basis points (bps) to 14%, Bank of Ukraine cut its key policy rate by another 100bps to 15.5% and Russia's central bank lowered its key interest rate for the fourth time this year by 50bps to 6.50%. Bank of Indonesia cut its repo rate by another 25bps to 5% in order to support liquidity and economic growth. Elsewhere, the Philippine central bank cut its reserve requirement ratio by 100bps last Friday to allow sufficient liquidity to support economic activity, bringing the cumulative reduction to 400bps this year. Chile, world’s largest copper producer, has been facing declining copper prices since June and the central bank cut its monetary policy rate for the third time this year by another 25bps to 1.75%, in order to boost inflation.

In Argentina, the first round of presidential elections was held on Sunday. Exit polls suggest that the Peronist candidate Alberto Fernández won in the first round against the outgoing President Mauricio Macri. Looking forward, the main challenge for the new president remains stabilising the economy and regaining investor confidence. General elections were also held in Uruguay last Sunday. Daniel Martínez of the incumbent centre-left coalition Frente Amplio is seen as the favourite candidate and collected 37% of votes according to exit polls. He will face Luis Lacalle Pou of the right-wing Partido Nacional in a second round on 24 November. The country is in need of reforms to avert a decline in economic growth in light of the steady fall of investments as a share of GDP seen in the past.

Upcoming events

US: Goods trade balance (Monday), Conference Board consumer confidence (Tuesday), preliminary Q3 GDP, Federal Open Market Committee meeting, ADP employment change (Wednesday), Personal Consumption Expenditures price index (Thursday), non-farm payrolls, final manufacturing PMI, ISM manufacturing index (Friday)

Euro Area: French INSEE consumer confidence (Tuesday), preliminary German HICP and Consumer Price Inflation (CPI), preliminary French Q3 GDP (Wednesday), preliminary Eurozone, Italian and Spanish Q3 GDP, flash Eurozone CPI estimate (Thursday)

UK: Motion for 12 December General Election, Bank of England’s Silvana Tenreyro speech in London (Monday), GfK consumer confidence, Speaker of the House of Commons John Bercow to step down (Thursday), manufacturing PMI (Friday)

China: Official manufacturing and non-manufacturing PMIs (Thursday), Caixin manufacturing PMI (Friday)

Japan: Bank of Japan meeting and decision (Thursday), manufacturing PMI (Friday)


Market and asset types measured by the following indices: Equities = MSCI. Fixed Income = JP Morgan and BofAML.

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