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The week’s big data release comes in the form of flash PMIs for the United States, European Union, and the United Kingdom. Broad trends have affected output across these economies, and it’s like they’ll continue into September. We also get the RBNZ’s latest rate statement following October’s hike. Is another on the way? 

Global PMI splash sets the economic tone 

It’s the time of the month where markets brace for a deluge of PMI reports. On the slate on Tuesday comes the latest economic output figures for the EU, including Germany and France, the UK, and the United States. 

We’re expecting similar themes to what we’ve seen during this period of economic recovery: slowing growth; supply chain snags; COVID cases weighing on progress; inflation growing fangs. 

Let’s start with a look at the EU. October’s stats show how those big three factors continue to inhibit growth. Manufacturing dipped to an eight-month low that month with a score of 58.3 – down from September’s 58.6.  

Services across the European Union tell a similar tale. The services PMI index fell to a six-month low of 54.6 in October from 56.4. Both falls in manufacturing and services pushed the composite index down to 54.2 from 56.2 in September. 

That’s quite the drop. The EU is still clear of contraction, but with input prices rising and delivery driver shortages increasing it’s going to be tight across Europe. Inflation is also up in Spain, France, and Germany. This writer’s prediction is further drops in output, and any rise would likely be an anomaly. 

Across the channel in the UK, things are a bit brighter. The composite reading for October rose from 54.9 to 57.8. This is the UK’s highest composite rating since June. 

Services got a big bump in October too with the index coming in at 59.1 versus 55.4 in the previous month. Reduced COVID-19 testing and quarantine needs for international travel helped push the index up. 

Manufacturing did not fare quite so well. Sector growth hit its lowest in eight months with a rating of 51.3. The combination of soaring input costs and logistical bottlenecks did for UK factory output in that month. 

While the overall rating puts UK PMIs on a growth footing, this could all be transitory. CPI inflation reached 4.2% in October, soaring clear of the Bank of England’s 2% target. This might be what finally forces the Bank of England to push rates higher in December. Markets thought this would be the case at November’s meeting, mainly thanks to the hawkish stance of Governor Andrew Bailey, but no dice. Something has to give.  

Across the Atlantic, the US’ recent PMI readings seem to indicate a backslide in manufacturing while services pepped up in October.  

You’re probably getting bored of reading about it now, but the United States is not immune to the same input and cost pressures that affect the EU and UK. Manufacturing expenses are hampering factory output. October’s IHS Markit reading came in at 58.4 against 59.2 expected.  

Counteracting this was a burst in services activity as COVID-19 delta variant cases subsided. The final U.S. Services Purchasing Managers’ Index compiled by IHS Markit increased to 58.7 in October from 54.9 in September. Wall Street had put services growth at 58.6. 

“After the Delta variant caused growth to slow in the third quarter, the easing of virus case numbers has been followed by a strong revival of economic activity, notably in the service sector, which looks set to be the driving force of the economy as we head towards the end of the year,” Chris Williams, IHS Chief Business Economist, said. 

Yet inflation is still the spectre at the feast. US CPI hit a practically molten 6.2% in its last reading. Much like the UK, something has to give. While services is the motor that is driving the US economy, if prices stay substantially high, that engine might start to seize and chuck out toxic fumes. A contraction in output is my prediction for this week’s US PMI data. 

More rate rises on the way for the RBNZ? 

The Reserve Bank of New Zealand became one of the first major central banks to raise rates in October.  

After keeping rates locked at historic lows for seven years, Governor Adrian Orr and the team at the RBNZ hiked rates to 0.5%. 

So, they’re up – but will they be up further by the end of the year?  

“The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment,” the RBNZ after its rate move. 

But inflation is still the dog that bites, no matter where your developed economy is. New Zealand’s latest CPI data reached 2.2% in Q3, surpassing the RBNZ’s 1.4% estimates. 

Markets appear to be pricing in another rise on Thursday this week. A move to 0.75% is potentially on the cards. According to Kiwibank analysts, there’s even a 36% chance of half point rise up to 1%. 

Looking to 2022, the consensus seems to be 2% by the end of the year. “We feel 3%-plus is too punchy at this stage,” said analysts at Kiwibank. “We expect the RBNZ to pause around 2%, and the bank’s own rate track is likely to peak around 2.4%.” 

That said, the RBNZ could be on course for 3% rate by 2024. 

There are no guarantees in the world of finance. You only have to look at the communication blip from the Bank of England’s hawkish rate signals translating to inaction at November’s rate decision to see that. 

However, markets appear confident that the RBNZ is ready to raise rites even further this week. 

PCE data to push the US inflation narrative 

The inflation drum keeps beating after the 6.2% CPI print in the US over a week ago – but Personal Consumption Expenditures deserve a look at too this week. It is the Fed’s favourite inflation metric after all. 

I think we can expect to see the PCE index going up and up and up. The major increase in input costs from manufacturers and services providers will inevitably be passed onto consumers. No doubt household spending will rise simply because prices will rise. 

We’ve already seen this in previous PCE readings. Consumer spending was up 0.6% in October, for example. Core PCE index rose 0.2% month on month. On an annualised basis, the Personal Consumption Expenditures Index is up 3.6%. 

So, prices are rising, but there is a bright spot: wages are going up too. Pay was up 1.5% in the third quarter, so some Americans may be taking home more in their pay packets. 

That said, the rate of wage growth is not as high as inflation.  

This is the Fed’s favourite inflation metric as mentioned above. Perhaps another hot print will actually force a rate hike to go along with November’s QE tapering? 

November’s FOMC meeting minutes lift the lid on the Fed’s thinking 

The FOMC’s meeting notes are always anticipated by investors and economists with bated breath. 

Minutes for November’s Fed get-together are released on Wednesday this week, and could tell the market much about how worried policymakers are about inflation and how close they think the labour market is to clearing the hurdle required to raise rates. 

We already know the big talking points from the November meeting – chiefly the decision to taper bond purchases but it’s always good to get under the skin of the US central bank, particularly to see any divisions between the Fed’s hawks and doves. 

Easing off of the Fed’s bond buying programme was the real headline from this month’s talks. The taper will be at a $15 billion-per-month clip, with the implication that the whole QE programme will be wrapped up by mid-2022. 

But chairman Jerome Powell was quick to push back on the rate hike narrative. He said the bank can afford to be patient, while there is still slack in the jobs market and while inflation is just transitory, and that “no clear signal” could be derived from the decision to scale back bond-buying. 

The central bank also said “substantial progress” had been made regarding price inflation, but that really appears not to be the case. That is, of course, if progress means higher prices. Still, the Fed is clinging to idea that these high prices will pass, and inflation will sort itself out by the middle of next year. 

It’s why the FOMC minutes are important. We can see the thinking behind the bank’s proclamations. 

Major economic data 

Date Time (GMT) Asset Event 
Tue 23-Nov 8:15am EUR French Flash Manufacturing PMI 
 8:15am EUR French Flash Services PMI 
 8:30am EUR German Flash Manufacturing PMI 
 8:30am EUR German Flash Services PMI 
 9:00am EUR Flash Manufacturing PMI 
 9:00am EUR Flash Services PMI 
 9:30am GBP Flash Manufacturing PMI 
 9:30am GBP Flash Services PMI 
 2:45pm USD Flash Manufacturing PMI 
 2:45pm USD Flash Services PMI 
    
Wed 24-Nov 1:00am NZD Official Cash Rate 
 1:00am NZD RBNZ Monetary Policy Statement 
 1:00am NZD RBNZ Rate Statement 
 2:00am NZD RBNZ Press Conference 
 9:00am EUR German ifo Business Climate 
 Tentative GBP Autumn Forecast Statement 
 1:30pm USD Prelim GDP q/q 
 1:30pm USD Core Durable Goods Orders m/m 
 1:30pm USD Durable Goods Orders m/m 
 1:30pm USD Unemployment Claims 
 3:00pm USD Core PCE Price Index m/m 
 3:00pm USD Revised UoM Consumer Sentiment 
 3:30pm USD Crude Oil Inventories 
 7:00pm USD FOMC Meeting Minutes 

 

Key earnings data 

Mon 22 Nov Tue 23 Nov 
 Medtronic (MDT) 
Zoom Video Communications (ZM)   
 XPeng (XPEV) 

 

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