The November FOMC meeting, October Non-Farm Payrolls data and Q3 earnings figures from Apple hold top billing this week from an event-risk point of view. When it comes to the FOMC, they have shown a tendency to not want to catch markets by surprise when it comes to interest rate decisions. Despite a run of solid macro data in the US and inflation creeping higher once again, the general expectation from markets is that the Fed will hold fire this week.
On the one hand, an argument could be made that with GDP and inflation both moving higher and the jobs market remaining tight, a further rate hike is warranted from the FOMC, which would be in line with previous communications from Fed officials that further tightening may be required. Equally, an argument can also be made that the push higher in bond yields in recent months has already done the work for the Fed in terms of providing restrictive monetary conditions (particularly with the move higher in US mortgage rates to multi-year highs). While it is highly unlikely that the bond yield moves and effects seen were intentional from the Fed, it could well be a deciding factor in any decision to hold rates steady respite rising inflation.
If the Fed decides not to spook an already jittery market with a rate hike this week, attention will again be on the language and forward guidance provided by Chairman Jerome Powell. If the FOMC maintains their tough talk on fighting inflation, and if CPI continues to head north, they may have to follow through with some action in coming months. Depending on the tone that Powell strikes, we could see some significant gyrations in the treasury yields around the psychologically key 5% level on the 10-year note which would then have implications for the greenback, the broader FX market, and stocks.
And with Apple earnings upcoming and the latest jobs figures in the US due on Friday, volatility could well ratchet up a notch or two between now and the end of the week.
Elsewhere, gold and oil remain reactive to the latest headlines from the Israel-Hamas conflict. Gold is retaining safe haven buying flows, which is keeping the precious metal on the doorstep of the $2k level. Though it remains to be seen how long that geopolitical tensions keep gold elevated, as historically these effects tend to wear off. But for the time being gold remains in favour with investors despite the strong USD and rising yields.
Oil is trading in choppy fashion as investors digest developments from the Gaza strip. The supply impact seems limited for now, which saw oil ease overnight however the unpredictable nature of the conflict means that further gains in the oil price back towards the $90 level cannot be ruled out.
Chinese PMI data released on Tuesday was a downer, with the Manufacturing data unexpectedly falling back into contraction territory. Chinese macro figures over the last six weeks had been on the improve, though this latest setback does justify the 1 trillion-yuan sovereign bond issuance pledged by the PBOC to try and shore-up the struggling economy.
The Bank of Japan made a marginal tweak to its YCC however no drastic changes were announced, with a move away from its highly restrictive policy likely to wait until 2024. As a result, the Yen weakened beyond the much-watched 150 level. The USD remains favoured in currency markets with the DXY still holding above the 106-level courtesy of rate differentials and safe-haven buying. Whether or not the USD remains on its perch could depend on the reaction of bond yields following the FOMC event.
It could well be a wild ride for financial markets when the Fed Chairman takes to the podium.