Oct 30, 2022
VOT Research Desk

Market Insights, Considerations & Analytics

Coming up is yet another remarkable week. The Fed would be almost expected to increase rates, placing Chairman Powell under pressure to pave the way for a modest rate hike in December yet appearing to be changing course. Prior to the week’s conclusion with the most recent release of nonfarm payrolls, monetary authorities policies in the UK and Australia will be critical for those currencies.

Fed reversal Not exactly

The markets are completely priced in a three-quarter percentage point rate increase from the Federal Reserve on Wednesday, as long as inflation stays unsustainably high and the employment market has not yet suffered any significant harm.

However, the Fed has begun to change its mind. Fed officials have hinted that they would slow down the pace of tightness come December as a result of business surveys, the yield curve, and several other leading indications suggesting that a recession is just around the horizon.

Since monetary policy has a significant lag time, the full effect of all the rate hikes that have already been implemented won’t be shown in the economic data till the following year. They fear that if they keep pressing the rate hike button too firmly, the economy may suffer unnecessarily.

As a result, the task of this meeting will be to find a way to allow for softer rate increases without appearing to give up, as doing so may lead to a surge in the stock market and a steep decline in bond yields, which would feed inflation. It will be a challenging messaging exercise since Powell is probably going to emphasize that rates are all still going up here from.

A swarm of significant data announcements are also planned, beginning on Tuesday with the ISM manufacturing survey. Before the ISM services print on Thursday and the official employment report on Friday, the ADP jobs report will then be released on Wednesday.

The labour market appears to have experienced the heat of the frequent rate increases in October. With nonfarm payrolls expected to reach 200k, economists anticipate another strong report, but the “tea leaves” indicate dismay. The monthly increase in applications for unemployment benefits was offset by a modest reduction in employment, according to the aggregate S&P Global survey.

While the wider result for the dollar remains favorable, there is potential for a significant retracement in this surge. The market is already flooded with long-dollar bets, the Fed is slipping into lower position, and the outlook for the euro has begun to brighten as a result of the dramatic drop in European energy costs. This notion is supported by the fact that the euro/dollar exchange rate this week broke a critical regression line.

BoE – Being cautious

Order has been reestablished in the bond and foreign exchange markets in the UK since Rishi Sunak’s appointment as prime minister. The fiscal crisis appears to be receding into the distance, enabling risk mood and monetary policy to re-align with the fundamental forces that have historically driven the value of the pound.

A three-quarter point rate increase has been fully priced in by the capital markets ahead of Thursday’s announcement by Bank of England officials regarding their most recent decision. Lately, speculation about a larger move vanished as other central banks took a more prudent position and deficit fears subsided.

The market’s response will mostly depend on the meeting notes, Governor Bailey’s press briefing, and the revised economic estimates now that the rate increase is set.

This is not the time for the BoE to shine as a champion from the perspective of risk management. Substantial action is required because inflation is over 10%, but the central bank already anticipates a recession to start this quarter, and the most recent business surveys support this.

As a result, the BoE might be prone to adopt a generally guarded stance. Signals of additional distress actions run the risk of escalating the anxiety in the bond market, which officials undoubtedly want to avoid. If so, the news might cause sterling to decline.

Further than, as it has been throughout the year, the destiny of the currency will continue to be influenced by the stock market and the perception of global risk.

Flood of Eurozone data

On Monday, the first estimate of GDP growth for the third quarter will be announced, along with the inflation statistics for October. On Thursday, data on jobs will be revealed.

Although recent dramatic drops in energy costs suggest that the European economy is on the edge of recession, it appears that the coming winter won’t be the end of the world even so.

The picture for the euro is no longer dire because Fed and ECB policy are beginning to align as well. Although it is still too early to talk about a trend reversal because that would probably require a ceasefire in the Ukraine and improved economic conditions everywhere, the worst appears to be at the rear of the euro.

RBA and the complex of commodities

On Tuesday, the Reserve Bank of Australia will wrap up its own meeting. Investors anticipate a cautious quarter-point rate increase. The RBA is concerned about the future of the world economy despite a dramatic increase in inflation, with a particular focus on the steep slowdown in China, Australia’s largest trading partner.

The Australian dollar, which has rallied along with equities markets, albeit unconvincingly, is not likely to be significantly affected by this move. Any relief rally might only last a short while as long as the property market is in freefall and the picture for China is so bleak.

Similar circumstances apply to New Zealand, a neighbor whose economy similarly strongly depends on Chinese demand to take in its exports of raw materials. On Wednesday, the nation’s Q3 employment report will be released.

Over the weekend in China, the business surveys for October will be made public. Even if the most recent GDP growth figure was positive, unemployed is rising and the offshore yuan is losing value as international investors grow more anxious that the political, regulatory, and economic developments of the last several years will continue.