The US CPI report will be in the spotlight this week, especially after the strong uptick in core prices last time. I forecast headline CPI to have increased by 0.5% m/m SA (7.8% y/y) and core CPI to have increased by 0.4% m/m (6#4%% y/y).
This week, investors will be closely watching the US CPI report. Last time, there was a strong upside surprise in the core print, so uncertainty remains high and there are still risks to the upside in some components. Our economists’ forecast for October headline CPI is 0.5% m/m SA and 7.8% y/y; I believe that core CPI will rise to 0.4% m/m, amounting to 6.4% y/y due to robust shelter inflation rates. I predict that core services will grow by 0.5%, down from September’s rate of 0,.79 % while rent-related expenses inflate by 0.7%. Also, I pay close attention to the University of Michigan consumer sentiment indicator (Fri) as it provides valuable insights into overall inflation expectations.
The Hot Zones this Week
Thursday – CPI and Core CPI
The market is currently split on what the Fed’s next move will be, with some expecting a 50bp hike and others expecting a 75bp hike. The Fed is still committed to hitting its target of 2% inflation; however, they are prepared to slow down the rate hikes if necessary.
From NewsSquawk:
Analysts expect headline consumer prices to pick up by 0.7% M/M in October, accelerating from the 0.4% M/M rate in September; the core measure is seen cooling touch to 0.5% M/M, lower than the 0.6% M/M in September, but a still elevated level vs historical level. The data will be framed in the context of how much progress the Fed is making toward lowering inflation. After the November FOMC meeting, Fed Chair Powell said it was “very premature” to consider pausing or ending the rate hiking cycle, noting that inflation remains well above the Fed’s longer run goals, with price pressures evident across goods and services. Although longer-term inflation expectations still appear well-anchored, the Fed wants to see inflation coming down decisively, and is prepared to stay the course until the job is done. The message from Powell was that the Fed is strongly committed to its inflation target of 2%. Powell did, however, allude to a potentially slower pace of rate hikes in December; the statement said the Fed will consider the “cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” when determining the pace of future rate increases. Analysts rationalized that with rates in the restrictive territory, the Fed can downshift to a slower pace of normalization to assess the impact of the 375bps worth of rate tightening unleashed since March. Currently, the market is split in its views about whether the Fed will implement a 50bps or 75bps rate hike in December. Accordingly, the market seems to be of the view that if inflation metrics move lower (and traders are keeping an eye on aggregate inflation data, including CPI, PCE, wages metrics within jobs data, consumer inflation expectations via surveys, etc), this gives the Fed cover to downshift to the lower increment; however, if inflation data does not cooperate, then the Fed will prefer the larger sized hike, and potentially an even a higher terminal rate (Powell suggested that the eventual peak Fed Funds Rate Target is above the 4.6% penciled in within the September projections; money markets see the peak at 5.00-5.25% in Q2 2023).
Global Spotlight
As the U.S. midterm elections draw near, the Republican Party is expected to gain significant power in Congress, which could lead to several roadblocks for President Joe Biden’s legislative agenda. Meanwhile, events such as the United Nations Climate Change Conference (COP27) and Singles’ Day will give us a glimpse into how different parts of the world are faring economically. In addition, the Association of Southeast Asian Nations will be convening in Phnom Penh, Cambodia from Nov. 10-13 to discuss topics such as climate change and regional development.
The Republican Party is projected to gain significant political power in the upcoming Nov. 8 U.S. midterm elections and models indicate that it is likely to take control of both the House of Representatives and the Senate. If Republicans gain a majority in either chamber, they will be able to halt President Joe Biden’s legislative agenda for the next two years. This includes possible obstruction of aid to Ukraine. Furthermore, Republicans are expected to utilize their power of congressional review to more closely examine and possibly impede several policies that Biden supports but they do not – such as energy and climate change initiatives, as well as talks with Iran.
COP27, the 2022 United Nations Climate Change Conference, will take place from November 6-18 in Sharm el-Sheikh, Egypt. With global energy security taking precedence over climate change concerns, many world leaders are expected to be in attendance. Even though various organizations and countries will be announcing commitments to climate change at the conference, the worldwide energy crisis has lowered people’s hopes for this year. High natural gas prices and Europe’s efforts to find new sources of energy have led some European countries to put off plans to stop using coal. Meanwhile, hosting Egypt is likely to try to direct conversations and negotiations toward issues that are most pressing for Africa and the poorer countries of the Global South- such as adjustment efforts to reduce climate change’s effect on vulnerable populations and climate finance associated with aid for energy transformation in developing nations.
Singles’ Day, China’s largest annual shopping holiday, falls on Nov. 11 every year and continues for a week. Last year alone, the event racked in $139 billion in sales. Singles’ Day will give us a measuring stick for Chinese consumption this year as the economy slows down. By 2022, we will be able to see how consumer confidence has changed in China by looking at what was bought during the Singles’ day sales season. This data will also help show how eager people are to spend money again after months of restrictions due to COVID-19. This will also show Beijing’s current stance on online shopping; last year during Singles’ Day, platforms received criticism from the city for excessive marketing that encouraged too much consumption.
From Nov. 10-13, the Association of Southeast Asian Nations will convene in Phnom Penh, Cambodia for their annual meeting. The event will be hosted by Cambodian Prime Minister Hun Sen, who will pass on the ASEAN chairmanship to Indonesian President Joko “Jokowi” Widodo for next year. U.S. President Joe Biden, Canadian Prime Minister Justin Trudeau, and U.N. Secretary-General Antonio Guterres will all attend a signing of the Treaty of Amity and Cooperation in Southeast Asia between Spain and Ukraine at an upcoming event promoting peace and cooperation in the region. The expected topics of discussion at the conference are climate change, Disaster Management, and response to current and future pandemics, as well as regional development.
The U.S. midterm elections, the UN Climate Change Conference (COP27), Singles’ Day, and the Association of Southeast Asian Nations meeting will all take place in November of this year. These events have a range of implications for politics, business, and society on a global scale. The Republican Party is projected to gain significant political power in the upcoming U.S. midterm elections and if they gain a majority in either chamber, they will be able to halt President Joe Biden’s legislative agenda for the next two years. Meanwhile, COP27 will take place from November 6-18 in Sharm el-Sheikh, Egypt and many world leaders are expected to attend even though global energy security has taken precedence over climate change concerns. Lastly, Singles’ Day falls on Nov 11 every year and continues for a week; last year it racked up $139 billion in sales. This data will help show how eager people are to spend money again after months of restrictions due to COVID-19 as well as Beijing’s current stance on online shopping.
Stratfor.com
Economic Calendar
On the data front, there is not a lot in the economic calendar this week until the CPI numbers come out towards the end of the week. The economic calendar is light this week with only a few reports scheduled for release. The most notable report is the Consumer Price Index (CPI), which will be released on Thursday.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Earnings
Aggregate Estimates and Revisions
- 22Q3 Y/Y earnings are expected to be 4.3%. Excluding the energy sector, the Y/Y earnings estimate is -3.4%.
- Of the 428 companies in the S&P 500 that have reported earnings to date for 22Q3, 71.3% have reported earnings above analyst estimates. This compares to a long-term average of 66.2% and prior four quarter average of 78.1%.
- During the week of Nov. 7, 31 S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Core View
Growth
I predict that the GDP growth will decelerate to 0.2% in 2022 (4Q/4Q) and then continue slowing down to -0.9% in 2023 (4Q/ 4Q.) The lagged impacts of stricter monetary policy and more challenging financial conditions shall have a cooling effect on the economy.
Inflation
The data is coming in quite strong, and given that prices are staying firm, I predict that headline PCE will grow by 5.8% from 4th quarter to fourth quarter 2022 and 2.9% in 2023. Core inflation is forecasted to be 5.0% and 3.1%, respectively those years as well. By the end of 2024, this puts inflation mostly in line with the Fed’s goal of 2%.
Federal Reserve
I expect that the Federal Reserve will raise its policy rate by 50 basis points in December, followed by two additional 25 basis point rate hikes in February and March of next year. With this, the forecasted terminal target range for the fund’s rate would be 4.75-5.0%. As inflationary pressures begin to subside, I am expecting that the Fed will start cutting rates come December 2023.
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