Although US CPI and core inflation slowed to 7.7% YoY and 6.3% respectively in October, the readings were too high above the 2% target for the Fed to lower its guard. The same can be said for the lower readings expected in Thursday’s October PCE deflator (6% consensus) and core inflation (5% consensus). On Friday’s jobs report, the fewer 200k nonfarm payrolls consensus expects for November will be high relative to pre-Covid levels. November’s CPI inflation readings, which come a day before the FOMC meeting, could surprise on the upside.
EUR could correct lower from the top of its 1.0220-1.0480 range of the past fortnight. The European Central Bank believes that monetary policy is not restrictive enough to lower double-digit inflation to its 2% target. On 30 November, consensus sees CPI inflation slowing to 10.4% YoY in November from 10.7% in October and core inflation unchanged at 5%. Unfortunately, the Eurozone is entering a technical recession in 4Q22 and 1Q23. Hence, the ECB is leaning towards a smaller 50 bps hike on 15 December after the jumbo 75 bps hike on 27 October. At the same meeting, the governing council will discuss the “key principles” of quantitative tightening without announcing a start date. Expect Bundesbank President Joachim Nagel to push the ECB to reduce its bond holdings at the start of 2023. Nagel and ECB President Christine Lagarde are speaking on 28 November and 2 December.
We are cautious about GBP after it rose above 1.20 for the first week since 12 August. GBP is well above its pre-mini budget level of 1.13 and has rebounded 17% from its new all-time low of 1.0350 on 26 September. Although the Conservative Party has dismantled the mini-budget and elected a new prime minister, inflation continued to double-digit levels, with the UK economy falling below pre-Covid levels. The bets for more rate hikes by the Bank of England will exacerbate the UK recession, also feeling the drag from fiscal spending cuts. There is no guarantee that the downturn will not extend beyond the expected four quarters into 2Q23. In September, consensus first predicted -0.2% growth in 2023, an outlook that has deteriorated to -0.4% in November and -0.8% last week. Not surprisingly, CFTC data showed the GBP’s recovery from unwinding short positions instead of accumulating long positions. In short, GBP is vulnerable if the USD regains some composure this week from the Fed and US data.
Quote of the day
“If people are doubting how far you can go, go so far that you can’t hear them anymore.”
Michele Ruiz
28 November in history
New Zealand was the first country to allow women to vote in 1893.
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