Drivers for the Week of October 17, 2021

• Markets are still digesting last week's data, which we believe give the Fed even greater confidence to begin tapering; the Fed releases its Beige Book report for the November 2-3 FOMC meeting Wednesday; we get lots of U.S. manufacturing data this week; weekly jobless claims will be watched closely; Canada reports some key data
  
• Eurozone has a quiet week; U.K. reports some important data; the market continues to price in imminent rate hikes by the Bank of England
  
• Japan reports some key data this week; RBA minutes will be released Tuesday; New Zealand reported Q3 CPI

AMERICAS

Markets are still digesting last week's data. CPI and PPI readings weren't as bad as markets feared. However, we are nowhere near sounding the all clear for inflation risks. Core PCE has been above the 2% target for five straight months and is nearly double it at 3.6% y/y in August. Meanwhile, retail sales surprised to the upside once again, along with upward revisions to the back months. All in all, we believe the data show that U.S. economy remains strong and that higher prices so far have not deterred U.S. consumers.

This will give the Fed even greater confidence to begin tapering. While the economy still needs some healing, emergency settings are no longer needed. While most Fed officials are stressing that tapering and lift-off are unrelated, we know that's not entirely true as one naturally follows the other. The question is one of timing and after last week's data, the Fed Funds futures strip has gotten more aggressive about lift-off. It is now pricing in 2/3 chance of Q3 22 lift-off, up from about 1/2 to start last week. Q4 lift-off is fully priced in now. Higher rates are likely and that should help boost the dollar as well.

The Fed releases its Beige Book report for the November 2-3 FOMC meeting Wednesday. Since the last FOMC meeting in September, there have been mixed signals from the labor market but wages continue to edge higher, as do prices. Ahead of that, Daly and Bostic speak Tuesday. Bostic, Kashkari, Evans, and Bullard speak Wednesday. Daly speaks Friday. At midnight, the media embargo goes into effect and there will be no Fed speakers until Chair Powell's press conference the afternoon of November 3. If last week's Fed speakers are any indication, the Fed is ready and willing to announce tapering at the upcoming FOMC meeting.

We get lots of U.S. manufacturing data this week. September IP will be reported Monday and is expected to rise 0.2% m/m vs. 0.4% in August. Fed regional surveys will continue to roll out with Philly Fed reporting Thursday, which is expected at 25.0 vs. 30.7 in September. Markit preliminary October PMI readings will be reported Friday. Manufacturing PMI is expected at 60.5 vs. 60.7 in September, while services PMI is expected at 55.2 vs. 54.9 in September. The composite PMI stood at 55.0 in September.

Weekly jobless claims will be watched closely. That's because the initial claims data are for the BLS survey week containing the 12th of the month. These are expected at 300k vs. 293k the previous week, which was a new pandemic low. Continuing claims are reported with a one-week lag and so next week's reading will be more important. This week, they are expected at 2.55 mln vs. 2.593 mln the previous week, also a new pandemic low. There are no consensus forecasts yet for October NFP but we expect it will be an improvement over September's 194k.

Other minor data round out the week. September budget statement will be reported sometime this week and a deficit of -$60.0 bln is expected vs. -$124.6 bln in August. August TIC data will be reported Monday. September building permits (-2.4% m/m expected) and housing starts (flat m/m expected) will be reported Tuesday. Leading index (0.4% m/m expected) and existing home sales (3.4% m/m expected) will be reported Thursday.

Canada reports some key data. September CPI will be reported Wednesday. Headline is expected to rise 4.3% y/y vs. 4.1% in August, while common core is expected to rise 1.9% y/y vs. 1.8% in August. If so, headline would be the highest since February 2003. August retail sales will be reported Friday. Headline is expected to rise 1.9% m/m vs. -0.6% in August, while sales ex-autos are expected to rise 2.4% m/m vs. -1.0% in July. Next Bank of Canada meeting is October 27 and another round of tapering is possible then as the economy continues to recover.

EUROPE/MIDDLE EAST/AFRICA

Eurozone has a quiet week. Preliminary October PMI readings Friday will be the highlight. Manufacturing PMI is expected at 57.0 vs. 58.6 in September, services PMI is expected at 55.4 vs. 56.4 in September, and the composite PMI is expected at 55.2 vs. 56.2 in September. Both the German and French composites are expected to fall to 54.3 and 54.7, respectively. For now, the ECB is likely to remain in dovish mode as the economic data continue to soften. We expect a dovish hold when it next meets October 28.

U.K. reports some important data. September CPI will be reported Wednesday. Headline inflation is expected to remain steady at 3.2% y/y, while CPIH is expected to fall a tick to 2.9% y/y. September retail sales will be reported Friday, along with preliminary October PMI readings. Headline sales are expected to rise 0.6% m/m vs. -0.9% in August, while sales ex-auto fuel are expected to fall -0.1% m/m vs. -1.2% in August. Manufacturing PMI is expected at 56.0 vs. 57.1 in September, services PMI is expected at 54.5 vs. 55.4 in September, and the composite PMI is expected at 54.0 vs. 54.9 in September.

The market continues to price in imminent rate hikes by the Bank of England. The short sterling strip is fully pricing in Q4 lift-off, followed by another three hikes in 2022. WIRP suggest nearly 30% odds of a hike at the November 4 meeting, rising to nearly 100% at the December 16 meeting. The only MPC members pushing back are Tenreyro and Mann. Governor Bailey over the weekend said the BOE will have to act on inflation and warned that higher energy costs will mean that price pressures "will last longer and it will of course get into the annual numbers for longer as a consequence. That raises for central banks the fear and concern of embedded expectations."

ASIA

Japan reports some key data this week. September trade data will be reported Wednesday. Exports are expected to rise 10.0% y/y vs. 26.2% in August, while imports are expected to rise 34.5% y/y vs. 44.7% in August. September supermarket sales will be reported Thursday. September national CPI will be reported Friday, along with preliminary October PMI readings. Headline inflation is expected at 0.2% y/y vs. -0.4% in August, while core inflation (ex-fresh food) is expected to rise 0.1% y/y vs. flat in July. If so, core would be positive for the first time since March 2020 but still well below the 2% target.

Reports emerged last week that the Bank of Japan will lower it inflation forecast for FY21 in its upcoming Outlook Report for the October 27-28 policy meeting. The forecast is likely to be cut to around 0% from 0.6% previously due to re-basing of the CPI. This would be seen as a very a dovish hold when it meets this month. FY24 will be added with the April 2022 Outlook Report and is likely to show inflation remaining well below the 2% target, which would mean no tightening until FY25 at the earliest.

RBA minutes will be released Tuesday. At last week's meeting, the RBA affirmed its forward guidance that rates would likely remain steady until 2024. Lowe warned of financial stability risks as he said "The Council of Financial Regulators has been discussing the medium-term risks to macroeconomic stability of rapid credit growth at a time of historically low interest rates. In this environment, it is important that lending standards are maintained and that loan serviceability buffers are appropriate." Lending standards were subsequently tightened by regulators. September leading index will be reported Wednesday. Preliminary October PMI readings will be reported Friday.

New Zealand reported Q3 CPI. Headline inflation accelerated to 4.9% y/y vs. 4.2% expected and 3.3% in Q2. This was the highest since Q2 2011 and moves further above the 1-3% target range. No wonder the market is pricing in further hikes by the RBNZ after it started the tightening cycle last week. WIRP suggests 25 bp hikes are nearly fully priced in for the November 24 meeting, with solid odds of a 50 bp move then. Another 25 bp hike is priced in for the February 23 meeting. However, the situation remains fluid as reports suggest the government is considering tightening pandemic restrictions again for Auckland as virus numbers rise.

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