US EARLY MORNING: US index futures are a little below neutral in wake of hawkish Powell; ISM, weekly claims ahead; Friday's jobs report comes into focus

NOTE: Daylight saving time in the UK has now ended, and the time differential between London and New York will be four hours this week. Daylight saving will end in the US on Sunday 6th November, upon which the usual five-hour time differential will be restored.

SNAPSHOT: US index are trading slightly beneath neutral after the downside in wake of Fed Chair Powell’s hawkish press conference, where he essentially said that while the Fed will consider the case for slowing rate hikes, it is still committed to tightening policy to manage inflation, while the eventual terminal rate may be higher than envisaged in the September forecasts (we recap the FOMC meeting and press conference below). Yields have continued higher along the Treasury curve, and are higher by 6-12bps, with the pressure most acutely felt along the front-part of the curve. The Dollar Index is garnering some strength, weighing on activity currencies and EMFX, amid the prospect of a higher US terminal rate. Crude futures are negative; while the hawkish impulse of Chair Powell is the overarching factor cited for the market’s tone on Thursday, it is also worth noting economic concerns in China, where the Caixin gauge of services and composite economic activity came in below expectations.

DAY AHEAD: While much of the focus will be on digesting the Fed’s latest policy decisions, it is still a busy docket for other events on Thursday; before the US day gets underway, the Norges Bank and Bank of England are both due to make policy announcements (previews for both are below), with a 50bps and 75bps rate hike expected respectively. The US day will see the release of weekly initial jobless claims data (these do not coincide with the survey week for the NFP jobs data due Friday – our NFP preview can be accessed here). The ISM services report is expected to pare back at the headline level by a point or so, while S&P Global’s final PMI composite and services releases for October are due 15 minutes before the release of the ISM. Factory orders and international trade data are also on the slate. There are quite a few ECB speakers due to make remarks again today, including the seemingly ever-present President Lagarde. Full day ahead schedule can be accessed here. Today’s US corporate earnings include CI, COP, AMGN, SBUX, PYPL; full earnings expectations can be accessed here.

FOMC RECAP: The Federal Funds Rate target was lifted by 75bps to 3.75-4.00%, as expected. The statement was dovishly received by the market, after it stated that 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 rationalised that with rates in restrictive territory, the Fed can downshift to a slower pace of normalisation to assess the impact of the 375bps worth of rate tightening unleashed since March. However, Fed chair Powell's press conference injected a hawkish bias after he suggested that it was “very premature” to consider pausing the course of hiking. The Fed chair said that the time to slow rate hikes might come as soon as the December meeting, he impressed that inflation remains well above the Fed's longer-run goals, with price pressures evident across goods and services. And 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, with the Fed strongly committed to its inflation target of 2%. He added that there was still "some ways to go" on rate hikes, while the 'ultimate rate level' might even be higher than previously expected (NOTE: the Committee forecast a 4.50-4.75% terminal rate in its forecasts). The Fed Chair said the debate on how far to lift rates was the important question, but there was still ground to cover before the Fed can 'meet that test', adding that there is a lot of uncertainty regarding the lagged impact of policy tightening. The press conference left the market with a tone of risk-off, and the market-based expectations for the terminal rate rose, now seeing rates peaking between 5.00-5.25% in May/June 2023 (last week, money markets were expecting rates to peak at 4.75-5.00% in May).

BOE PREVIEW (12:00GMT/08:00EDT): With Y/Y CPI running at an uncomfortably high 10.1% in September and the core metric advancing to 6.5%, policymakers are expected to deliver a “significant” rate hike after the 50bps adjustment in September underwhelmed some in the market. Expectations are for the MPC to hike the Bank Rate by 75bps to 3%, according to 18 /30 analysts surveyed by Reuters. In terms of market pricing, a 75bps hike is 95% priced in as bets for 100bps continue to recede. The decision to hike rates is expected to be unanimous, however, there is expected to be a split in views over the magnitude with Dhingra (voted for a 25bps hike in September) and Tenreyro potential dissenters. Note, the Bank has continued to push back on the aggressive level of market pricing with Deputy Governor Broadbent (20th Oct) noting that it remains to be seen if rates need to rise as much as currently priced in by markets. It’s also worth noting that by the time of the meeting, the Bank’s Gilt sale operation (short and medium-term) will have commenced after pushing back the start date in October. Elsewhere, the accompanying MPR projections will be subject to great uncertainty and potentially of limited use given that they can only factor in stated government policy. Given the fiscal event due on October 31st has now been pushed back to November 17th, the MPC will need to base its forecast on the Energy Price Guarantee being maintained for two years, instead of the shorter timeframe that Chancellor Hunt is expected to officially unveil. For the full Newsquawk preview, please click here.

NORGES PREVIEW (09:00GMT/05:00EDT): Expectations are divided evenly between a 25bp and 50bp hike going into the policy announcement, from the current 2.25%, with market pricing leaning towards the hawkish option at present. A 25bp hike would chime with the explicit guidance provided in September given concerns that the economy is cooling. However, price pressures continue to ramp up with headline and core CPI both surpassing forecasts for September and thus potentially justifying a 50bp increase. Additionally, and somewhat dependent on the magnitude announced in November, we look for any potential inferences within the statement as to how much tightening to expect next month; reminder, September’s guidance implied 25bp at both the November and December meetings. Note, as this is an interim gathering there will not be a fresh set of forecasts, but we will still receive written guidance from the Bank and Governor Bach will host a press conference at 09:30GMT. For the full Newsquawk preview, please click here.

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03 Nov 2022 - 08:30- Research Sheet- Source: Newsquawk

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