Japan: BoJ meeting on Thursday and Industrial Production data

We expect the Bank of Japan to continue to remain on pause and leave the policy rate unchanged when it meets in October. And you can read more about what Min Joo expects here. In a nutshell, we think the BoJ expected to reiterate its core message that if the economy develops in line with the Bank's forecast, it will continue to normalise monetary policy. Markets will pay particular attention to the BoJ’s quarterly outlook report. We believe that the inflation outlook for the whole of 2024 could be revised upwards, but no major changes are expected for the coming year, while the GDP outlook for FY24 should be revised downwards, reflecting recent production declines related to the auto sector and natural disasters.

Industrial production is expected to rebound to 2.0% MoM sa, following the normalisation of auto production since mid-September and the end of production disruptions from mega earthquake warnings. Retail sales growth is also expected to remain strong, driven by strong growth in car sales.

South Korea: IP and trade data

Industrial production is expected to show a second month of solid growth as auto production normalises and semiconductor production rebounds. Meanwhile, October trade is certainly in focus. Early October export data suggests slower growth here, but mostly due to the unwinding of favourable base effects. Chip exports will remain a key driver of growth, but we see some signs of weakening in petrochemicals and steel exports.

Australia: Inflation data moving to target

Headline YoY inflation should fall in the third quarter, finally dropping to within the 2-3% target band for the first time since mid-2021. Lower gasoline and electricity price rebates are driving that. However, core inflation is expected to remain well above 3%, given the still tight labour market conditions, suggesting rate cuts are unlikely in the RBA’s November meeting.

Indonesia: CPI data set to remain muted

Headline inflation is expected to remain muted at levels below 2% largely driven by ample food supply and lower food prices, lower oil prices and a stronger rupiah. This should create room for Bank Indonesia to cut rates in the fourth quarter.

Key events in Asia this week

Source: Refinitiv, ING

Energy – Oil sells off following Israel response

Oil prices opened this morning lower with ICE Brent trading more than 4% lower at the time of writing, taking the market back below $73/bbl. This weakness comes despite Israel finally responding over the weekend to Iran’s recent missile attack. However, Israel’s response appears to have been measured with only Iranian air defence and missile production facilities targeted. The concern for the market had been if Israel targeted Iran’s energy or nuclear infrastructure. The more targeted response from Israel leaves the door open for de-escalation and clearly the price action in oil this morning suggests the market is of the same view. While it is still unclear if or how Iran may retaliate, the government has downplayed the damage caused by Israel’s response. The Iranian supreme leader has said that the attack should not be “exaggerated or downplayed”. Clearly, if we do see some de-escalation it would allow fundamentals once again to dictate price direction. And with a surplus market over 2025, this would mean that oil prices are likely to remain under pressure.

The latest positioning data for ICE Brent showed little change in the managed money net long over the last week. Speculators reduced their net long by 1,941 lots to 134,581 lots as of last Tuesday. The lack of movement shows that speculators have been torn between growing geopolitical risks and bearish 2025 fundamentals. As for refined products, speculators remain bearish on middle distillates. The positioning data shows that speculators increased their net short in ICE gasoil by 10,777 lots to 41,786 lots. Similarly, for NYMEX ULSD, the managed money net short increased by 3,826 lots to 26,314 lots. Weak demand, growing Middle Eastern supply and comfortable inventory levels continue to keep pressure on middle distillates.   

European natural gas prices strengthened on Friday. TTF settled more than 3.2% higher on the day taking prices a little over EUR43.5/MWh, the highest year-to-date level. Forecasts for colder weather at the end of this week, a relatively small outage in Norway, along with Middle Eastern tensions, have provided upside to the market. Although with broader markets of the view that we could possibly see some de-escalation in the Middle East following developments over the weekend, gas prices may trade lower today. However, the other factor which is offering support to the market is that last week we saw several days of marginal storage draws, and so storage will start the heating season slightly below where we would have expected it to be. But at more than 95% full these are still very comfortable levels, just not as comfortable as we were initially expecting.

Agriculture – UNICA report higher sugarcane crush

The latest fortnightly report from the UNICA shows that sugar cane crushing in Centre-South Brazil stood at 33.8mt over the first half of October, compared to 32.9mt during the same period last year. The cumulative sugar cane crush for the season as of mid-October rose 2.4% year-on-year to 538.8mt. Meanwhile, sugar production rose by 8% YoY to 2.4mt over the first half of October. Around 47.3% of cane was allocated to sugar production in the fortnight, lower than the 48.1% allocated for sugar production in the same period last year. Cumulative sugar output so far this season is 35.6mt, up 1.9% YoY.

France’s Agriculture Ministry said that around 25% of the corn crop was harvested as of 21 October, well below the five-year average of 69%. The Ministry reported that 75% of the corn was rated in good to very good condition, down from 78% in the previous week and 83% a year earlier. Meanwhile, about 21% of the French soft wheat was planted for the above-mentioned period, compared with a five-year average of 47%.

The latest CFTC data show that money managers increased their net short position in CBOT soybeans by 19,233 lots to 59,574 lots as of 22 October. The move was dominated by fresh shorts with the gross short position increasing by 18,631 lots to 152,610 lots. Similarly, speculators increased their bearish bets in wheat by 2,902 lots over the last week, leaving them with a net short position of 28,915 lots. The net speculative short position in CBOT corn fell by 15,489 lots to 71,499 lots over the reporting week. Strong US corn export sales data last week may drive further short covering.

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Canada – Is 50 the new 25?

No, I’m not talking about age, although I’d greatly benefit from that view! I knew I would eat crow on Wednesday’s Bank of Canada (BoC) call with the high market pricing for a 50 basis point (bp) cut. There’s no regret in having conviction that risks need to be managed when the Bank delivers a rate cut that historically aligns to emergency periods. It could condition Canadians to expect data misses to be met with large monetary responses. I was hoping this would be clearly addressed in the press conference. Unfortunately, it was not, and there was little indication on where the bar is set for another 50 bps in December.

Within the press release, oil was mentioned twice, which is not common fare. It’s been a contributor to a larger-than-expected decline in inflation, but all it would take is a supply disruption from geopolitical events to cause a spike. If so, would we assume all bets are off on future rate cuts? Of course not.

Next up were shelter prices, which were noted to be decelerating. Of course! This is highly forecastable and observable. The peak impact of the rapid escalation in mortgage rates is in the rear-view mirror. And, the act of cutting interest rates takes heat off mortgage interest costs, where there’s a “circular reference” into inflation metrics. Almost a fifth of shelter costs derives from this single input and models have correctly predicted this easing in the growth-impulse.

Next up was mention that the Bank’s preferred core measures were just under 2.5%. The memo that communicated 2.5% was a meaningful threshold, rather than the midpoint of the inflation range, must have gotten lost. The Bank also did not make significant changes to their outlook on the economy or core inflation metrics, except to mark-to-market in Q3.

Carolyn Rogers offered the clearest (and most transparent) explanation — with the benefit of time and more data, the 50 bps cut reflects greater confidence that inflation will hold near 2%. By extension, a faster normalization in rates is warranted. However, this logic automatically argues for at least one more 50 bps cut in December, absent a large miss to the upside on the Bank’s forecast. No surprise, markets have about two-thirds of that priced in.

Normalization means getting back to the BoC’s range for the neutral rate, which they estimate is between 2.25% and 3.25%. The midpoint is cited as the ideal target. Now, that range is not static. It’s regularly revised based on population and productivity trends. For instance, the government’s recently announced changes to immigration targets should result in a downshift in the range due to labour market impacts. In addition, Canada’s persistent poor productivity performance offers further rationale to lower the range. However, doing so would only mean that the BoC policy rate is even further away from neutral than originally believed, yet another argument for several 50 basis point rate cuts to achieve normalization. But as it currently stands, this requires returning to 2.75%, at a minimum. There was no discussion at the press conference on the appropriate pace, other than if the BoC’s forecast is met, interest rates will be cut again.

Let’s get back to fundamentals and pull the lens back on what’s really motivating outsized rate cuts. For decades, central banks drilled into the public mindset that the best approach in monetary policy was:

Gradual (and transparent) adjustments;

Decisions reflect a forward-looking economic and risk landscape, generally within the 12-to-18-month range.

But that was the pre-pandemic world when central bankers had reasonable confidence in forecast models and historical relationships. Since then, the communication pivoted to focusing analysts on the here-and-now data. Confidence requires irrefutable proof, rather than being about 60% of the way there on the data trend.

Understandable given that the pandemic created a persistent inflation surge that models were not designed to predict. The shock occurred simultaneously along the demand and supply channels. Most macroeconomic models have greater sophistication in understanding the demand side of the equation, rather than the supply side. But here too there were big failures. For instance, the unemployment rate typically had a great track record in predicting household financial stress and consumer patterns. But it had no chance on accuracy during the pandemic cycle that displayed historic departures as the pause button was hit on loan repayments and household bank accounts were backfilled with massive government transfers.

Those days are long gone, and the learnings and sophistication of models has since broadened, as has the understanding of those who rely on them. With the absence of unusual or unique factors, there should be greater confidence in the predictive outcomes of models and judgement. Yet, the central bank keeps its eyes and communication trained on the immediate data to influence decisions. Effectively, decisions are based on data fluctuations largely informing one-quarter ahead rather than the medium term. This is not just a Bank of Canada phenomenon, but a global central bank trend.

What could this mean in the bigger picture? One outcome is an amplification of interest rate volatility. No longer are 50, 75 or 100 basis point moves reserved for the “oh shoot!” emergency moments where there’s high risk of a recession. Interest rate cycles have a later start, but then get compressed, creating larger jumps and tumbles, or volatility.

Is that a bad thing? Not in every aspect. As the BoC noted, they want to stick the landing. A larger interest-rate move isn’t a signal that they know something you don’t. It is an admission that they are behind the curve because that’s the natural state that occurs when the emphasis is on changes in the near-term data. By the time you see the data, observe persistence, you’ll naturally be behind the curve. The data, after all, are already backward looking. But at least once this condition is known, the adjustment is swift to try to prevent more economic weight. As the BoC Governor noted, we took a bigger step because inflation is back to the 2% target, and want to keep it there.

However, this can likewise train households to develop a “pile in” psychology. Canadians are not shy about taking on debt. And the housing market is indeed a sport, with a team fielded by population growth and insufficient supply within key segments, like the detached market. The Canadian history on housing is clear: It responds quickly to interest rate movements. And we’ve just come out of a lengthy pent-up demand cycle. In addition, the government is adding fuel to the market with recent policy changes that will stoke demand amongst first time buyers. That means there will be two big channels feeding through the housing market simultaneously, even as immigration flows get tapped down with the government’s recent announcement.

There will be those wanting to “beat the crowd” and secure “a deal” before the combination of government measures and even lower interest rates create a groundswell in demand that risks flipping various markets from balance back to a sellers’ market. But some will be forced to wait longer, in need of those new government measures. So for those with eyes trained on the here-and-now data, the next couple of months may produce housing data that might look like Canadians are not overly responding to interest rate cuts, but my money is on nature and nurture coming back into play. 2025 could display a stronger response in housing demand as monetary and government policy collide into a one-two punch to unleash pent-up demand.

If the Bank of Canada is going to prioritize the near-term data towards outsized rate cuts, we must consider that it would need to be equally responsive to risk-development. This can create an overcorrection on interest rates, going down too deep only to be fine tuned again on the upside as the household spending impulses kick in more suddenly relative to when interest rates follow more gradual cycles. Likewise, it can result in more stop-and-go monetary policy.

U.S. – Countdown to Election Day

One of the most anticipated global events of 2024 is now nearly a week away. As financial markets anxiously await the outcome of the U.S. presidential and congressional elections, we have seen U.S. Treasury yields and the U.S. dollar rise to three-month highs (Chart 1). The uptick which began earlier this month was initially incited by stronger-than-expected economic data, but recent movements have also likely been driven by the narrowing in the polls for the U.S. presidential election. Given that the election will determine the path of fiscal policy moving forward, and by extension monetary policy, uncertainty related to the outcome is likely to remain a weight on financial markets through to November 5th.

Elevated interest rates continued to dampen housing market activity in September, as existing home sales fell to their lowest level since 2010! Demand is also likely being restrained in part by consumer expectations for lower interest rates moving forward, with Federal Reserve Chair Powell indicating that rates would likely be trending lower through the coming year during his press conference last month. Existing home sales are likely to remain subdued in the near-term as mortgage rates moved back above 6½% in October. Nevertheless, the housing market is expected to thaw over the coming year as the Federal Reserve continues to reduce borrowing costs.

The Federal Reserve will be entering its pre-interest rate decision blackout period last weekend, with no further updates expected until Chair Powell’s post-meeting press conference on November 7th. The Fed officials we heard from last week stated that the strength of incoming economic data would warrant caution in future policy decisions, but all speakers noted that the trajectory of interest rates would continue to be downward. Market pricing has pulled back their expectations for rate cuts, but they are now realigned with the Federal Reserve’s median projection from the September Summary of Economic Projections (Chart 2).

This week sees a bumper crop of data releases that will be key inputs to the Federal Reserve’s next interest rate decision. The advance estimate for real GDP growth in the third quarter is expected to show the economy continuing to grow at a strong pace of 3.0%. While employment growth remained solid in the third quarter, October’s employment report due out this Friday is expected to show a deceleration in job gains (125k vs. 254k in September). The Federal Reserve will also be monitoring the release of their preferred inflation metric this week, core PCE, which is expected to show a modest decline to 2.6% in September.

Assuming there are no surprises in the incoming data, the Federal Reserve is expected to continue to cut rates at a pace of 25 basis points per meeting through the end of the year. Chair Powell’s remarks on November 7th will be monitored closely for guidance, although they may be competing with the results of the 2024 election for the attention of financial markets. Suffice it to say, markets will not be left wanting for important developments in the coming weeks.

All eyes on US data as Fed turns hawkish again

The Federal Reserve’s surprise decision in September to cut rates by a larger-than-expected 50-basis-points seems like a distant memory now, as policymakers are once again sending out hawkish soundbites.

US economic indicators since the September meeting have been on the strong side, including the CPI report, with Fed officials cautioning that another 50-bps cut is unlikely in the near term. The sudden switch in the narrative from ‘hard landing’ to ‘soft landing’, or possibly even a ‘no landing’, has spurred a sharp reversal in Treasury yields, which in turn has pushed the US dollar higher.

With the Fed’s November policy decision fast approaching, next week’s data will serve as a timely update on the strength of the US economy as well as on inflation.

Slowdown, what slowdown?

Kicking things off are the October consumer confidence index and the JOLTS job openings for September on Tuesday. But the top-tier releases do not start until Wednesday when the first estimate of third quarter GDP is due.

The US economy is expected to have expanded by an annualized rate of 3.0% in Q3, the same pace as in Q2. Not only is this above average growth but an upside surprise is more likely than a downside one as the Atlanta Fed’s GDPNow model puts the estimate at 3.4%.

Other data on Wednesday will include the ADP private employment report, which will provide an early glimpse into the labour market, and pending home sales.

Spotlight on PCE inflation after mixed CPI

Both the CPI and PCE measures of inflation show a divergence between the headline and core readings. The core PCE price index, which the Fed puts the most weight on in its decision making, ticked up to 2.7% y/y in August even as headline PCE eased to 2.2%. It’s likely that both prints stayed unchanged in September or fell slightly. Hence, the inflation numbers may not be particularly helpful for the Fed or investors.

Still, the personal income and consumption figures due the same day will offer additional clues for policymakers, while October Challenger Layoffs and the quarterly employment cost will be watched too.

NFP report may hold the cards

Finally on Friday, the week’s highlight – the October nonfarm payrolls report – will come to the fore. After a solid 254k rise in September, it’s projected that the US labour market created 140k new jobs in October, signalling a marked slowdown. Nevertheless, the unemployment rate is expected to have held at 4.1%, while average hourly earnings are forecast to have moderated slightly from 0.4% to 0.3% m/m.

Also important will be the ISM manufacturing PMI, which is expected to improve from 47.2 to 47.6 in October. With the Fed now more worried about the jobs market than inflation, soft payrolls could set the tone back to a more dovish one.

Can the US dollar extend its rebound?

Moreover, any signs that the American economy is cooling is likely to push up market bets of back-to-back rate cuts for the next few meetings. However, if growth remains robust and more significantly, PCE inflation points to some stickiness, rate cut bets will probably suffer a further blow.

At the moment, only one additional 25-bps reduction is fully priced in for 2024. If a rate cut in November starts to come into doubt, the US dollar could climb to fresh highs but stocks on Wall Street would probably come under selling pressure.

For the latter, however, a busy earnings week might keep the positive momentum going if results from Microsoft, Apple and Amazon.com don’t disappoint.

Bank of Japan expected to stand pat

Twenty twenty-four was a turning point for the Bank of Japan’s decades-long fight against deflation. The BoJ abandoned its yield-curve control policy, halved its bond purchases, and raised borrowing costs twice, ending its policy of negative interest rates.

However, despite policymakers’ clear intention to continue the normalization of monetary policy and raise rates even higher, inflation appears to be settling around the BoJ’s 2.0% target, lessening the need for further tightening. The most recent commentary from Governor Ueda and other board members suggests a rate hike is not forthcoming on Thursday when the Bank announces its October decision.

But the updated outlook report with a fresh set of projections on inflation and growth should be quite insightful on the likelihood of a rate hike in December or during the first few months of 2025.

In the absence of any hints about a rate hike anytime soon, the yen will probably continue to struggle against the US dollar. Yet, a renewed weakness in the yen will only incentivize policymakers to hike sooner rather than later and this is a risk investors may be overlooking.

Also on the Japanese schedule are preliminary industrial output figures and retail sales figures for September, both due on Thursday.

Euro awaits flash GDP and CPI

The euro’s double top pattern against the greenback did not let down technical analysis enthusiasts and the pair recently brushed 16-week lows, falling below $1.08. Next week’s releases are unlikely to be of much help to the bulls.

The flash estimate of GDP out on Wednesday is expected to show that the Eurozone economy eked out growth of just 0.2% q/q in the third quarter. On Thursday, attention will turn to the flash CPI readings. The headline rate probably edged up from 1.7% to 1.9% y/y in October, but the ECB is already forecasting a pickup in the coming months.

Nevertheless, stronger-than-expected data could provide the euro with some short-term relief following four consecutive weeks of losses. Alternatively, if the numbers disappoint, investors are sure to ramp up their bets of a 50-bps cut by the ECB in December.

Pound looking shaky ahead of UK budget

It hasn’t been the best of times for sterling either lately, despite the Bank of England being one of the more hawkish central banks at the moment. The pound has lost grip of the $1.30 handle, and there could be more downside on Wednesday when the UK Chancellor of the Exchequer Rachel Reeves announces the new Labour government’s first budget.

The UK press has gone into overdrive with its coverage of the budget and all indications are that Reeves will unveil tax increases of £40 billion, raising the tax burden to the highest since 1948. Whilst this may not be good news for taxpayers, BoE policymakers might welcome it, as tighter fiscal policy will dampen demand in the economy, paving the way for faster rate reductions.

The pound is at risk of slipping further from a deficit-reducing budget. Even if there are some growth boosting policies included, they are likely to be longer-term measures and not get in the way of the BoE cutting rates. Yet, there might be some support for sterling if investors take note of the fact that the UK government is focusing on long term investments and keeping the deficit in check rather than on short-term sweeteners for voters that push up borrowing.

Australian CPI eyed as RBA decision looms

Finally, traders will be watching CPI stats out of Australia on Wednesday as the Reserve Bank of Australia maintains a neutral stance on rates. After edging up earlier in the year, inflation in Australia finally started moving in the right direction over the summer. The monthly print fell to 2.6% y/y in August, hitting the RBA’s 2-3% target band for the first time since 2021.

The quarterly data, which is deemed more accurate, is bound to form the basis of discussion for the November 5 meeting. However, even if there is more good progress in bringing inflation down, particularly in the trimmed and weighted mean measures, the RBA is likely to remain cautious for now and at best, begin the debate of when to start cutting rates.

But for the Australian dollar, a hawkish RBA may only go so far in coming to the aussie’s aid if broader market risk sentiment remains fragile and the US dollar stays strong. In addition to domestic data, aussie traders will also be monitoring China’s October PMIs out on Thursday and Friday.

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