October

Poland’s inflation may fall to single digits in August but pace of disinflation to slow The final CPI print for June confirmed that inflation slowed to 11.5% year-on-year from 13.0% in May. We estimate that core CPI fell to 11.1% YoY from 11.5% a month prior. We see further deceleration ahead, likely allowing the MPC to cut rates in September and October.   Prices of goods rose by 11.4% YoY, and service prices by 11.7% YoY, compared with 13.3% and 12.3%, respectively, in the previous month. The biggest contributors to further disinflation in June were the deepening of the decline in fuel prices, the slowdown in the growth of prices of energy carriers, and the slightly slower growth of food prices compared to a month ago. These factors lowered the annual inflation rate in June by about 1.1 percentage points relative to May. For the second month in a row, consumer prices did not change significantly vs. the previous month. Core inflation declined markedly again and according to our estimates eased to about 11.1% YoY in June vs.11.5% in May. However, the months of rapid disinflation are behind us. Since the peak in February, CPI inflation has declined by nearly seven percentage points. We expect the disinflation process to continue, but its pace in the second half of the year will be slower, due to, among other things, a somewhat smaller drag from the reference base. In July, we may see a decline in prices relative to June and we may see the annual inflation rate at single-digit levels as early as August. The Monetary Policy Council has officially ended the cycle of interest rate hikes and is preparing for rate cuts, which, according to recent announcements by the National Bank of Poland President Adam Glapinski, may take place as early as after the summer holidays. This is also our baseline scenario, assuming rate cuts in September and October (both by 25bp). At the same time, the NBP's July projection indicates that even in the absence of interest rate changes, inflation will take a long time to return to target so the space for rate cuts seems limited. The market-priced scale of monetary easing may prove too aggressive.

Weak UK PMIs bolster chances of November BoE pause The latest UK purchasing managers indices undoubtedly vindicate the Bank of England’s decision to keep rates on hold this month. We think the Bank’s tightening cycle is over.   We’ve had the latest purchasing managers indices for the UK and it’s another dismal outcome. The services PMI now stands at 47.2, down from 49.5 and that’s lower than had been expected by economists. There’s little doubt from the accompanying S&P Global press release that the economy is weakening, and the comments on the jobs market stand out in particular. The survey indicates that employment is now falling at the fastest rate since October 2009, when you exclude the volatility during lockdowns. And prices charged by firms are increasing less rapidly too. All of this supports the wider body of evidence from the data that the jobs market is weakening and that domestically-generated inflation is likely to slow over coming months. Admittedly, the Bank of England has been more reluctant to base policy on surveys while actual inflation and wage data have (at least until recently) been coming in consistently hot. But with lower gas prices taking pressure off the service sector to lift prices aggressively, in an environment where demand appears to be cooling, inflation in the service sector should continue to fall over coming months. Services CPI – currently 6.8% - should end the year below 6%. We therefore think the Bank will remain on hold in November and that August’s rate hike marked the top in this tightening cycle. Remember that we only have one inflation and wage data release before November’s meeting. So if the Bank felt it had enough evidence to pause yesterday, then barring any big surprises in those data releases, it’s unlikely that much will have changed by the next meeting. Remember, too, that one official who voted for a rate hike this week – Jon Cunliffe – now leaves the committee and there’s no guarantee his successor – Sarah Breeden – will vote the same way. That suggests the decision in November could be a little less contested than it was this month. Bigger picture, the Bank is also acutely aware that the impact of past hikes is still feeding through, and it’s made it abundantly clear that the length of time rates stay high is now more important than how high they peak in the short-run. That said, we expect the first rate cuts by the middle of next year.

According to the latest CFTC report, the past week was relatively calm in the futures market. One notable change was the value of the net short yen by position, which corrected by 1.2 billion, while changes in other currencies were minimal. The US dollar's net positioning, after sharply rising the previous week, saw a 0.3 billion correction, bringing it to 8.5 billion, indicating a firm speculative positioning for the dollar. Other factors that supported the greenback are the drop in the number of long positions in oil and especially gold, with a weekly change of -4.8 billion, implying further declines. This often signifies growing bullish sentiment for the US dollar.   The University of Michigan's Consumer Sentiment Index fell to 63.0 in October, the reading was below the forecast of 67.2, reaching the lowest level since May. This marks the third consecutive decline and can be largely attributed to rising gas prices and a decline in the stock market. However, consumer spending remains at a good level despite weaker sentiment in recent months. China's consumer price index remained flat from a year earlier in September, while the Producer Price Index fell by 2.5% as concerns linger about weak demand. Both figures were slightly below consensus estimates. This week's data on industrial production, retail sales, and third-quarter GDP will provide a clearer picture of the impact of the government's additional stimulus measures. The conflict between Israel and Hamas has quickly escalated into the bloodiest clash in the past 50 years from both sides. As both Israel and Iran are minor natural gas exporters, European natural gas prices rose by about 40% last week. Oil markets remain calmer due to reduced demand and excess production capacity. US consumer price inflation for September shows headline prices rose 0.4% month-on-month (consensus 0.3%), and the core index slowed down from 4.3% year-on-year to 4.1% year-on-year, which is a positive sign for the Federal Reserve. There is growing confidence that the Fed's rate hike cycle is coming to an end.   The British pound corrected slightly above the resistance level at 1.2305 and then resumed its decline. It is assumed that the local peak has been formed, and the sell-off will continue, with the nearest target being 1.2033 (the low from October 4). In case it breaks below this level, selling pressure may intensify, with the long-term target being 1.1740/90.  

Business sentiment darkens in France, signalling a general loss of economic dynamism The business climate in France darkened in October across all sectors. Business leaders are less optimistic about past and future activity. Economic growth is likely to slow further.   The business climate in France darkened in October, dropping two points over the month to 98. The fall is visible in all sectors, signalling a widespread loss of economic dynamism. Business leaders everywhere are less optimistic about past production and activity but also about future activity and production prospects. Order books are judged to be less full in the retail and construction sectors, though they improved slightly in industry. This indicator, the first available for the fourth quarter of 2023, suggests that the French economy is likely to continue to slow. After a third quarter in which economic activity probably softened markedly (we forecast quarterly growth of 0.1% in Q3 compared with 0.5% in the second quarter), business sentiment suggests that a rebound in the fourth quarter is unlikely. Against a backdrop of persistently poor order books in industry, weakening demand, particularly from international markets, and a waning catch-up effect in some sectors, the outlook for the industrial sector is weak and a rebound is not expected before 2024. The construction sector, for its part, is likely to see a further fall-back in activity due to higher interest rates, which are having an increasing impact on credit demand. Household consumption is also likely to remain subdued over the coming months. While wages have risen, allowing households to regain a little purchasing power, the labour market is showing the first signs of weakening, consumer confidence remains low, and inflation proves to be stickier than expected. Recent rises in oil prices linked to geopolitical tensions will keep energy inflation buoyant in France until the end of the year and into 2024, which will continue to depress household purchasing power and limit consumer spending. Retail and services are, therefore, likely to face weak demand. Ultimately, this data suggests the French economy is likely to slow further in the fourth quarter. We expect GDP to stagnate in the coming three months, which would bring average growth for 2023 to 0.8%. We believe the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by a very restrictive monetary policy. Because of a negative carry-over effect, we forecast average GDP growth of only 0.6% in 2024.

The Commodities Feed: Lingering supply risks The oil market started the week on a weak footing. However, geopolitical risks remain elevated and the short-term outlook remains dependent on developments in the Middle East.   Energy - supply risks remain The oil market came under significant pressure yesterday with ICE Brent settling 3.35% lower on the day, while WTI traded down to its lowest level since the Israel-Hamas conflict. This is despite the fact that there are clear upside risks still facing the market in the current geopolitical environment. Disruptions to Iranian oil flows remain the most obvious risk to the market, which could see anywhere between 500k b/d and 1m b/d of supply lost if the US were to strictly enforce sanctions once again. Up until now, developments in the Middle East have yet to impact oil supply. In the absence of supply disruptions from the region, it is difficult to see a significant and sustained upside in prices. Also important for the market are developments in Venezuela. Recently, the US decided to ease sanctions against Venezuela in return for the promise of fairer elections in 2024. The expectation was that the lifting of these sanctions could see Venezuela increase its oil supply in the region of 200k b/d. However, overnight, the supreme court in Venezuela suspended the results of the opposition’s primary elections, which will likely call into question whether the sanctions relief provided to Venezuela will remain in place.   On the calendar for today, December Brent futures expire and the API will also release weekly US inventory data. In addition, markets will await China’s official PMI data which will be released this morning. Expectations are for the manufacturing PMI to come in at 50.2 for October, unchanged from the previous month. A second consecutive reading in expansion territory will likely go down well with markets, showing some further signs of firming by the Chinese economy.

China: Momentum waned in October PMI data for October showed momentum in China's economy waned following recent improvements in hard activity data. The manufacturing PMI dropped back into contraction territory and the non-manufacturing PMI also fell.   Economic momentum slowed in October China's Official PMI numbers fell in October, which comes as a slight shock as recent activity data had been firming, and this suggests that the economy is still struggling despite the better-than-expected 3Q23 GDP figures reported recently.  China's composite PMI dropped from 52.0 to only 50.7 - consistent with only very slow overall economic growth. Within this total, the manufacturing PMI index fell into contraction territory (49.5, down from 50.2). There was a bigger fall in the non-manufacturing index to 50.6 from 51.7, but it managed to remain in expansion territory (just).    China's Official PMI indices (headlines)   Most industries saw growth slow By industry type, most manufacturing sectors experienced a slowdown in growth in October, though for companies that are heavy consumers of energy, activity actually declined slightly, perhaps affected by recent increases in the prices of crude energy.  Focusing on the manufacturing sector, the sub-components of the PMI index were quite mixed. Weak export orders and an inventory buildup, together with weak imports weighed on the headline index. Manufacturing production itself was not so bad, and employment also looked stronger, though quite a lot of the increase can be attributed to higher purchasing prices, which isn't necessarily a good thing.    October 2023 Manufacturing PMI - subcomponents   4Q23 GDP could slow If reflected in hard activity data, today's PMIs suggest that the momentum of China's economic growth ebbed at the beginning of the fourth quarter. Talk of recent support measures, including a wider central government deficit, will help offset any tendency for the economy to slow, though such measures will probably have more of an impact on growth at the beginning of 2024, given that we are already a third of the way through 4Q23.  Even so, today's data suggest that although it has weakened, economic growth is still ongoing. And if this initial set of data is representative of what will follow for the rest of the quarter, it should still be enough for China to hit its 5% GDP target for 2023 though on slower incremental growth in the fourth quarter of 2023. That said, 5% is a low hurdle, and reaching it doesn't mean that all of China's growth worries are over.

French inflation falls in October, but should soon stabilise Inflation in France fell to 4%, compared with 4.9% in September. The trend towards disinflation is well underway in France, but it will take time. The fall in inflation is likely to be much smaller in the coming months.   Inflation falls to 4% in October Consumer price inflation stood at 4% in October, compared with 4.9% in September. This fall in inflation can be attributed to a slowdown in the prices of food (7.7% in October, compared with 9.7% in September), manufactured goods (2.3%, compared with 2.8%) and energy (5.2%, compared with 11.9% in September). Unlike in other European countries, energy inflation continued to make a positive contribution to French inflation in October, due to last year's tariff shield and the reduction in fuel prices, which had kept energy prices lower in France than elsewhere. On the other hand, service prices accelerated again, rising by 3.2% year-on-year in October, compared with 2.9% in September, a sign that the repeated increases in the minimum wage are continuing to drive up prices in the service sector. Inflation according to the harmonised index, which is important for the ECB, stood at 4.5%, down from 5.7% in October.   Disinflation will take time Overall, this data confirms the findings of previous months. The trend towards disinflation is well underway in France. Nevertheless, disinflation will not be a smooth ride and will take time. Inflation is likely to remain close to 4% for the next few months. Given the various government interventions on energy prices over the past year, the base effects of energy inflation are less favourable in France than elsewhere. What's more, is that the recent rise in oil prices means that the trend will be less clear-cut than expected and that further spikes in inflation caused by energy inflation cannot be ruled out in the coming months. Despite weakening demand, the indexation of minimum wages to inflation is likely to maintain strong momentum in services prices, which could become the main contributor to inflation over the months ahead. On the other hand, inflation in food and manufactured goods should continue to fall as a result of falling global demand, high inventories and lower production costs.  Given the latest geopolitical developments and their impact on energy prices, inflation should continue to fall over the coming months – albeit more slowly than previously forecast. In its latest forecasts published in September, the Banque de France expects inflation according to the harmonised index to return to 2.2% at the end of 2024 and 1.6% at the end of 2025. However, we will probably have to wait longer to see inflation return to these levels. We are expecting inflation according to the harmonised index to be 2.5% at the end of 2024 and 1.9% at the end of 2025.

Italian inflation sees a sharp fall on favourable energy base effects The decline in Italian inflation in October was stronger than expected, bringing the headline inflation rate temporarily below the 2% threshold. While we could see a rebound over the winter, this is good news for real disposable income developments.   Headline inflation surprises to the downside, driven by a favourable base effectWe had anticipated a steep fall in Italian headline inflation for October – but the actual data has turned out even stronger than expected. The preliminary estimate disclosed by the Istat shows that headline inflation fell to 1.8% year-on-year (from 5.3% in September), the lowest level since July 2021 and helped by huge base effects in the energy components. The bulk of the decline is explained by non-regulated (to -17.7% from +7.5% YoY) and regulated (-32.9% from -32.7% YoY) energy goods, but food components also provided a solid contribution. These falls trumped the increases in housing and transport services. Core inflation (which leaves out energy and fresh food) also decelerated to 4.2% from 4.6% in September, and now lies well above the headline measure as expected. Behind this, there is a re-widening between services inflation at 4.1% and goods inflation (+0.1%).   Inflation to return above 2% over the winter Looking ahead, the energy component will unlikely be able to act any further as a drag and we expect inflation to return back above 2% over the winter. The pace at which the core component will be able to decelerate will crucially depend on consumption developments. As shown by the preliminary estimate of third-quarter GDP also released this morning, the Italian economy stalled over the quarter, with a negative contribution of domestic demand (gross of inventories) compensated by net exports. Thanks to a resilient labour market and decent wage growth, we suspect that consumption might not have acted as a drag in the third quarter, and could gain potential support over the winter from the impact of declining inflation on real disposable income. This could potentially slow the decline in core inflation through the services component. All in all, after today’s release we're revising down our inflation forecasts to 5.9% for 2023 and 2.3% for 2024.

Korea: Exports rebound for the first time in thirteen months Exports rebounded in October, driven mainly by solid vehicle and machinery exports, along with signs of improvement in chip exports, suggesting that global demand conditions are holding up well. However, the weak manufacturing PMI hints that the expected export recovery will only be modest.   Exports gain suggests global demand conditions remain healthy October exports rose 5.1% YoY (vs -4.4% in September, 6.1% market consensus) on the back of solid car (19.8%) and machinery exports. We also see some signs of improvement in chip exports as their decline moderated to -3.1% from the recent low of -44.5% in January 2023. We believe that Korean chip makers benefit the most from the recent strong demand for AI investment, and chip exports will likely rebound by the end of the year. Also, the recent rise in oil prices has boosted petroleum exports, which registered an 18% gain.  Despite growing concerns over the slowdown in developed economies, Korean exports suggest that global demand remains robust and is even recovering in some sectors. The robust exports to the US (17.3%) signal that resilient private consumption and investment may be sustained at least in the near term as EV cars, mobile devices, and machinery gained the most. However, exports to the EU declined (-10.7%) on the back of weak steel and machinery exports.  Imports dropped more than expected in October, falling by -9.7% (vs -16.5% in September, -2.1% market consensus). The recent rise in global commodity prices hasn't had much impact yet but will come through more meaningfully in the coming months. This will likely narrow the trade surplus despite the recovery in exports.    Exports rebounded but the trade surplus narrowed in October   Manufacturing PMI edged down in October The manufacturing PMI fell to 49.8 in October (vs 49.9 in September), staying below the neutral 50 level for a sixteenth consecutive month. Output and new orders gained compared to the previous month, which is a good sign for exports in the near term. However, a high level of inventories and heightened tensions in the Middle East probably dragged down other subindexes such as inventories, employment, and supplier deliveries. We expect the semiconductor industry to continue to recover with robust demand, but other consumer goods manufacturers may face strong headwinds in the near future.  

China’s trade surplus shrinks in October A continuation of weak exports could weigh on the contribution of trade to GDP growth in the fourth quarter, though there could be a more positive story emerging about domestic demand buried in the import data. At this stage, it is too difficult to draw firm conclusions and more data is needed.   Trade figures raise more questions than they answer China's October trade surplus shrank to CNY405.47bn from CNY558.74bn in September. The cause was a combination of weaker exports (-3.1% year-on-year in Chinese yuan terms, down from -6.2% in September) and stronger imports (+6.4%, swinging up from -0.8% in September).  Ordinarily, the weaker export figure would not bode too well for the contribution to GDP from net exports, and it certainly indicates that overseas demand for China's exports remains weak.  Conversely, the import figure suggests that domestic demand may not be as weak as indicated by, for example, the recent run of PMI numbers. Though this raises the question, which data do you put more weight on?    China commodity imports (YoY YTD %)   Data distortions make interpretation difficult It is tempting to try to dissect these trade figures to try to figure out what is actually going on. But even using year-on-year cumulative figures runs the risk of distortions caused by lockdowns at the end of last year in China, and our best advice at this stage is to reserve judgment on what is happening and wait to see what next month's data bring before conjuring up some fanciful explanation for what happened this month. Even looking at the figures in terms of volume levels runs risks as these numbers are also highly seasonal.  For those who are prepared to stomach these problems, the chart below of imports of crude materials suggests that in fact, this month, nothing particularly exciting took place.   In year-on-year year-to-date terms, the chart shows that imports of iron and copper ores and concentrates, together with crude oil and natural gas are all growing, though not trending particularly strongly.  Earlier inventory building for crude may account for some of the current strength in oil, and the same is also probably true for natural gas as we head into the colder winter months.   Imports of copper and iron ore and concentrates have held fairly steady in these terms at about 8.5% YoY YTD in recent months, which is probably a bit more than the state of manufacturing or construction would indicate, so there may be a more positive story brewing here. However, we think it is too soon to draw any firm conclusions in the face of such conflicting numbers, and this month's figures aren't really out of the ordinary compared to recent months either.  Not shown here are imports of refined petroleum, which are running at a 95% rate of growth, though mainly due to increases in export quotas for similar products, and coal imports are also running strongly, though the rate of increase looks to be slowing.    No change to our GDP forecasts for now Until we get a better idea of what is happening here, we are not going to be revising our GDP figures for the year, which we recently revised higher to 5.4% for full year 2023. Whether there are the beginnings of a trade-off building between a weaker external environment and a firming domestic economy is an appealing hypothesis, but one that does not have enough support for now to run as a central forecast. Further data is needed.

Singapore inflation rises more than expected Headline inflation heated up to 4.7% year-on-year compared to expectations of a 4.5% rise.   October inflation heats up more than expected Singapore's headline inflation rose to 4.7% YoY, higher than the median forecast of a 4.5% increase from October last year. Prices were up 0.2% from the previous month. Core inflation, which is the preferred measure of the Monetary Authority of Singapore (MAS), rebounded to 3.3% YoY, up from the previous month's 3.0% gain. The central bank was expecting some upside pressure on prices in the near term owing to higher energy prices and utilities but the acceleration in October was more than market participants were anticipating.  As expected, transport costs picked up (8.4% YoY vs 6.3% previous) as did healthcare (5.2% YoY) and housing & utilities (3.9% YoY). Meanwhile, items related to recreation & culture saw prices increase 5.8% YoY (vs 4.3% previous), reflecting still robust domestic spending, which figured in the latest 3Q GDP report.  For the year, the MAS expects headline inflation to average roughly 5% YoY while core inflation is forecast to settle at between 2.5-3.5% YoY.            Inflation picks up more than expected in October

Inflation picks up more than expected in October Elevated inflation points to MAS extending pause well into 2024 With the latest rebound in inflation and still elevated risks to the inflation outlook, we expect the MAS to extend its pause well into 2024. With the MAS announcing it will be meeting four times beginning next year, we believe the central bank will have more flexibility to react to changes in the inflation and growth outlook.  Despite today’s pickup in both the headline and core inflation readings, the central bank still expects inflation to cool in 2024. If we see core inflation head back closer towards the 2% level, we believe the MAS could consider adjusting its current stance in the second half of 2024.

Asia Morning Bites Japan's inflation quickens to 3.3% but misses forecasts. Singapore reports industrial production later on, which is expected to contract. Global macro and markets Global markets:  With the US out on holiday yesterday, global markets aren’t very exciting today. European government bond yields pushed higher by about 6-7bp at the 10Y part of the curve. 2Y European government bond yields rose about 2-4bp. The USD was a little softer yesterday, and EURUSD drifted up to 1.0906. Other G-10 FX was also slightly stronger vs the USD, except for the JPY which remained flattish at about 149.53. USDCNY also moved lower and is now 7.1476. European stocks made small gains yesterday in the region of 0.2%. Chinese stocks also gained. The Hang Seng was up nearly a per cent and the CSI gained 0.48%.   G-7 macro:  The main releases yesterday were a swathe of European PMI numbers, which broadly speaking edged higher, but remained in contraction settings. Our European Economist, Bert Colijn, writes that he believes the Eurozone is in a shallow recession. Germany will also release its Ifo business survey later today. The consensus of forecasts looks for a small gain, which would be in line with yesterday’s PMI data. There is very little out for the US, only the S&P PMIs.   Japan:  Consumer price inflation reaccelerated to 3.3% YoY in October (vs 3.0% in September, 3.4% market consensus), for the first increase in four months. On a monthly comparison, inflation rose 0.7% MoM (sa), the fastest growth ever (except during periods when indirect taxes are raised), with increases in both goods (1.3% MoM sa) and service prices (0.2% MoM sa). The price gains were across almost all items. The reduced government subsidy for utility bills was a major reason for the sharp rise. Accommodation and entertainment also rose meaningfully thanks to strong demand from inbound tourists while tight room supply continued. Lastly, the rise in import prices due to the weak JPY is probably also leading to the overall domestic price increases. Today’s outcome fell short of the market consensus but was clearly against the BoJ’s projection that inflation would slow by the year-end. Also, although most of the upward pressures came from supply-side factors, service prices also increased meaningfully. Both the government and the BoJ will be concerned about higher-than-expected inflation. The government’s efforts to curb price increases will continue with an extension of energy subsidies until next April and they are also suggesting tax benefits for low-income households. Meanwhile, we believe the BoJ will move away from its super-accommodative stance next year. We believe that the BoJ may scrap the Yield Curve Program as early as 1Q24, as JGBs appear to have stabilized, following the UST trend, then begin its first rate hike in 2Q24 if wage growth continues to accelerate next year.   Singapore: October data on industrial production is set for release today.  Industrial production is expected to remain in annual contraction by about 2.3% YoY and lower by 0.4% from the previous month.  Production has largely tracked the struggles of the export sector and we will only likely see a meaningful rebound once global demand recovers.  What to look out for: Singapore industrial production Japan Jibun PMI 24 (November) Malaysia CPI inflation (24 November) Singapore industrial production (24 November)

  US core PCE Deflator (Oct) – 30/11 – when the October CPI numbers were released a couple of weeks ago and saw headline CPI slow to 3.2%, and core prices slow from 4.2% to 4.1%, bets on another Fed rate hike in December were pared back sharply.   What was particularly noteworthy was a similar slowdown in super core inflation which the Fed pays close attention to and could well translate into a similar slowdown in this week's core PCE deflator numbers.If we see a similar trend playout in the core PCE deflator numbers that we saw in the headline CPI and PPI numbers, then it will become increasingly difficult for Fed officials to push back on the idea that rate cuts are coming in the middle part of next year. In September PCE core deflator slowed to 3.7% its lowest level in 2 years and this week's October numbers are expected to slow further to 3.5%. This is likely to be the Fed's next key challenge in the face of slowing inflation, that is reining in market expectations of rate cuts and reinforcing the higher for longer mantra that has tightened financial conditions this past few months.      

  US core PCE Deflator (Oct) – 30/11 – when the October CPI numbers were released a couple of weeks ago and saw headline CPI slow to 3.2%, and core prices slow from 4.2% to 4.1%, bets on another Fed rate hike in December were pared back sharply.   What was particularly noteworthy was a similar slowdown in super core inflation which the Fed pays close attention to and could well translate into a similar slowdown in this week's core PCE deflator numbers.If we see a similar trend playout in the core PCE deflator numbers that we saw in the headline CPI and PPI numbers, then it will become increasingly difficult for Fed officials to push back on the idea that rate cuts are coming in the middle part of next year. In September PCE core deflator slowed to 3.7% its lowest level in 2 years and this week's October numbers are expected to slow further to 3.5%. This is likely to be the Fed's next key challenge in the face of slowing inflation, that is reining in market expectations of rate cuts and reinforcing the higher for longer mantra that has tightened financial conditions this past few months.      

DAX set to open at a new record high, US ADP report in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets saw another positive session yesterday with a new record high for the German DAX, while the FTSE100 fulfilled its role as the perennial party pooper with another disappointing session and closing lower for the second day in succession. This was mainly due to weakness in metals and energy prices with Brent crude prices closing at a 5-month low. US markets also struggled for gains with the Nasdaq 100 closing higher due to a strong performance from the Magnificent 7 led by Apple, and Nvidia, while the Russell 2000 finished the day over 1% lower, with the S&P500 and Dow closing little changed.     The indifferent finish seen in the US has been shrugged off by Asia markets with a strong session there after the Bank of Japan's latest Tankan survey showed a big improvement in manufacturers sentiment with the auto sector with the second successive month of gains as chip shortages eased.   This rebound in Asia markets looks set to filter through into this morning's European open with the DAX set to open at a new record high.   Yesterday's economic data from Europe pointed to a modest improvement in services sector economic activity, while the latest US ISM service sector numbers were a mixed bag, with the headline number coming in ahead of forecasts at 52.7. Prices paid did slow but by less than expected, coming in at 58.3 pointing to stickier than expected inflation, while the employment index edged higher to 50.7.   Today we get a look at the latest ADP payrolls report for November as an appetiser for Friday's non-farm payrolls report. We are starting see increasing evidence that the US jobs market is starting to slow, with vacancies falling to their lowest level since March 2021 and with the last two ADP reports adding a combined 202k new jobs as private sector hiring slows.   October saw 113k jobs added an improvement on September and November is expected to see an improvement on that to 130k, given that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.   We also have the latest rate decision from the Bank of Canada where we aren't expecting any changes to monetary policy here with the central bank forecast to keep rates unchanged at 5%.   The last 3-months have seen no growth in the economy at all while the October jobs report saw a rise of 17.5k jobs, all of these were part time positions. On full time employment we saw the first decline in jobs growth since May with a decline of -3.3k, while unemployment rose from 5.5% to 5.7% and the highest level since January 2021. We're also starting to see inflationary pressure continue to subside with core CPI on the median slipping from 3.9% to 3.6% in October.    EUR/USD – has fallen below the 200-day SMA at 1.0825, with a fall below the 1.0800 level raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 has seen the pound slip back towards support at 1.2580/90 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – has found support at the 0.8555 area and is currently looking to recover through the 0.8600 area. While below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 25 points higher at 7,514   DAX is expected to open 56 points higher at 16,589   CAC40 is expected to open 20 points higher at 7,407

Japanese data improves but we still don’t expect a BoJ policy shift this month Although third-quarter GDP was revised down unexpectedly, the improved current account and cash earnings suggest a rebound in growth in the current quarter. Market speculation about the Bank of Japan's possible policy turnaround at the December meeting has been amplified after recent remarks from Governor Kazuo Ueda and Deputy Governor Ryozo Himino.   GDP contraction deepened in 3Q23 Third-quarter GDP was unexpectedly revised down to -0.7% quarter-on-quarter (seasonally adjusted) compared to the flash estimate and market consensus of -0.5%. The largest revision came from private consumption, which fell 0.2% (vs 0.0% in the flash estimate) and the inventory contribution to GDP, which was down by 0.2% ppt. The negative contribution of inventory should be a good sign for the inventory restocking cycle. But household spending still lagged amid high inflation despite relatively healthy labour market conditions, which should be a real concern for the Bank of Japan. We think that weaker-than-expected GDP could justify the Bank of Japan's current easing policy at least for now.   Meanwhile, GDP for the first quarter was revised up meaningfully from 0.9% to 1.2% resulting in an upward revision to annual GDP. Thus, now we expect 2023 GDP to rise 2.0% year-on-year.    However, other data releases today - labour cash earnings, household spending, and current account - point to a rebound in growth in the fourth quarter, thus we believe that the BoJ will shift its policy early next year.   Contraction deepened in 3Q23   Labour cash earnings rose in October Labour cash earnings rose 1.5% YoY in October (vs 1.2% in September, 1.0% market consensus) beating the market consensus. Contractual earnings gained steadily by 1.3% (vs 0.9% in September) while volatile bonus earnings (7.5%) rebounded after two months of declines. Also, hours worked bounced back 0.7% for the first time in four months, thus overall labour market conditions and earnings appear to have recovered in October. However, wage growth was still short of inflation growth, thus real earnings dropped 2.3% in October, although at a slower pace than the previous month's -2.9%.  Nominal wage growth continues and is clearly faster than the previous year. Also, there are several news reports that big companies plan to raise wages above this year's level of growth. Thus, we believe that next year's wage growth should accelerate a bit more than the current year.    Cash earnings and household spending improved in October   Current account surplus widened in October In a separate report, the current account surplus widened more than expected in October to JPY 2.6tn (vs 2.0 in September, 1.8 market consensus). Despite the global headwinds, the current account surplus will likely widen in the coming months. Due to falling commodity prices, the merchandise account will turn to surplus while an influx of foreign tourists will help the travel account to remain in surplus. We expect the trade of goods and services to improve in the current quarter.    Current account surplus in October led by service (travel)   BoJ preview Several remarks by the Bank of Japan, including Governor Ueda, have shaken the FX market quite strongly. Deputy Governor Himino said that ending the negative interest rate policy would have only a limited impact on the economy and Governor Ueda yesterday met with the prime minister, highlighting the importance of sustainable wage growth and inflation, which led to a fairly rapid shift in market sentiment betting on the Bank of Japan's policy tightening. Dollar weakness is also supporting the sudden move of the yen partially, especially ahead of today's release of the US nonfarm payrolls data.   It seems like the BoJ is paving the way to a gradual normalisation and giving the market a signal that the time is approaching. However, since these comments were made outside of the BoJ meeting, any sudden major change of policy is not expected this month. Yes, we remember that Governor Kuroda surprised the market with a yield curve control tweak last December, but we believe Governor Ueda is unlikely to adjust policy without prior communication. Thus, we expect some changes in the statement and dialogue from Governor Ueda at the BoJ meeting on 18-19 December.    As we have previously argued, we think the Bank of Japan's rate hike will come in 2Q24, most likely at its June meeting. By then, the BoJ will be able to confirm a solid wage increase with Shunto's results. In terms of inflation, it will trend down early next year, but still core inflation, excluding fresh food, is expected to remain above 2%. Even if the BoJ carries out a rate hike, we believe that the Bank's JGB buying operation will continue in order to avoid a rapid rise in long-term yields.

Yen rebounds after two-day slide US inflation expected to drop to 3.0% The Japanese yen has ended a two-day slide, in which it dropped 1.4% against the US dollar. In Tuesday’s European session, USD/JPY is trading at 145.21, down 0.66%. Yen volatility continues The yen has been showing sharp swings since last Thursday, when signals from the Bank of Japan of a possible tightening in policy sent the yen soaring over 2% on Thursday. The yen then reversed directions and gave up much of those gains but has bounced back on Tuesday. The BoJ meets on December 18-19 in what has become a hotly anticipated event due to recent comments from Governor Kazuo Ueda and BoJ Deputy Governor Ryozo Himino. Ueda spoke of “an even more challenging situation” coming up for the BoJ and Himino mused about the consequences if rates were to rise into positive territory. On Monday, a report that Ueda was not referring to possible changes in rate policy sent the yen sharply lower. The takeaway is that the yen is very sensitive to talk about rate tightening and public comments from BoJ policy makers about rate policy ahead of the December meeting could have a strong impact on the yen’s movement. US inflation expected to decline to 3.0% The US releases November CPI later today, with a consensus estimate of 3.0% y/y, down from 3.2% in October. Monthly, CPI is expected to remain flat, unchanged from October. Core CPI, which has been running higher than the headline rate, is projected to remain unchanged at 4.0% y/y. Monthly, the core rate is expected to inch higher to 0.3%, up from 0.2% in October.   It’s a virtual certainty that the Fed will hold rates at a range of 5%-5.25% on Wednesday, but today’s inflation release could be a key factor as to what the Fed does in the upcoming months. There is a major disconnect between the markets, which have priced in four rate cuts in 2024, and the Fed, which is insisting that the door remains open to further hikes. A strong inflation report could temper market expectations for rate hikes next year, while a soft inflation release will provide support for the market stance and could force the Fed to reconsider its hawkish position. . USD/JPY Technical USD/JPY is putting pressure on support at 145.12. Below, there is support at 144.68 There is resistance at 145.85 and 146.89

This report is prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 4.0.     Event: Sales and gross profit margin for October revealed. Yesterday, during the WSE trading hours, Action released preliminary sales and gross profit margin on sales for October. The Group’s consolidated revenues reached PLN 228 million (up 5% yoy) and the gross profit margin on sales in October arrived at 7.6% (-0.1 mom/ -0.1 pp yoy). For January-October cumulatively, Action’s revenues stand at PLN 2,017 million (up 5% yoy) with the weighted average gross margin on sales at 7.9% (+0.4 pp yoy). Expected impact: Neutral. We cannot preclude that the reported margin proves to be higher than the preliminary one, as it was in the previous quarters