Michael Brown
DIGEST – Markets were on surer footing on Wednesday as calmer tones prevailed, with equity dip buyers emerging once more, and the buck remaining underpinned. Today, the BoE take centre stage.
WHERE WE STAND – Somewhat steadier tones prevailed yesterday, as the somewhat chaotic and risk-averse trade seen a day prior faded almost as rapidly as it had emerged.
In fact, just as that bout of risk-off had no obvious single catalyst, there wasn’t an especially obvious catalyst to kickstart the aforementioned turnaround, further supporting my framing yesterday that the slide in stocks was more of a ‘pause for breath’ in the broader risk rally, as opposed to said rally having come to an end.
Anyway, yesterday’s US data releases certainly won’t have harmed risk appetite at all. Per the ADP report, private sector employment rose +42k last month, not only the fastest rate in 4 months, but also towards the top of the range of estimates for the breakeven pace, particularly if a few state/local government jobs are thrown on top. The October ISM services survey was also a solid one, with the headline index rising to an 8-month high 52.4, and the new orders metric rising to its best levels in a year. I’ve got a funny feeling that ‘US exceptionalism’ might just be making a comeback.
Of course, data of that ilk does cast some doubt on the idea that the FOMC will deliver another 25bp cut at the December meeting, not least after Chair Powell said that such a move was ‘far from’ a foregone conclusion at last week’s presser. I’d contend, however, that the Fed holding off on another rate cut due to surprisingly swift economic growth is no bad thing, quite the opposite in fact considering that such robust growth would likely serve to further underpin what is already a very rapid pace of earnings growth.
With that in mind, my view remains that the path of least resistance for equities continues to tilt firmly to the upside, and that any dips – of the ilk we saw yesterday – should continue to be viewed as buying opportunities.
Elsewhere, the US Treasury’s quarterly refunding announcement provided a bit more intrigue than it usually tends to, yesterday, with benchmarks softening across the curve, led by the long-end. This stemmed not only from guidance for the coming quarter, which was little changed, but a remark that the Treasury has begun to “preliminarily consider” future increases in auction sizes. Of course, this comes at a time when the market is already needing to absorb a deluge of supply, not just in terms of Govvies, but also IG issuance too. Benchmark 30-year yields now trade close to 1-month highs, with momentum likely to flip further in favour of the bears if that more sizeable issuance is indeed realised.
That climb in Treasury yields, coupled with the aforementioned better-than-expected US figures, sparked some chunky demand for the greenback, with the DXY rising further north of the 100 mark, briefly printing fresh 5-month highs. A break above the 200-day moving average at 100.35 remains the next key test for dollar bulls, with spot having stalled around there yesterday, though a return to the right hand side of the dollar smile, and greater faith in the ‘US outperformance’ story, should make relatively short work of that level.
LOOK AHEAD – Happy ‘BoE Day’ to all who observe, with not only an intriguing policy decision, but a newfangled Monetary Policy Report, ahead of us.
Bank Rate should be maintained at 4.00% at the conclusion of the November confab, though I’d expect at least 2, possibly 3, dovish dissenters to instead vote in favour of a 25bp rate cut. There’s a slim chance that one, or two, of these dissenters may instead plump for a larger 50bp move, though it’s unlikely there are enough doves to force a cut this time out, given uncertainty over whether price pressures have indeed peaked, as well as a distinct lack of clarity on the fiscal front ahead of the late-November Budget. Any dissenters, though, will now get an opportunity to explain that vote in more detail, with every MPC member getting a paragraph in the minutes to portray their view.
In any case, the MPC should retain its guidance regarding a ‘gradual and careful’ pace of rate reductions moving forwards, though the timing of said cuts will continue to hinge on the evolution of incoming data. Meanwhile, the updated round of forecasts – which now include a ‘central projection’, as well as various ‘risks and scenarios’ to said projection. All this new info, and the new format of the MPR, could lead to a slower, and possibly more volatile market reaction later on, as market participants try to work everything out in this rather unfamiliar format, and with more information to digest as well.
Besides the BoE, we also hear from the Norges Bank today, who should stand pat, maintaining the deposit rate at 4.00%. There’s also a ton of Fedspeak on the docket, though those remarks should simply serve to reinforce Chair Powell’s point last week regarding notable divisions on the FOMC as to the appropriate future policy path.
Brown is Senior Research Strategist at Pepperstone
