- NIESR UK inflation warning and BRC Shop Price to be digested ahead of
Europe Manufacturing PMIs, US ADP Employment, FOMC statement, EIA
Oil inventories report and corp earnings; narrowing US presidential
polls cast long shadow
- Europe Manufacturing PMIs: expected to echo improving trend seen in
many PMIs yesterday
- US ADP Employment: solid gain expected, labour demand firm, though
skills shortages clearly impeding stronger gains
- FOMC: focus on hints about a December move, dissents also in view
- Charts: USD/CHF, Fed rate expectations by meeting, German, UK & US 10-yr
yield, 10-yr BTP/Bund and Bono/Bund spreads, US IG & HY Bond ETFs, JPM
EMBI spread, VIX & WTI future
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** EVENTS PREVIEW **
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Given that the US elections are just under a week away, today's FOMC meeting is unsurprisingly expected to be something of a non-event, with a rather modest schedule of statistics comprising the overnight BRC Shop price measure (and NIESR warning that UK CPI is likely to hit 4.0% in 2017), the delayed (due to All Saints Day) continental European Manufacturing PMIs, German Unemployment, and US ADP Employment estimate. The annual economic forecasts of the 'Five Wise Men' in Germany will be accompanied by a small (EUR 3 Bln) 10-yr Bund sale, with another hefty run of corporate earnings also due. The EIA weekly oil inventories report will again be very sensitive, following a huge rise in API crude oil stocks of 9.3 Mln bbls vs. expectations of 1.0 Mln, with only a modest offset from a larger than projected fall of 3.6 Mln in Gasoline stocks, which has left oil futures looking at the lower end of the recent uptrend channel. But with the latest US opinion once again suggesting that the outcome of the presidential election still looks far too close to call, this will likely be the overriding theme. That said, non-fixed income market participants would do well to keep a close eye on the seemingly relentless rise in govt bond yields, above all long dated, and this despite the setback in oil prices implying less immediate pressure on headline inflation measures. That said an element of "risk off" does appear to be emerging. In passing, it is also perhaps worth noting that the main take home for me from the Volatility Symposium which I spoke at on Monday (e-mail me if you did not receive the annotated presentation yesterday) was that, every hue of market participant sees markets as massively under-priced and unprepared for gap risk, of the ilk of 1987 Black Monday or the 1994 debacle. As everyone is aware, markets have effectively beaten the living daylights out of long volatility plays over the past 5 years, and with portfolio returns generally weak due to financial repression via Central Banks, less and less money is being spent on portfolio protection due to a rising focus on reducing costs to enhance returns... that looks to be a recipe for dislocation at some stage.
** Europe - Manufacturing PMIs **
- Better than expected flash readings and a broad array of generally better than expected PMIs from around the world yesterday suggests there may be some scope for modest upward revisions to the Euro area flash readings, and perhaps slightly stronger rises in Italy and Spain. However barring any larger outliers, today's reports will probably have only very limited impact on markets.
** U.S.A. - October ADP Employment / FOMC meeting **
- Today's ADP Employment estimate is seen at 160K, modestly higher than September's 154K, and compares with forecasts for headline Payrolls, which are expected to pick-up to 175K after two slightly weaker reports in August (+167K) and September (+156K), with Manufacturing projected to post another slightly smaller fall of -5K after prior drops of -13K and -16K. For some, the lower pace of employment growth has been constructed as indicating some weakening in labour demand, though with Claims at 260K or blow in recent months, it is rather more likely that this indicates skills shortages, and the absolute level of average payrolls growth remains well above any estimate of the current breakeven rate. If it were not for the presidential election, would the Fed be likely to hike rates today? Probably. As such the question is the extent to which this week's FOMC statement offers a more explicit hint that a December hike is likely, even though this will likely remain quite oblique as the FOMC will remain data dependent. It will be recalled that the September statement observed: "The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives." It will also be interesting to see if there is any change in the dissenting votes, with George and Mester likely to stand their ground, but Rosengren indirectly hinting he may drop the dissent for this meeting, though he will vote to hike in December.
from Marc Ostwald