The Daily Update: The Week Ahead

Fumio Kishida, Japan’s Prime Minister, defied some predictions and secured a comfortable majority in the parliamentary election. Kishida, who has been head of the Liberal Democratic Party (LDP) for only a few weeks, secured 259 seats of the 465-member lower house, as a result giving his party an absolute majority and control over parliamentary committees. The junior partner in the LDP’s coalition, Komeito, also won 32 seats. The combined total of 291 is well above the 233 majority Kishida had aimed for.

There had been fears that with Kishida only being at the wheel a short time, his time as Prime Minister would be brief. However, with these results, (endorsed by the market with the Nikkei soaring over 2.6%) Kishida will be able to put a stamp on his own policies in an upper house election next summer.

West Virginia Democrat Joe Manchin, put a spanner in Biden’s spending plans saying he would be opposed to a large plan like that without understanding its full economic consequences. Manchin made it clear today doesn’t want to support just a ‘framework’, but rather is interested in a full text, which implies further delays to the whole process.

Mid-week the markets held a holding pattern as we awaited the FOMC, the BoE and OPEC announcements plus we had Non-farm payrolls on Friday. With regards to the FOMC the feeling that it was all but certain they would taper the asset purchasing program. The consensus was the Fed will start in November and wrap up by mid-2022, reducing Treasuries by $10 billion a month and MBS by $5 billion.

OPEC was under pressure to open the taps, with the US, Japan, India and China all reportedly been trying to pressure the cartel into increasing output. It seems when Putin, one of the linchpins of OPEC+, warned that $100 a barrel was a distinct possibility, the alarm bells really started ringing.

As widely expected, the Fed announced plans to start tapering from this month ’in light of the substantial further progress the economy has made toward the Committee’s goals since last December’. The central bank will cut purchases of treasuries by USD10bn and mortgage-backed securities (MBS) by USD5bn a month. The net total for November will be USD70bn and USD35bn for Treasuries and MBS, and the same reduction for December.

In the statement following the meeting it was noted that the Fed expects to make similar adjustments in later months, however, would be open to varying the pace of tapering if conditions merit. ‘The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook’ the statement said.

Interestingly, the statement mentioned specific purchase targets for November and December, but not beyond. On market pricing of rate hikes, Powell said lift-off will be dependent on the economy and they will not hesitate if a response is called for on tapering.

With regard to the Bank of England, the decision was far more contentious. The BoE surprised the market and left its monetary policy unchanged for November. The base rate was left at 0.10% and the total QE purchase target was also left at £895bn. The decision was markedly less hawkish than markets had been anticipating, who had priced in a +.15% move ahead of the announcement. The Bank’s Monetary Policy Committee (MPC) voted 7-2 to keep its benchmark interest rate unchanged and 6-3 in favour of continuing the existing program of U.K. government bond purchases at a target stock of £875 billion. The MPC voted unanimously to maintain its GBP20bn stock of corporate bond purchases, keeping the total asset purchase program at GBP895bn.

In the statement, the MPC said ‘The Committee judges that, provided the incoming data, particularly on the labour market, are broadly in line with the central projections in the November Monetary Policy Report, it will be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target’. They also noted that the ‘a high degree of uncertainty’ surrounding the near-term outlook for the labour market, following the end of the UK’s furlough scheme at the end of September, was a key factor in its decision.

Decision to hold interest rates has led to accusations that Andrew Bailey, the BoE’s Governor, who voted for a hold, misled markets in the run-up to the decision, earning him the moniker of an ‘unreliable boyfriend’, a nickname first used for his predecessor, Mark Carney, for his inability to communicate with markets.

Before the Non-Farm Payroll figures the estimates were for 450k jobs added, an unemployment rate of 4.7% and participation rate of 61.7%.

The actual number of jobs added was 531k with the previous month’s figure revised up to 312k from 194k. The unemployment rate was lower at 4.6% versus the prior month’s reading of 4.8% and the participation rate fell slightly to 61.6% The average hourly earnings was on the nose at 0.4% with the yoy figure at 4.9% vs last month’s 4.6%.

As for markets, the S&P continued its upward trajectory, making new highs every day last week. After the payroll figures, treasuries rallied strongly, catching some by surprise. Short covering seems to be the most likely explanation.

The week ahead we have the CPI and PPI reports out of the US. President Biden is also likely to announce his pick for the Fed positions in the coming days. We will also hear from several Fed speakers.

The U.K. has its monthly data dump this week. Q3 GDP, September IP, construction output, service index, and trade will all be reported Thursday.

The Eurozone has a quieter week. Germany will report September trade data and November ZEW survey Tuesday.

In Japan we have the September leading index which will be reported today. October machine tool orders will be reported on Wednesday, and October’s PPI will be reported Thursday.