US EARLY MORNING: US index futures are modestly higher ahead of ADP jobs data and the FOMC rate decision

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 equity futures are trading with modest gains of between 0.1-0.3%, led by the Nasdaq-100; Treasury yields are lower by 1-4bps, with the rally concentrated in the front-part of the curve. The Dollar Index is a little lower, perhaps due to jawboning by Japanese policymakers which has pressured USDJPY, while the constructive risk tone appears to be supporting activity currencies. Crude benchmarks are up by around a buck a piece after API data reportedly showed a surprise draw for headline crude stocks. Traders are focussing on today’s FOMC meeting, where the central bank is likely to increase the Federal Funds Rate target by 75bps, talking it to 3.75-4.00%; any commentary that alludes to the Committee moving towards a slower pace of rate hikes ahead will be welcomed by the market. The API’s gauge of national employment will be released before the FOMC meeting, and is expected to show 193k jobs being added to the economy; the data will help shape expectations for Friday’s official jobs data, even though the data series still garners some criticisms from the analyst community with regards to its forecasting power; looking to Friday, the street currently expects 200k after the 263k in September. While the jobs data is unlikely to shift the narrative too much for today’s FOMC, we note that JOLTs data released yesterday surprisingly picked up, alluding to still very tight conditions in the labour market, and that resulted in money markets increasing their view on where the eventual terminal rate will be; a week ago, money markets had expected terminal to be just over 4.8% in May 2023; current pricing is pricing rates to be slightly above 5.00% by next May.

DAY AHEAD: FOMC is the highlight of the day, and is expected to raise rates 75bps, and there is some very negligible pricing for a larger 100bps after yesterday's decent ISM data and JOLTs data which continues to allude to a tight labour market (our Fed preview can be accessed here). Traders will eye the ADP's gauge of US national employment to help shape expectations for Friday's key official jobs data (193k expected vs 208k prior). Elsewhere, weekly US MBA mortgage applications data, weekly energy inventory data from the DoE (API data reportedly showed Crude -6.5mln vs exp. +0.4mln, Cushing stocks +0.9mln, gasoline -2.6mln vs exp. -1.4mln, distillate +0.9mln vs exp. -0.6mln). The US Treasury will make its refunding announcement (preview below). On the central banks front, remarks are expected from the ECB's Villeroy and BoC's Morrow. Our full day ahead schedule can be accessed here. Earnings-wise, highlights include CVS and QCOM (earnings expectations can be accessed here).

FOMC PREVIEW (18:00GMT/14:00EDT): The Fed is expected to hike its target Fed Funds range by another 75bps to 3.75-4%, with a firm focus on the guidance and Powell's presser as the FOMC looks to step down the pace of tightening as it approaches the terminal rate, roughly in the 4.5-5% area. That comes despite a lack of progress in bringing inflation down, with concerns rising around the risk of overshooting on hikes. As a hawkish offset to expectations around an approaching Fed pause, Powell could use the meeting to signal a higher terminal rate - there are no new SEPs at this meeting - than the September 'Dot Plot' implied [4.6%], whilst continuing to lean on the "higher for longer" messaging. Although dovish risks include Powell signalling 50bps in December whilst failing to guide to a higher terminal rate; too much focus on financial stability also risks shifting expectations to a Fed pause. (Full preview here).

US REFUNDING (12:30GMT/08:30EDT): The US Treasury is expected by many to leave almost all of its coupon auction sizes for the upcoming quarter unchanged after the August refunding saw the Treasury Borrowing Advisory Committee (TBAC) say "auction sizes are expected to level out next quarter." However, there are some expectations for the 20yr bond to see additional cuts, with desks gravitating around an estimated USD 1bln reduction for both the new issue and reopenings. A key issue in focus will be any decisions regarding the previously touted Treasury buybacks after the TBAC said the option warranted further discussions, while Treasury Secretary Yellen said recently that it was conceivable something could be done. Briefly, the appeal of buybacks, where the Treasury would purchase outstanding debt securities which would then be cancelled, include improving liquidity in illiquid Treasury securities (mainly those further out the curve), whilst funding the purchases with more T-Bill issuance, which would be desirable in the current environment where short-end paper is seeing high demand. On the other hand, some of the cons with buybacks include higher taxpayer costs due to refinancing (during an inverted yield curve) at higher bill rates, creating uncertainty about the Treasury's issuance path, and signalling issues with the Fed carrying out QT at the same time.

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02 Nov 2022 - 08:29- Research Sheet- Source: Newsquawk

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